Category: Insurance Coverage

Let’s Eat Grandma = Let’s Eat, Grandma?

To the possible dismay of grammar purists, a federal court recently found that an insurance policy provision meant the same thing whether or not it included a comma before a key phrase. After poking fun at insurance policies (“long been the butt of jokes”), the court recognized that they can “provide fodder for scores of attorneys, grammarians, and logophiles” like when “the placement (or omission) of one comma can make the difference.” This case is an example.

The policy covered Constantin for claims related to “services directed toward expertise in banking finance, accounting, risk and systems analysis, design and implementation, asset recovery and strategy planning for financial institutions.” Constantin sought coverage for an underlying litigation that involved “services directed toward expertise in . . . accounting.” But that litigation did not involve services “for financial institutions.”

So the question was whether “for financial institutions” applied just to the service immediately preceding it or to all services identified in the provision, including accounting services. The court found that it modified the entire series, explaining that “while commas at the end of a series can avoid ambiguity, the use of such commas is discretionary.”

Bottom line: While a comma can save grandma’s life, it couldn’t save coverage here.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

Article By Patrick M. McDermott and Casey L. Coffey of Hunton Andrews Kurth

For more articles on insurance, visit the NLR Insurance Reinsurance & Surety section.

Recent Attorney-Client Privilege Cases Show The Risks Of Insurance Counsel Authoring Denial Letters

Claims of bad faith present unique challenges for insurers (and their counsel) with respect to attorney-client privilege: if the insurer’s state of mind is at issue, is the legal advice on which the insurer relied also at issue, thereby waiving the privilege? And if so, under what circumstances? The following addresses this issue in the context of a common practice for insurance counsel—authoring denial letters—and two recent holdings that should serve as warnings in this practice.

I.  Waiving Attorney-Client Privilege: Legal Advice vs. Insurer’s Coverage Decision

In cases involving claims of bad faith, courts are relatively clear that an insurer waives its attorney-client privilege when it expressly invokes the “advice of counsel” defense, which generally provides that “when an insurer’s actions are in conformity with advice given to it by counsel, the insurer’s actions are taken in good faith, and thus the essential element that an aggrieved insured must demonstrate in establishing insurer bad faith is nullified.”[1] However, courts are less united on whether a waiver occurs when the insurer receives advice from its attorney when making its coverage decision, but does not expressly assert the “advice of counsel” defense.

Most courts reject claims of waiver under these circumstances, recognizing the difference between (a) the attorney’s advice on the law and (b) the insurer’s ultimate decision to provide coverage or not. The latter is relevant to a claim of bad faith, but the former is not.[2] By contrast, some courts have held that under certain circumstances, the insurer waives its attorney-client privilege by relying on legal advice—even without actually invoking the “advice of counsel” defense. The Supreme Court of Arizona summarized the underlying rationale as follows:

When a litigant seeks to establish its mental state by asserting that it acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question. Thus, the advice received from counsel as part of its investigation and evaluation is not only relevant but, on an issue such as this, inextricably intertwined with the court’s truth-seeking functions.[3]

II.  Insurance Counsel Authoring Denial Letters

This attorney-client privilege issue has recently spread to a new battleground, and one which is common practice for insurance counsel: authoring denial letters. To address waiver under these circumstances, some courts have continued the majority rationale by reinforcing the distinction between the attorney’s legal advice and the insurer’s ultimate decision whether to grant coverage.[4] However, two recent decisions should serve as warnings to insurers and their attorneys moving forward.

The first is Canyon Estates Condo. Ass’n v. Atain Specialty Ins. Co., in which the Western District of Washington held that the insurer’s outside counsel did not perform “a privileged task” when it authored and sent denial letters directly to the insured.[5] The court explained that Washington law enforces a presumption that “there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process,” which the insurer may overcome “by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability,” such as “whether or not coverage exists under the law.”[6]

Concluding that the insurer had not overcome this presumption with respect to the denial letters, the court explained that the attorney “clearly—and arguably, knowingly—engaged in at least some quasi-fiduciary activities, including the authoring of draft letters signed by [the insurer] and sent to [the insured] related to coverage and claims processing.”[7] Although drafting the denial letter surely involved legal questions regarding coverage, the court reasoned that “where the insurer’s attorney is involved in both quasi-fiduciary and coverage or liability capacities,” waiving privilege is likely to occur because “counsel’s legal analysis and recommendations to the insurer regarding liability generally or coverage in particular will very likely implicate the work performed and information obtained in his or her quasi-fiduciary capacity.”[8] Importantly, although Canyon Estates did involve claims of bad faith, the court’s reasoning offers no indication that the presence of such claims was essential to its decision. Indeed, the district court did not mention “bad faith” at all, which suggests that insurers and their attorneys could face privilege challenges even when the insured does not assert claims of bad faith.

The second warning is Travelers Prop. Cas. Co. of Am. v. 100 Renaissance, LLC, in which the Supreme Court of Mississippi held that an insurer waived its attorney-client privilege when its in-house counsel ghostwrote denial letters, which were then sent from the adjuster to the insured.[9] Initially, the insurer had denied the insured’s claim because it did not involve a covered “auto” under the policy.[10] The insured’s attorney then sent a lengthy legal analysis to the insurer’s adjuster, arguing that a particular Mississippi statute mandated coverage.[11] The adjuster was not an attorney, and therefore sought advice from the insurer’s in-house counsel, who then penned a letter (in the adjuster’s name) that reaffirmed why—under the policy and Mississippi statutes—coverage was not required.[12] Ultimately, the insured asserted claims against the insurer for bad faith, and sought a deposition of the insurer’s in-house counsel, along with emails between counsel and the adjuster.[13]

The Supreme Court of Mississippi concluded that the insurer waived its attorney-client privilege, explaining that “if the claims handler relied substantially, if not wholly, on in-house counsel to prepare her denial letter, the reasoning of in-house counsel should be discoverable.”[14] The court reasoned that although the insurer sent the letter “in an effort to explain its arguable and legitimate basis to deny the claim,” the adjuster’s testimony made clear that she did not actually understand the legal basis for the denial, and therefore the letter merely represented the attorney’s reasons for denying the claim—not the insurer’s.[15] According to the court, this meant that the attorney did more than just “act as legal counsel and give advice to [the adjuster] to include in the denial letter.”[16] Citing with approval the Supreme Court of Arizona’s decision in Lee, the court explained:

[A] litigant cannot with one hand wield the sword—asserting as a defense that, as the law requires, it made a reasonable investigation into the state of the law and in good faith drew conclusions from that investigation—and with the other hand raise the shield—using the privilege to keep the jury from finding out what its employees actually did, learned in, and gained from that investigation.[17]

Like in Lee, the heart of this decision is the rejection of any distinction between (a) the attorney’s advice on the law and (b) the insurer’s ultimate decision to provide coverage or not. Yet, whether the insurer can articulate that advice as well as its attorney should be immaterial to whether the coverage decision itself had sound legal basis—an issue which the dissent in 100 Renaissance underscored.[18] Without this distinction, privilege would seemingly be at risk in every case involving claims of bad faith (and perhaps even those without such claims) where legal analysis is at least a partial basis for the denial. And given the vast array of statutory, common law, and interpretive issues that inform each decision, this will be a frequent occurrence.

This leaves an insurer (and the adjuster in particular) with two choices: (a) try to interpret the law itself without help from legal counsel, or (b) ask the insurer’s attorney for legal advice, in which case their communications will be subject to discovery unless the insurer can sufficiently re-articulate the legal analysis. Thus, in either case, the insurer must be able to explain often-complex legal issues. The dissent in 100 Renaissance described this exact dilemma: “The majority thus appears to impose a requirement that in order to preserve the privilege, a claims handler must be able to explain legal arguments at her deposition—the same legal issues for which she sought advice in the first place.”[19] Not only that, these are also the same legal issues that the insured had to have its attorney explain, with which the insurer’s counsel then disagreed. As a result, not only must the insurer be able to articulate legal analyses, it must do so for issues on which legal professionals diverge. Indeed, both the majority and dissent in 100 Renaissance actually appear to acknowledge this, yet arrive at starkly different conclusions.[20]

[1] James M. Fischer, Should Advice of Counsel Constitute a Defense for Insurer Bad Faith, 72 Tex. L. Rev. 1447, 1461–62 (1994)

[2] See Aetna Casualty & Sur. Co. v. Superior Court, 153 Cal. App. 3d 467, 475 (Cal. Ct. App. 1984) (insurer did not waive privilege because it did not invoke “advice of counsel” defense, but instead “claim[ed] it acted as it did not because it was advised to do so, but because the advice was, in its view, correct; and it is prepared to defend itself on the basis of that asserted correctness rather than the mere fact of the advice. Such a defense does not waive the attorney-client privilege”); Botkin v. Donegal Mut. Ins. Co., 2011 U.S. Dist. LEXIS 63871, *19 (W.D. Va. 2011) (“There would be little point in retaining coverage counsel to issue an opinion if a party did not intend to rely on it. Likewise, if reliance always gave rise to waiver in this circumstance, no one would seek coverage counsel’s advice.”); Palmer by Diacon v. Farmers Ins. Exch., 261 Mont. 91, 110 (Mont. 1993) (“The attorney-client privilege applies unless the insurer directly relies on advice of counsel as a defense to the bad faith charge.”) (emphasis in original) (citations omitted)

[3] State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 60 (Ariz. 2000); see Tackett v. State Farm Fire & Casualty Ins. Co., 653 A.2d 254, 260 (Del. 1995) (when “an insurer makes factual representations which implicitly rely upon legal advice as justification for non-payment of claims, the insurer cannot shield itself from disclosure of the complete advice of counsel relevant to the handling of the claim”); but see Bertelsen v. Allstate Ins. Co., 796 N.W.2d 685, 703 (S.D. 2011) (finding that the Supreme Court of Arizona’s decision in Lee went “too far.”).

[4] See Liberty Corp. Capital Ltd. v. Palmetto Bluff Shooting Club, LLC, 2020 U.S. Dist. LEXIS 220654, *11 (D. S.C. 2020) (drafting denial letter does not waive privilege because “[b]ased on counsel’s advice, the client will always have subjective evaluations of its claims and defenses,” and therefore “insurer must take one step further and assert that its denial of the claim is objectively reasonable because it relied on the advice of counsel”) (citations omitted); Barnard Pipeline, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 53778, *9 (D. Mont. 2014) (insurer’s attorney drafted denial letter, but “insurer has not asserted the defense of advice of counsel, and therefore has not waived the attorney-client privilege, simply because the insurer’s representative admits in response to a question on cross-examination that he/she listened to advice of counsel in deciding to deny an insured’s claim.”).

[5] 2020 U.S. Dist. LEXIS 10915, *4 (W.D. Wash. 2020).

[6] Id. at *2–3 (citations omitted).

[7] Id. at *4.

[8] Id. at *3–4 (citations omitted).

[9] 2020 Miss. LEXIS 409, *16–17 (Miss. 2020).

[10] Id. at *2

[11] Id

[12] Id. at *4–5

[13] Id. at *13–14.

[14] Id. at *22 (emphasis in original).

[15] See id. at *12 (“I don’t know. I’m not an attorney. I don’t know anything about statutes. That’s what we have General Counsel for. I deal with policy language, what’s in the policy.”).

[16] Id. at *18.

[17] Id. at *21.

[18] Id. at *27 (regardless of whether it can articulate legal analysis, “Travelers has already given its reasons for denying the claim. And the relevant question is whether Travelers had an ‘arguable or legitimate basis for denying the claim.’”) (citations omitted).

[19] Id. at *25.

[20] See id. at *16–17 (Majority explaining that adjuster’s “testimony also demonstrated a lack of knowledge of Mississippi UM law. She could not explain the origin or intended purpose of her citation of a nonexistent Mississippi statute in the denial letter.”).

© 2020 Dinsmore & Shohl LLP. All rights reserved.
For more, visit the NLR Litigation / Trial Practice section.

Bedrock Principles of Insurance Contract Interpretation May Aid Policyholders Seeking Coverage for Losses Due to COVID-19

Determining how an insurance policy applies to a situation not anticipated by the policy’s drafters often results in disputes between an insurer and a policyholder.  So, it’s no surprise that the COVID-19 pandemic, which is unprecedented in many respects, has led to numerous differences of opinion regarding the extent to which various types of insurance cover a wide array of losses related to COVID-19.  And while the first court rulings on this subject were recently issued, these decisions reached differing conclusions and are largely driven by the specific facts alleged and policy language at issue (as well as controlling law), leaving broader disagreements over the scope of coverage largely unresolved.[1]  In other words, seven months after policyholders began submitting claims, uncertainty continues to hang over a wide array of coverage issues related to COVID-19.

With this uncertainty in mind, policyholders evaluating potential coverage for losses due to COVID-19 should bear in mind a central tenet of insurance coverage law:  the interpretation of insurance policies weighs heavily in favor of coverage when there is uncertainty.  From this basic precept flow a few well-established principles of insurance contract interpretation that all policyholders should bear in mind and that may play a valuable role for those seeking coverage as a result of COVID-19.

First, courts nationwide generally agree that insurance policies should be construed in favor of coverage and any ambiguities should be read in the policyholder’s favor.  A sampling of decisions from around the country illustrate how this rule operates to ensure broad coverage for policyholders in situations that may appear uncertain.  For instance, courts have held that:  (1) a policy that covered acts by a truck driver while “on duty” included events that occurred while the driver was asleep in the passenger berth of the truck[2]; (2) a policy that covered “collapse” of a structure could include sagging of that structure[3]; and (3) a policy that covered “functions incidental to [an auto dealership’s] garage business” included an informal gathering of a few employees after work to drink beer at the dealership.[4]  While these cases all differ significantly in their specifics, they each illustrate the broad manner in which courts will interpret the scope of coverage under an insurance policy, especially when some uncertainty is present.[5]

Second, where an insurer seeks to deny coverage based on an exclusionary clause, that exclusion should be read narrowly and the insurer bears the burden of proof.  Coverage rulings from various courts demonstrate the narrow reading that courts will apply to exclusions when their application is disputed.  For example, courts have rejected insurers’ attempts to preclude coverage by narrowly reading exclusions such that:  (1) an exclusion applying to a “contractor” included only contractors retained by the insured, rather than any contractor performing work that benefits the insured[6]; (2) an exclusion for “owned property” did not apply to groundwater located on an insured’s property[7]; and (3) an exclusion for injury arising “from or during the course of business pursuits of an insured” did not apply to an insured’s posting of allegedly defamatory posters regarding a coworker at their workplace.[8]  Courts will often apply this principle not only to provisions explicitly marked as an “exclusion” but to other limitations on coverage as well.

Third, some courts will resolve disputes in favor of coverage when a policyholder can demonstrate that they had a reasonable expectation of coverage, even if that expectation is arguably inconsistent with certain terms in the policy.  In an illustrative example, a court refused to bar coverage for a fight under a nightclub’s policy with an “assault and battery” exclusion because the nightclub alleged it was not aware of the exclusion and believed that physical altercations were covered by the policy.[9]

Fourth, with respect to third-party liability insurance policies, insurers generally have a very broad duty to defend, and often must defend an entire lawsuit when any allegation pled in a complaint could potentially fall within coverage.  To illustrate how broadly this rule can apply, an insurer under a policy covering a landlord’s “real estate manager” was found to have a duty to provide a complete defense to a tenant watering a few plants as a favor to the landlord.[10]

Of course, these tenets alone will not determine whether a particular claim is covered under a particular policy, and policyholders seeking coverage should be prepared to detail the specific facts and law supporting their demand for coverage.  For instance, a policyholder seeking business interruption coverage under a property insurance policy that requires “direct physical loss” will want not only to cite these favorable general principles but should also consider providing any available evidence regarding the potential presence of COVID-19 at the property.  The policyholder should further look to draw analogies to cases where a similar policy requirement was satisfied by the existence of condition that impacted property but did not result in permanent damage to property, such as bacteria, ammonia, or a loss of power.[11]  But, regardless of the specific facts and policy provisions under which a policyholder is seeking coverage, the key principles of insurance coverage law placing a thumb on the scale in their favor should play a key role in their coverage analysis during these uncertain times.

[1] See Social Life Magazine v. Sentinel Ins. Co., No. 1:20-cv-03311-VEC (S.D.N.Y. May 14, 2020); Gavrilides Mgmt. Co. v. Mich. Ins. Co., No. 20-000258-CB (Mich. Cir. Ct. July 1, 2020); Rose’s 1, LLC v. Erie Ins. Exch., No. 2020-CA-002424-B (D.C. Super. Ct. Aug. 6, 2020); Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-cv-03127-SRB (W. D. Mo. Aug. 12, 2020); Optical Servs. USA/JC1 v. Franklin Mut. Ins. Co., No. BER-L-3681-20, (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020).

[2] Torres v. Transguard Ins. Co. of America Inc., 2014 WL 3362124, No. CV-13-01578 (D. Ariz. June 20, 2014).

[3] Key Biscayne Ambassador Condominium Association Inc. v. Aspen Specialty Insurance Co., 2018 WL 1863741 No. 16-24564, (S.D. Fla. Feb. 5, 2018).

[4] Sentry Select Insurance Company v. Ruiz, 324 F. Supp. 3d 874 (W.D. Tex. 2018).

[5] Additionally, not only must insurers read policies broadly in favor of coverage, they also have a duty to investigate a claim before denying coverage, and failure to investigate may give rise to extracontractual liability.  Given the haste with which many insurance carriers have denied coverage for claims related to COVID-19, it’s little surprise that a number of lawsuits have already been filed alleging that an insurer failed to conduct an adequate investigation before denying coverage for a COVID-19 related claim.

[6] United States Liability Insurance Co. v. Benchmark Insurance Services, 797 F.3d 116 (1st Cir. 2015); Atain Specialty Inc. Co. v. Lusa Construction, Inc., 2016 WL 3452750, No. 14-4356 (D.N.J. June 21, 2016).

[7] Reliance Inc. v. Armstrong World Industries, 678 A.2d 1152 (N.J. App. Div. 1996).

[8] Illinois Farmers Ins. Co. v. Modory, 2019 IL App (1st) 180721-U, ¶ 42 (App. Ct. Ill. March 15, 2019).

[9] Fall v. First Mercury Ins. Co., 225 F. Supp. 3d 842, 849 (D. Ariz. 2016).

[10] Dove v. State Farm, 399 P.3d 400 (N.M. Ct. App. 2017).

[11] Motorists Mutual Ins. Co. v. Hardinger, 131 Fed. Appx. 823 (3d. Cir 2005); Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America, Civ. No. 2:12-CV-04418, 2014 WL 6675934 (D.N.J. Nov. 25, 2014); Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co., 968 A.2d 724 (N.J. App. Div. 2009).

© 2020 Gilbert LLP
For more articles on insurance law, visit the National Law Review Insurance Reinsurance & Surety section.

Coronavirus and the Constitutional Rights of Businesses: Butler v. Wolf

In Butler v. Wolf, Judge Stickman of the Western District of Pennsylvania issued an important ruling on Pennsylvania Governor Wolf’s coronavirus lockdown orders which impacts the Governor’s ability to re-impose some of the more draconian restrictions that he, and governors in New York, New Jersey, and elsewhere, put in place between March and June. Whether or not you agree with the result from a political standpoint, the decision is a must-read for anyone interested in the constitutionality of the ongoing, and unprecedented, government intervention in citizens’ daily lives in response to the coronavirus pandemic. Judge Stickman’s ruling touches on many civil liberties, including the First Amendment’s right to assemble, as well as the Fourteenth Amendment’s protection of the right to travel, the right to leave one’s home for any reason or no reason, the right to support oneself by pursuing a chosen occupation, and other rights.

This firm has litigated the constitutional rights of businesses —particularly the Fourteenth Amendment right to due process—on behalf of its clients, and readers of this blog will be most interested in Judge Stickman’s ruling that the orders shutting down non “life sustaining” businesses violated businesses’ rights to due process and equal protection under the Fourteenth Amendment. “An economy is not a machine that can be shut down and restarted at will by government. It is an organic system made up of free people,” and “[t]he ability to support oneself is essential to free people in a free economy.” Small businesses should also take comfort in this ruling, which prohibits the re-imposition of blanket closures of all businesses.

The Ruling

The plaintiffs in Butler v. Wolf included small businesses that sold furniture and health and beauty products; these businesses were shut down by the Governor’s orders, while Walmart, Lowes, and The Home Depot stayed open and sold the exact same products. The judge found that the lockdown orders unfairly favored these big-box retailers over the plaintiff small businesses because it “treated these retailers differently than their larger competitors, which were permitted to remain open and continue offering the same products that Plaintiffs were forbidden from selling.” The court noted it was “paradoxical that in an effort to keep people apart, [the Governor’s] business closure orders permitted to remain in business the largest retailers with the highest occupancy limits.” The Governor’s order, therefore, was not rationally related to combatting the virus, because closing a small furniture store “did not keep at home a consumer looking to buy a new chair or lamp, it just sent him to Walmart.” “In fact, while attempting to limit interactions, the arbitrary method of distinction used by [the Governor] almost universally favored businesses which offered more, rather than fewer products,” and which also, therefore “attract large crowds.”

Because the business closures treated two types of businesses differently, and that different treatment did not actually accomplish the stated goal of limiting interpersonal interactions to combat the virus, Judge Stickman found the lockdown order violated the Equal Protection Clause of the Fourteenth Amendment. Right now, this ruling applies only in the Western District of Pennsylvania (Pittsburgh and its surrounding areas), but once Judge Stickman’s ruling is appealed to the Third Circuit, the decision of that court (whether they agree with Judge Stickman or overrule him), will become binding in New Jersey, all of Pennsylvania, and Delaware.

The Big Picture

The ruling issued on September 14, 2020, only a few days shy of the 233rd anniversary of the founding fathers’ signing of the Constitution on September 17, 1787. It is fitting that the Judge wrote a lengthy and well-written opinion reminding us of the importance of the rule of law, and role of courts, even in times of crisis. As he stated, “[t]he liberties protected by the Constitution are not fair-weather freedoms—in place when times are good but able to be cast aside in times of trouble. . . . Rather, the Constitution sets certain lines that may not be crossed, even in an emergency.” Anticipating what will most certainly be many peoples’ reactions to the ruling—i.e., that we must do whatever it takes to protect ourselves from the virus—the Judge wrote:

[G]ood intentions toward a laudable end are not alone enough to uphold government action against a constitutional challenge. Indeed, the greatest threats to our system of constitutional liberties may arise when the ends are laudable, and the intent is good—especially in a time of emergency. In an emergency, even a vigilant public may let down its guard over its constitutional liberties only to find that liberties, once relinquished, are hard to recoup and that restrictions—while expedient in the face of an emergency situation—may persist long after immediate danger has passed.

As this author said in March, people following China’s response to the outbreak would have seen references to the idea that a democracy, like the United States, could not impose such severe restrictions on its own citizens. Then governors here did impose extreme restrictions as the virus spread and have openly stated that these restrictions will become the “new normal.” Judge Stickman noted the incongruity created by states adopting the same approach as China: “[i]t appears as though the imposition of lockdowns in Wuhan and other areas of China—a nation unconstrained by concern for civil liberties and constitutional norms—started a domino effect where one country, and state, after another imposed draconian and hitherto untried measures on their citizens.” But, the Judge found, “the Constitution cannot accept the concept of a ‘new normal’ where the basic liberties of the people can be subordinated to open-ended emergency mitigation measures.” That is why, as this author also predicted in March, the constitutionality of restrictions here, unlike in China, will be subject to judicial review if and when they go too far. Judge Stickman’s ruling in Butler v. Wolf came in one of the many cases now winding their way through the courts raising these exact types of challenges.

Nothing is certain, but it is likely that this case, and others like it, limit future “blanket” type orders, and force governments to take a more nuanced approach to combatting the virus (which includes deeper consideration of constitutional freedoms). Businesses trying to navigate the uncertainty created by government orders that have been ruled unconstitutional should consult experienced attorneys.

©2020 Norris McLaughlin P.A., All Rights Reserved
For more articles on COVID-19, visit the National Law Review Coronavirus News section.

Federal Judge Sides with Business Owners in Losses Resulting from Pandemic

A federal judge in Kansas City ruled that policyholders whose businesses have been interrupted as a result of the coronavirus pandemic may proceed with their cause of action against their insurers.

U.S. District Court Judge Stephen Bough of the Western District of Missouri who is presiding over a case involving multiple business owners ruled Aug. 12, 2020, that policyholders claiming a loss due to the pandemic may move forward with their cases because they made a plausible argument that their property losses were a direct physical loss attributable to COVID-19.

The seven business plaintiffs in the Kansas City case, led by Studio 417 salon, argued that coronavirus is a widespread airborne virus that very well could have been present in its business establishment, even though it might be undetectable by the naked eye. The presence of this virus rendered their businesses unsafe and unusable, thereby forcing their shutdowns by various municipalities or states’ orders. That shutdown, they argued, triggered their insurance coverage due to the presence of the virus that led to a physical loss even it did not cause structural physical damage. Studio 417, Inc., et al. v. The Cincinnati Insurance Co., Case No. 20-cv-03127-SRB.

Judge Bough ruled that under the ordinary meaning of “physical loss,” the policyholder suffered a loss when the spread of coronavirus led to prohibition or restrictions on their businesses. He cited a previous case of U.S. District Court Judge Catherine Perry of St. Louis in Mehl v. Travelers that denied summary judgment to an insurance company when a policyholder alleged his house was uninhabitable because of an infestation of spiders. “Mehl supports the conclusion that ‘physical loss’ is not synonymous with physical damage,” Judge Bough wrote in his opinion, and further commented that “other courts have similarly recognized that even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”

© 2020 by Clifford Law Offices PC. All rights reserved.
ARTICLE BY Clifford Law
For more articles on insurance, visit the National Law Review Insurance Reinsurance & Surety section.

Renewed Shutdowns/Restrictions Present Interesting Issues Regarding COVID-19 Business Interruption Claims

In recent weeks we have published multiple pieces on issues related to the calculation of damages under business interruption policies for losses associated with COVID-19 shutdowns/restrictions.  Unlike more conventional business interruption claims, such as losses associated with a hurricane, COVID-19 claims are likely to be more complicated regarding the end date for loss calculations, especially in instances where the policyholder was permitted to resume operations in a limited capacity, such as restaurants that initially were ordered closed but then were allowed to transition to a take-out/delivery model, outdoor seating only, or to operate at restricted capacities.

As many jurisdictions now face a resurgence in COVID-19 cases, another complicating issue is likely to arise.  In these jurisdictions that previously imposed restrictions on operations but lifted such restrictions, many policyholders have already submitted COVID-19-related business interruption claims to their insurance carriers.  Having thought that they had weathered the storm and were on the path to recovery, they now face the potential of new shutdowns/restrictions.

If renewed shutdowns/restrictions are imposed, a question is likely to arise as to whether these policyholders have one claim applicable to both sets of shutdowns/restrictions or two separate claims.  Does the policyholder need to provide additional notice related to the second set of shutdowns/restrictions?  Is it more beneficial for the policyholder to have one or multiple coverage triggering events (i.e., occurrences)?  What is the impact on available limits or deductibles/retentions?

These are just a few of the insurance issues potentially presented by the prospect of renewed shutdowns/restrictions.  Policyholders should review the terms of their policies carefully to understand their rights and their best path forward.

© 2020 Gilbert LLP

For more on business interruption, see the National Law Review Insurance, Reinsurance & Surety law section.

One-Two Punch: Businesses Must Fight the Virus and Possible Liability Claims

After several weeks in lockdown and thousands of business closures in an attempt to control the spread of the novel coronavirus, businesses are finally reopening their doors. Given the high transmission of COVID-19, businesses should consider their risks of legal liability to visitors on their property – customers, employees and others – in the event of COVID-19 exposure at their premises.  But the fear of civil liability remains a hindering problem. These claims will most commonly be pursued under the legal theory of negligence and plaintiffs may seeking financial compensation for their injuries and medical treatment related to COVID-19. Plaintiff’s lawyers in these cases will focus on the operations and procedures in place during the reopening. Some businesses are taking extraordinary measures to protect customers, while others are doing the bare minimum. Businesses need to know how to be in compliance with best safety practices to prevent and defend against claims related to an alleged failure to protect customers from COVID-19 exposures.

Immunity for Businesses for COVID-19 Exposure?

A large number of states, including Massachusetts, have enacted laws to shield health care workers, health care facilities and volunteer organizations treating COVID-19 patients from negligence claims subject to certain exceptions. However, the immunity does not extend to cover damages caused by gross negligence or recklessness. It is important to note that these states have not provided similar immunity to other businesses, nor have they limited liability in cases involving gross negligence for COVID-19 related claims. There have been discussions of additional legislation to protect businesses in these cases, but this has yet to happen.

Tort Claims and Premises Liability Law in Massachusetts

Personal injury claims typically stem from negligent acts, where a party had a duty of care, failed to reasonably care for that individual, and that failure to care caused the individual harm or injury. A ”duty of care” exists when its reasonably foreseeable that some act or omission would cause some type of knowable harm, and thus taking reasonable action to ensure safety. The breach of that duty is the act or omission that causes the harm. The breach of duty must cause some damages. Damages are monetary compensation for the victim’s injuries and losses if liability is found.

Premises liability law, a subset of personal injury law, similarly holds that property owners owe a duty of reasonable care to visitors on their premises in Massachusetts, so as to not create or allow unsafe or hazardous conditions to exist on their premises that could cause injury or harm to patrons and guests. If a hazardous condition exists that could reasonably cause harm, and the property owner fails to remove it or warn of it, this could ultimately result in liability.

The duty of care is stricter for business owners, as they invite persons onto their property to purchase goods or services. The level of care owed depends upon the type of visitor on the property. Massachusetts has two types of lawfully present visitors: 1) licensees- individuals presenting financial gain for the property owner like patrons, diners, shoppers; and 2) invitees- those who are not providing any financial gain to the property owner like guests and friends at a social gathering. The property owner owes its visitors a duty of care, that is to keep the property reasonably safe. In this context, the property owner is well aware of the risks associated with COVID-19, the nature of the disease and how it is transmitted. If it did not take reasonable steps to prevent the transmission of the virus to its licensees and invitees, and the claimant can prove the business’ failure to exercise reasonable care was a “substantial contributing factor” in causing the claimant’s injury, they may be entitled to damages, which can include among other things, medical expenses, economic damages, and even emotional distress.

Breach of Duty

There is an abundance of guidance available to businesses on the virus, transmission, preventative measures. Whether a business “breached” their duty of care will focus on what the business did to determine if taking action (or taking no action) was reasonable or not, given the state of knowledge on the virus. Thus, claimants would need to point to what steps the businesses took to protect its licensees and invitees, and whether there were additional procedures that could have been implemented to prevent the transmission, and whether those additional actions were reasonable in light of what was known about the virus. Intentional ignorance is not a defense – property owners have a duty to investigate known or potential hazards, including COVID-19.

Causation

Claimants in tort claims have the burden of proving causation. This usually means proving that the breach of duty was a “substantial contributing factor” in causing the claimant’s injury. In COVID-19 cases, the claimant will ultimately need to prove that the virus was contracted at that business as opposed to another source, which may be extremely difficult to do. Asymptomatic spread of COVID-19 is one of many challenges to proving the initial source of exposure. While some claimants will rely on contact tracing, that alone does not rule out alternative sources of COVID-19 exposure – any other place the person visited (markets, homes, their workplace), and exposure to family members and friends.

Notably, a large number of states are enacting legislation applicable to workers compensation claims related to COVID-19. This legislation establishes a rebuttable presumption that an employee who tests positive for COVID-19 contracted it in the course of employment, although some are limited to essential workers. A “rebuttable presumption” means that the burden of disproving causation is thrust upon the employer. While there are no similar rebuttable presumptions for personal injury and premise liability claimants at this time, it is an open question as to whether these presumptions can be used affirmatively in tort lawsuits, particularly in a situation where a worker brings COVID-19 into the home and sickens a family member or housemate.

Mitigating Liability

If businesses can show that safety protocols were followed, this evidence can be used to defend these types of claims. The Centers for Disease Control and Prevention (CDC) has set guidelines that should be followed as best practices to avoid COVID-19 liability claims. There is an abundance of state and local guidance on social distancing, use of masks and other measures to prevent the spread of the virus. With the vast amount of information available to the public on the risks of the virus and preventative measures, claimants will argue that businesses have enough information to safely operate Crafty plaintiff’s lawyers will likely seek out and find guidance that specifically supports their clients case. Business owners are advised to do the same for their respective industries, whether it be restaurants, offices or youth sports leagues.

Defenses to Consider in Defending COVID 19 Liability Claims

Statute of Limitations

The statute of limitations for in Massachusetts governing personal injury and premises liability cases places a time limit of three years within the date of the incident for filing the lawsuit. Lawsuits filed after the statute of limitations period may be dismissed as “time-barred.” Other states have similar statutes, although the specific timeframe may vary.

Modified Comparative Negligence Law

Some states, including Massachusetts, use a modified comparative negligence rule in personal injury cases, allowing plaintiffs to recover only if the defendant’s share of the blame was equal to or greater than their own. There are only a few exceptions allowing plaintiffs to recover if they were more than 51% at fault. Another important factor of this rule to consider is that if plaintiffs are found to be at fault, their damages are reduced by their allocated share of the blame. Did the visitor where a mask? Did they stay 6 feet apart from other individuals? Did they wash their hands and sanitize frequently? Were they placing their hands on their mouth and nose? These facts and circumstances are critical factors to consider when shifting the blame to the claimant.

Assumption of Risk Abolished in Massachusetts

Some jurisdictions allow a defendant in a personal injury action to raise an affirmative defense of assumption of risk, but that is abolished in Massachusetts as a defense in personal injury cases. In jurisdictions where this defense is allowed, instead of denying the allegations, defendants can assert that a plaintiff was aware of the risk when engaging in the activity or conduct, fully had knowledge of the consequences and willingly disregarded the risks or assumed the risks. Therefore, the defendant cannot be at fault for negligence and this serves as a complete bar to recovery.

Liability Waivers

Did a plaintiff sign a written liability waiver acknowledging and accepting risks? Enforceability of liability waivers as well as the exceptions to the enforceability of releases vary from state to state. While this only shows licensees and invitees were made aware of the risk, using such waivers in these COVID 19 claims is not a slam dunk defense.

Conclusion

We encourage businesses to consider these liability risks when resuming operations and to follow comprehensive procedures and CDC guidelines to mitigate the risks and protect licensees and invitees from the spread of the virus at these establishments. Our office can help businesses develop a plan specific to their business to mitigate the risks of liability from emerging claims related to COVID 19 and provide guidance and advocacy for defending such claims.

©2020 CMBG3 Law, LLC. All rights reserved.

ARTICLE BY Seta Accaoui at CMBG3 Law.
For more on business COVID-19 liability, see the National Law Review Coronavirus News section.

Reasons for Communicating Clearly With Your Insurer Regarding the Scope of Coverage Before Purchasing Cyber Insurance

Purchasing cyber insurance is notoriously complex—standard form policies do not currently exist, many key terms setting the scope of coverage have not been analyzed by courts, and cyber risks are complicated and constantly evolving.  Given these complexities, prospective policyholders should consider, before purchasing a cyber policy, communicating their expectations for coverage in clear and specific terms to their insurer.  Such communications, which can be conducted through an insurance broker, can help a policyholder obtain policy terms that accurately reflect their desired coverage.  Additionally, these communications create a written record of the contracting parties’ understanding, which may prove useful should the insurer later contend that coverage is not available consistent with these discussions and the policyholder’s expectations.

Singling out a key policy provision and examining the coverage issues that provision can present helps illustrate the potential value of such communication.  Currently, the high-profile Mondelez International, Inc. v. Zurich American Insurance Co. litigation provides an excellent opportunity to examine the coverage issues that can arise from one such provision:  the so-called “war exclusion.”  This exclusion, a variant of which is included in almost every insurance policy by insurers seeking to limit their exposure to potentially catastrophic losses that might result from war, may sound straightforward but can be difficult to apply, as the line between war and other conflicts is often fuzzy and fact-specific.  Compare In re Sept. 11 Litig., 931 F. Supp. 2d 496, 508 (S.D.N.Y. 2013), aff’d, 751 F.3d 86 (2d Cir. 2014) (concluding that the September 11, 2001 attack by Al Qaeda was an “act of war”), with Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 1015 (2d Cir. 1974) (holding that the hijacking of an airplane by the Popular Front for the Liberation of Palestine was not the result of “war”).  This is especially true in the cyber context, where understanding the precise nature and purpose of a cyber attack is often difficult.  While the Mondelez case does not involve a dedicated cyber insurance policy—it concerns a property insurance policy that includes coverage for “physical loss or damage to electronic data, programs, or software, including physical loss or damage caused by the malicious introduction of a machine code or instruction”—it is still instructive because the insured seeks coverage for a cyber attack and the insurer disputes coverage based on the war exclusion, which almost all cyber insurance policies contain in some fashion.

The dispute in Mondelez arose when the policyholder suffered over one hundred million dollars in losses due to network disruptions caused by the NotPetya ransomware attack and sought coverage under their property insurance policy for “physical loss or damage to electronic data, programs, or software . . . .”  See Complaint, Mondelez International, Inc. v. Zurich American Insurance Co., No. 2018L011008, 2018 WL 4941760 (Ill. Cir. Ct., Oct. 10, 2018).  In response, the insurer denied coverage based on the war exclusion that precluded coverage for “loss or damage directly or indirectly caused by or resulting from . . . hostile or warlike action in time of peace or war, including action in hindering, combatting or defending against an actual, impending or expected attack by any:  (i) government or sovereign power (de jure or de facto); (ii) military, naval, or air force; or (iii) agent or authority of any party specified in i or ii above.”  In short, the policyholder believed it bought broad coverage for ransomware attacks, but now must litigate whether the NotPetya attack was a “warlike action” by a government “agent,” under circumstances where numerous sources link the cyber attack to Russia and its armed forces (though Russia denies any involvement).  While the Mondelez case is still in the early stages, and details of any communications among the parties regarding the wording and meaning of the war exclusion are not publicly known, the mere existence of this litigation highlights the challenges that can face a policyholder who learns only after a substantial loss that their insurer reads a key policy provision to preclude coverage that the policyholder expected to be available.

As noted above, communication prior to policy placement can be a valuable tool to secure clear wording for key policy provisions and potentially avoid this kind of situation.  While this may seem obvious, such communication is often overlooked by policyholders more focused on other policy details like limits and premiums.  A close review of the war exclusion helps illustrate the potential benefits of these communications.  While the precise phrasing of the war exclusion at issue in Mondelez is more typical of property policies than cyber policies, war exclusions in many cyber policies arguably apply to conduct not only by state actors but also by quasi-state actors or groups with political motives.  For this reason, policyholders may want to seek language specifying that the exclusion only applies to acts by a military force or a sovereign nation, as many cyber attacks are attributed to quasi-state actors or non-state groups with political ends, or are the subject of debated attribution.  Similarly, some war exclusions apply not only to specified conflicts such as war, invasion, and mutiny, but also to more amorphous conduct like “warlike actions”—policyholders seeking greater certainty may wish to avoid such language.  Further, as with any exclusion, avoiding overbroad introductory language (like that excluding any loss “in any way related to or arising out of” war) is generally in a policyholder’s interest.  And even if a war exclusion is broadly worded, some insurers will include a carve-back creating an exception for losses due to attacks on computer systems or breaches of network security, thus preserving cyber coverage even when the war exclusion might otherwise apply.  Given the impact that small changes in wording can have on the scope of coverage, communicating clearly—with respect to the war exclusion or any other key policy provision—can play a crucial role in assuring that a policyholder secures wording that provides the coverage they desire.  Of course, an insurer may respond to a policyholder by refusing to revise a policy term or insisting that a desired coverage is unavailable, in which case the policyholder has the benefit of understanding a policy’s purported scope prior to purchase and the opportunity to investigate coverage from other insurers.

In addition, communication allows a policyholder to make a record of their expectations as to the scope of coverage, which may prove useful if an insurer later refuses to provide coverage consistent with the expectations that the policyholder conveyed.  Many courts interpreting disputed policy language put substantial weight on an insured’s reasonable expectations and often rely on communications between policyholders and insurers to support a policyholder’s reading.  See, e.g., Monsanto Co. v. Int’l Ins. Co. (EIL), 652 A.2d 36, 39 (Del. 1994); Celley v. Mut. Benefit Health & Acc. Ass’n, 324 A.2d 430, 435 (Pa. Super. 1974); Ponder v. State Farm Mut. Auto. Ins. Co., 12 P.3d 960, 962 (N.M. 2000); Michigan Mutual Liability Co. v. Hoover Bros., Inc., 237 N.E.2d 754, 756 (Ill. App. 1968).  As the recently-issued Restatement of The Law of Liability Insurance observes, where “extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning” than the one advanced by the insurer, the policyholder’s proposed meaning will often control.  Another recent case addressing a war exclusion (completely outside the cyber context) demonstrates the role such communications may play in interpreting disputed policy provisions, as the court’s analysis of the exclusion included a review of the communications during the underwriting process between the insured, the broker, and the insurer and an examination of what those communications indicated about the parties’ intent for the exclusion’s application.  Universal Cable Prods., LLC v. Atl. Specialty Ins. Co., 929 F.3d 1143 (9th Cir. 2019).  While contested coverage provisions should generally be read in an insured’s favor so long as that reading is reasonable—even in the absence of favorable underwriting communications—the cases above underscore the potential value in establishing during the underwriting process a record of the insured’s expectations as to the scope of coverage (especially in an area such as cyber insurance, where guidance like prior court decisions is limited).

For these reasons, policyholders should consider clearly communicating their intentions to their insurer when purchasing cyber insurance—this may include communicating not just questions about the scope of coverage and requests for modifications to the policy, but also the concerns animating those questions and the goals behind those requested modifications.  When having such communications with cyber insurers, policyholders will generally want to work closely with an insurance broker knowledgeable about cyber insurance, and may also want to consult experienced coverage counsel.  Clear communication during the underwriting process can play an important role in helping policyholders obtain cyber coverage that will meet their expectations should they one day confront a cyber event.

© 2020 Gilbert LLP

ARTICLE BY Daniel I. Wolf at Gilbert LLP.

Riot-Related Damage and Income Losses are Covered under Most Business Owners’ Policies

Following the deaths of George Floyd, Breonna Taylor, Ahmaud Arbery, Tony McDade, and Rayshard Brooks, protests against systematic racism in general, and police brutality in particular, have swept the globe. These protests have largely been peaceful, but a small, fractious group of individuals has used the protests as cover to incite violence, damage property, and loot businesses. While it might be cold comfort to the affected business owners to hear that property damage is not the norm, most have insurance that protects their pecuniary interest.[1]

 First-party property insurance policies generally include riot and civil commotion as covered causes of loss, unless there is a specific exclusion in the policy. Although courts have acknowledged that defining a “riot” can be difficult because they can vary in size, courts have identified at least four elements:

  1. unlawful assembly of three or more people (or lawful assembly that due to its violence and tumult becomes unlawful);
  2. acts of violence;
  3. intent to mutually assist against lawful authority where “lawful authority” is not limited to official law enforcement, but extends to those whose rights are or may be injured and who seek to protect those rights; and
  4. some degree of public terror (i.e., any minor public disturbance does not rise to the level of “riot”).

Blackledge v. Omega Ins. Co., 740 So. 2d 295, 299 (Miss. 1999).

Civil commotion likewise is undefined in most property policies. As a starting point, the term necessarily means something other than “riot,” since each term in an insurance policy is presumed to have its own meaning. See, e.g., Portland Sch. Dist. No. 1J v. Great Am. Ins. Co., 241 Or. App. 161, 171 (2011). Thus, while “civil commotion” may be similar to a riot, courts have construed the term more broadly, finding that civil commotion entails “either a more serious disturbance or one that is a part of a broader series of disturbances.” Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 368 F. Supp. 1098, 1138 (S.D.N.Y. 1973), aff’d, 505 F.2d 989 (2d Cir. 1974). In fact, most property policies contain no limitation on the breadth of commotion or the type of harm that it might pose to person or property.

In many policies, riot, civil commotion, vandalism, and malicious mischief are “specified causes of loss.” The practical effect of this designation is that numerous exclusions will contain exceptions for loss caused by these situations. For example, while damage to a business’s electronic data may be excluded, the exclusion may contain an exception for damage to electronic data resulting from specified causes of loss, such as riot or civil commotion. Similarly, even where the policy contains a pollution exclusion – purportedly excluding loss, damage, cost, or expense caused by or contributed to or made worse by the release of “pollutants,” which could include tear gas – that exclusion may not apply to loss or damage caused by riot, civil commotion, or vandalism.

If a policy covers riot or civil commotion, covered losses may include property damage to the building and its contents, and lost income while the building is under repair or subject to government orders affecting the business’s operations (e.g., curfews limiting hours of operation) where the order is the result of property damage elsewhere. Business insurance policies may also cover costs incurred in protecting insured property from future, imminent harm or continued damage. These costs might include hiring (or increasing) security personnel, boarding up windows and doors, securing inventory in place or moving inventory and operations off-site.

Prior to the riots in Minneapolis, Minnesota, the costliest U.S. civil disorder occurred after the acquittal of police officers involved with the arrest and beating of a black American, Rodney King, from April 29 through May 4, 1992, causing $775 million in insured losses.[2] More recently, there were approximately $24 million in insured losses following the death of Freddie Gray, a black American who died in police custody after suffering a spinal cord injury.[3] Insured losses are not yet available for the riots in Minneapolis, but the Property Claims Services (“PCS”) unit of Verisk Analytics designated the event as a catastrophe. On June 4, 2020, PCS included over 20 other states, making the civil unrest that started in Minnesota a multi-state catastrophic event.[4]

If your business has experienced or may experience a loss because of civil unrest or riots, you should begin keeping track of these losses – and costs incurred to avoid them – immediately. Save receipts and inventory damages. Contact your insurance company as soon as you experience a loss to report your claim and diligently log your interactions with your insurer and its representatives. If you feel your insurer wrongfully denied your claim or delayed payment, contact experienced insurance coverage counsel.

[1] The authors by no means intend to equate property damage and a lost life. Quite the opposite. One is recoverable (and insurable); the other is irreplaceable.

[2]  https://www.iii.org/fact-statistic/facts-statistics-civil-disorders (last viewed June 15, 2020).

[3] Id.

[4] Id. By June 4, 2020, at least 40 cities in 23 states had imposed curfews. National Guard were called in Washington, D.C. and at least 21 states.

Copyright © 2020, Hunton Andrews Kurth LLP. All Rights Reserved.
For more on property insurance amid protests, see the National Law Review Insurance, Reinsurance and Surety law page.

A Word About Business Interruption Claims From Vandalism, Riot and Civil Commotion

The death of George Floyd is a national tragedy that should never have happened.  The winds of change are in the air and we can only hope that peace, understanding, justice and fairness for all will prevail.  What happened to George Floyd and the cries to end racial injustice, however, have been overshadowed in the eyes of many by the vandalism, looting and rioting that followed.  That brings us to insurance.

There have been many articles discussing whether and how the business losses arising from the vandalism and looting will be covered under insurance policies.  Because these losses took place during the novel coronavirus pandemic, the insurance coverage issues have become more complex.  This is particularly true for business interruption claims.

There are three issues that I thought were worth highlighting.  The first concerns the confluence of the existing COVID-19 stay-home orders and the vandalism and looting.  The second is the necessary nexus between direct physical damage and civil orders under coverage for civil authority.  Finally, the effect of anti-concurrent cause clauses in property policies.

First, some of the business interruption claims now being brought by businesses that had to shut down because of the protests or because of the curfew orders have been complicated by overlapping civil authority stay-home orders because of the novel coronavirus.  Where a business was closed because of COVID-19 stay-home orders or was open only to provide curbside pickup or delivery services, how is its loss of income and extra expense calculated if the business had to close because of the civil unrest?  Analyzing this issue requires much more space than this blog post can provide.  It is a complicated issue that depends on exactly what coverage is provided and how loss of income is calculated under the relevant business interruption coverage grant.

Just as an example, under a common business income and extra expense coverage form, the amount of business income loss is determined based upon the net income of the business “before the direct physical loss or damage occurred,” the likely net income of the business “if no physical loss or damage has occurred . . . ” and “the operating expenses, including payroll expenses, necessary to resume operations with the same quality of service that existed just before the direct physical loss or damage.”  When applied to the recent vandalism and looting business interruption losses, the net income before the vandalism and looting may have been much less than in months or years past because of the COVID-19 stay-home orders.  If no vandalism and looting had occurred, the likely net income would have been the same as under the existing COVID-19 stay-home orders; that is to say, most likely diminished from prior periods.  Yet some are pushing for the COVID-19 effect not to be considered at all in the calculation of net income in the context of business interruption losses due to vandalism and looting.

Second, civil orders that prevented ingress and egress to and from businesses because of the threat of violence from possible protests likely will not be sufficient to trigger coverage under business interruption civil order provisions.  The common form requires a nexus between direct physical damage and the civil order.  For example, the action of civil authority must be “taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage. . . .”  If a local government shuts down a business district in advance of a protest and before there is any physical damage to property, that civil order should not trigger coverage under the business interruption coverage grant.  A civil order that shuts down a business district after vandalism because the area is dangerous likely would result in some coverage under the business interruption coverage grant depending on other policy factors.

Finally, some property policies limit coverage to covered causes of loss and preclude coverage if the loss was caused in part by a non-covered cause of loss.  For example,

We will not pay for loss or damage caused directly by any of the following. Such loss or damage is excluded regardless of any other cause of event that contributes concurrently or in any sequence to the loss.  These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

If an insurance policy excludes a cause like looting, but covers vandalism, even if the loss was caused in part by looting, the anti-concurrent causation clause would preclude coverage.  So too, if part of the loss claimed was caused by the novel coronavirus and the policy has a virus exclusion, that would preclude the loss even if part of it was caused by vandalism.

As always, it is most important to read the complete policy because not all insurance policies are the same.  Nevertheless, there is no doubt that business interruption losses arising from the recent civil unrest have been complicated by existing governmental orders covering the novel coronavirus.  It will take patience by all parties and careful analysis to work through these claims.

© Copyright 2020 Squire Patton Boggs (US) LLP

For more on business interruption claims, see the National Law Review Insurance, Reinsurance and Surety law section.