The widespread denial of coverage under first-party property insurance policies for business interruption losses resulting from the COVID-19 pandemic has been extensively reported, but so far less attention has been paid to related third-party claims and attendant coverage issues arising under liability insurance policies. When ticketed attendees sued the organizer of the South by Southwest (SXSW) music and film festival, SXSW LLC, for refunds after the 2020 annual event was cancelled because of the COVID-19 pandemic, the company’s liability insurer, Federal Insurance Company, refused to make good its duty to defend. SXSW has now sued Federal in the U.S. District Court for the Western District of Texas seeking a declaration that Federal owes a duty to defend SXSW against the underlying putative class action, providing insight on COVID-19-related liability coverage issues.
Judge Catherine C. Eagles of the U.S. District Court for the Middle District of North Carolina made the right call by allowing a large hospital system policyholder to litigate the merits of its COVID-19 business interruption claim to recovery where so many others have had that door improperly and prematurely shut by other federal courts recently.
Look at virtually any COVID-19 case favoring an insurer, and you will find a citation to Section 148:46 of Couch on Insurance. It is virtually ubiquitous: courts siding with insurers cite Couch as restating a “widely held rule” on the meaning of “physical loss or damage”—words typically in the trigger for property-insurance coverage, including business-income coverage. It has been cited, ad nauseam, as evidence of a general consensus that all property-insurance claims require some “distinct, demonstrable, physical alteration of the property.” Indeed, some pro-insurer decisions substitute a citation to this section for an actual analysis of the specific language before the court.
In a new article in the Tort, Trial & Insurance Practice Law Journal, colleague Scott Greenspan and co-authors address the history and development of the “physical loss” rule, Couch’s distortion of it, and its impact on contemporary litigation. They also explore the correct rule, as explained in pre-and post-Couch precedent and in other treatises that more accurately state the law. Finally, the authors articulate the severe consequences that will follow for policyholders—banks, businesses, and homeowners—if Couch’s rule, continues to be blindly followed by courts without knowledge of its origins in legal quicksand.
In a recent federal court filing, Zurich American Insurance Company asked the district court to ignore the entirety of science regarding COVID-19 in order to support Zurich’s denial of all coverage for COVID-19 business interruption losses.
A recent article in Law360 shines a spotlight on an Amended Complaint filed by Pillsbury’s award-winning Insurance Recovery and Advisory Group in a significant insurance recovery action seeking coverage for COVID-19 business interruption. In it, the Amended Complaint is described as a “beefed-up filing” where our colleagues have “unleashed a deluge of scientific studies on COVID-19.” The article suggests that the “the arguments outlined in Tuesday’s filing could be a potential avenue around Mama Jo’s v. Sparta Insurance Co., a heavily cited decision in which the Eleventh Circuit held that policyholders must show their properties required physical repairs to constitute direct physical loss. A number of insurers have pointed to that ruling in shooting down COVID-19 insurance cases.”
The Biden administration has hit the ground running with executive orders, regulatory and legislative priorities, and cabinet-level and other top posts being announced on a daily basis. Our public policy colleagues have been closely tracking many of the policy priorities of the new administration and highlighting important regulatory and legislative developments that businesses can expect coming down the pipeline.
Since the beginning of the COVID-19 business interruption insurance coverage battles, insurers have labored to pour cold water on these claims—often hiring the biggest and wealthiest law firms in America to crush hair salons, motels, restaurants and bars represented by solo practitioners or lawyers with little prior insurance coverage experience. Not surprisingly, insurers have been successful in many of these early David-versus-Goliath cases (many of which involved policies with virus exclusions that the policyholders were seeking to avoid by pointing to government shutdown orders—and not the virus—as the sole cause of their loss), as we recently discussed. But the tide is turning as, increasingly, courts are applying the policies as written—rather than how insurers wished they had been written—and finding clear paths to coverage for COVID-19 claims. One such recent California federal district court case, Pez Seafood DTLA, LLC v. Travelers Indemnity Co., is a must-read for policyholders with COVID-19 losses, especially in California.
Since the novel coronavirus landed in America, the insurance industry has worked hard to create the impression that there is no coverage for business interruption losses resulting from the pandemic. For the most part, insurers have discussed the “intent” of the policies and avoided specific policy analysis. The insurer disinformation effort recently started including citations to lists of court decisions obtained to date—as if insurance coverage should be decided not on the terms of the contracts at issue but instead on the basis of an early win/loss record. A review of court statistics, along with two recent court decisions, expose the fallacy of the insurers’ argument.
If 2020 was the year of the pandemic, 2021 appears to be shaping up to be the year of “returning to normal.” So far, most coverage disputes related to COVID-19 have been reactions to direct losses caused by the virus and related measures (i.e., relating to business interruption or event cancellation). In the upcoming months and years, however, many businesses will have to make proactive decisions on how to return to work. It is important for businesses to understand how those decisions may impact a variety of potential insurance coverages, including possible D&O coverage, as this post will discuss. Additionally, now that insurance companies have a better understanding of the types of risks involved with COVID-19, coverage terms and exclusions in policies issued after the pandemic may become drastically different.
The United States declared a national emergency in response to COVID-19 on March 13, 2020, and states quickly followed with stay-at-home orders that impacted businesses and institutions nationwide. It has now been nine full months since the pandemic emerged in the United States and businesses began to shut down in the face of contamination and civil authority orders effecting restrictions on access to and use of their premises.