Insurance Coverage and Recovery Developments in the Post-COVID World
Insurance Coverage and Recovery Developments in the Post-COVID World

This article provides a summary of a presentation Peter Selvin gave on April 22, 2021 to the Litigation Counsel of America. 

PART 1: Business Interruption: COVID-19

COVID-19 has impacted nearly every aspect of business and insurance is no exception. While infection rates continue to fall, there is a rise in business interruption insurance claims and litigation. This article highlights some of the emerging themes and notable developments in COVID-related insurance litigation claims.

In March 2021, the Los Angeles Lakers filed a COVID-19 business interruption lawsuit against Chubb Ltd. stating that the virus had caused “physical loss and damage to its properties” and criticized the insurer for denying its claim while gaining profits. “The Los Angeles Lakers Inc. said it had paid $145,052 in premiums for an all-risk policy issued by Chubb unit Federal Insurance Co. that provided $89.4 million in coverage, including $47.6 million for business interruption, according to the lawsuit in The Los Angeles Lakers Inc. vs. Federal Insurance Co.”  –Business Insurance, March 16, 2021

The largest percentage of cases litigated through motion to dismiss or summary judgment have affirmed coverage denials, but a notable minority of cases have favored policyholders.

The following are two of the cases that have found coverage in the business interruption area:

In Henderson Road Restaurant Systems, Inc., v. Zurich American Ins. Co., the court was dealing with business interruption claims from a series of restaurants that had closed as a result of the stay at home orders that had been issued by various states and municipalities. The coverage provision provided for damages for suspension caused by direct physical loss of or damage to property. In Henderson Road, restaurants had to shut down or downsize as a result of state and local public health orders.

The court in this case found that physical loss of the real property means something different than damage to the real property. The plaintiffs argued that they lost real property when the state ordered that they could no longer use their property for their intended purpose – as dine-in restaurants – but were denied coverage by the business interruption carrier. According to the court, the policy’s language is susceptible to this interpretation.

In Studio 417 Inc. v. Cincinnati Insurance Co., the plaintiffs alleged direct loss as a result of  a causal relationship between COVID-19 and their alleged losses. Plaintiffs alleged that COVID-19 is a physical substance that lives on and is active on inert physical surfaces, the court found that this was sufficient to withstand a motion to dismiss.

Can the loss of use of business income as a result of the pandemic and the ensuing government shutdown orders satisfy the requirement of “direct physical loss of or damage to property”? That depends on your jurisdiction.

Yes.  In Valley Lodge Corp. v. Society Insurance, MDL No. 2964 (N.D. Ill. February 22, 2021), restaurants had to restructure their operations so that they were merely takeout and limited in-person dining spaces. The court stated that the pandemic caused the shutdown orders to impose a physical limit on their restaurant space.

No.  In 7th Inning Stretch LLC v. Arch Ins. Co., Civil Action No. 20-8161 (D.N.J. March 26, 2021), the ruling is more consistent with the majority of the views that the shutdowns did not trigger physical loss or damage. The court noted that while the plaintiffs alleged that it was statistically certain that the virus was physically present on its property for some period of time, that was insufficient to overcome a motion to dismiss. The presence of a virus that harms humans but does not physically alter structures does not constitute coverage property loss or damage.

The outcomes of the business interruption cases often depend on the language of the coverage grant: “Physical loss or damage to covered property” vs “physical loss of or damage to covered property” “… The operative text is ‘direct physical loss of or damage to covered property’…The disjunctive ‘or’ in that phrase means that ‘physical loss’ must cover something different from ‘physical damage’”. In Re Society Ins. Co. COVID-19 Business Interruption Protection Litigation, MDL No. 2964 (U.S. MDL February 22, 2021).

PART 2: Cyber Claims

The stay-at-home orders and the trend of remote work highlight the importance of insurance coverage for data breaches. “The recent mass shift to remote working caused by the global pandemic has provided an ideal breeding ground for both malicious cyber-attacks and unintentional data security incidents… The end result of [remote working] may be a material departure from the company’s cybersecurity and data privacy policies and procedures as well as the representations made by the company to its insurance carrier”. Dean, et al., Cyber Insurance Coverage in The Remote Working World (NYU May, 2020).

Coverage For Cyber Claims Under CGL Policies

While the first resort ought to be to cyber insurance, “injury arising out of oral or written publication, in any manner, of material that violates a person’s right of privacy” is a typical covered offense under CGL insurance policies.

  • Disclosure of confidential information arising out of insured’s conduct: Covered.

Travelers Indemnity Company vs. Portal Healthcare Solutions, 35 F.Supp. 3d 765 (E.D. Va. 2014), aff'd, 644 Fed. Appx. 245 (4th Cir. 2016); Evanston Ins. Co. v. Gene by Gene, Ltd., 155 F.Supp.3d 706, 708 (S.D. Tex. 2016) (insured published DNA results on its website without the affected individual's consent).

  • Disclosure of confidential information arising out of third party’s (such as a hacker) conduct: Not Covered.

Zurich Am. Ins. Co. vs. Sony Corp., 2014 WL 3253541 (N.Y. Sup. Ct. February 24, 2011); Innovak International vs. Hanover Insurance Company, 280 F.Supp. 3d 1340 (M.D. Fla. 2017); St. Paul Fire & Marine Insurance Company vs. Rosen Millennium, Inc., Case No: 6:17-cv-540 (M.D. Fla. 2018) (finding that third-party data breaches are not covered under CGL policies).

The touchstone is “publication” by the insured.

Emerging Issues

Are companies liable for data breaches experienced by their vendors, where the breach exposes confidential information concerning the company’s customers or clients?  See Eugenio vs. Laboratory Corporation of America, C.A. No. 2020-0305-PAF (Del. April 28, 2020).

Do crime or computer fraud policies cover losses relating to “spoofing” or “social engineering”? Compare Medidata vs Fed. Ins. Co, 268 F.Supp.3d 471 (S.D.N.Y. 2017), aff’d, 17-2492-cv (2nd Cir. Jul. 6, 2018), with American Tooling Center v. Travelers Casualty and Surety, 2017 WL 3263356 (6th Cir. 2017); Apache Corporation v. Great American Insurance Company, 2015 WL 7709584 (5th Cir. 2015); Taylor & Lieberman v. Federal Insurance Company, 2015 WL 3824130 (C.D. Cal. 2017).

PART 3: Employment

Possible COVID-Related Employment Claims

  • Discrimination in allowing some employees to work remotely, but not others; inviting some employees, but not others, to return to the office.
  • Wage and hour claims arising from employees working remotely, where “working hours” may be difficult to track.
  • Claims arising from an employer’s requirement that employees returning to work be vaccinated.
  • Claims arising from an employee’s reluctance to return to the office as a result of fears about health relating to the pandemic.
  • Claims that employer’s workplace environment was unsafe due to COVID.

Coverage For COVID-Related Employment Claims Under EPL Insurance

  • Claims must allege an “employment wrongful act”, which typically includes invasion of privacy, discrimination, harassment or retaliation.
  • Bodily injury exclusion. Most EPL policies contain exclusions for loss related to bodily injury.
  • Wage and hour exclusion. Wage and hour claims are often excluded from EPL policies and, even where covered, may be subject to reduced sub-limits.

PART 4: Securities Claims

COVID-Related Securities Suits

There have reportedly been 29 COVID-related securities class actions, eight derivative actions and seven SEC enforcement actions.

Typical definition of “securities claim” under D&O policies:

  1. Alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities) which is:

(a) Brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization; or

(b) Brought by a security holder of an Organization with respect to such security holder’s interest in securities of such Organization; or

2. Brought derivatively on the behalf of an Organization by a security holder of such Organization, relating to a Securities Claim as defined in subparagraph (1) above.

Typical COVID-Related Securities Claims

  • Claims that the company’s economic projections and financial results did not take into account the impact of the COVID-related shutdowns.
  • Claims against pharmaceutical companies concerning management’s representations about the efficacy of their products for the treatment of COVID.
  • Claims alleging misrepresentations concerning a company’s receipt or use of federal funds in connection with COVID-related programs.
  • Claims against travel and leisure companies concerning company statements about how COVID has impacted their businesses.

PART 5: Coverage Litigation

COVID-Related Conditions for the Conduct of Trials 

April 1, 2021 notice to attorney from the Los Angeles Superior Court:

  • A Mandatory Settlement Conference (MSC) or mediation must have been held within the last 90 days. If there has not been one within that period, Department 1 will arrange for an MSC with an available judge if requested. Alternatively, parties may elect to meet with a private mediator.
  • Whether the parties agree to a jury of fewer than 12 persons, which would allow the trial to proceed in the assigned department.
  • Whether the parties agree to a bench trial of some or all the issues, which may avoid a jury trial altogether.
  • Whether any witnesses can testify remotely, which would help to reduce the number of people in the courtroom.

Federal Court Remand of COVID-19: Business Interruption Insurance Litigation To State Courts

See, e.g., Dianoia’s Eatery, LLC, d/b/a Dianoia’s & Pizzeria Da Vide v. Motorists Mut. Ins. Co., No. 20-787, 2020 WL 5051459, at *2 (W.D. Pa. Aug. 27, 2020); Greg Promushkin, P.C. et al. v. Hanover Ins. Grp., No. 20-2561, 2020 WL 475498, at *3 (E.D. Pa. Aug. 14, 2020); Umami Pittsburgh, LLC d/b/a Umami v. Motorists Commercial Mut. Ins. Co., No. 020-2561, slip op. at 4 (W.D. Pa. Aug. 2020).

These cases largely turn on the principle that state  courts are best suited to resolve “novel questions of  state law”. See, e.g., Allen v. Ferguson, 791 F.2d 611,  616 (7th Cir. 1986).

Stay of Declaratory Relief Suit Pending the Resolution of the Underlying Liability Claim

“…the insured may be saddled with the Procrustean dilemma of being forced to adduce facts proving his or her own liability in the underlying lawsuit in order to satisfy the insurer that there may be merit to the underlying covered claim... We do not believe that [the insured] could reasonably have anticipated such a self-defeating burden when it purchased the policies at issue. Cf. North Pacific Ins. Co. v. Wilson's Distrib. Service, Inc., 908 P.2d 827, 832 (Or.Ct. App. 1995) (holding that an insurer's prayer for a declaratory action... should be stayed pending the resolution of the underlying lawsuit because such premature litigation "put[s] the [insureds] in the conflictive position of being required to abandon their denial of liability in [the underlying] action in order to come within the exception of the policy exclusion...[and] [a]n insurer may not put its insured in that position.")” Dairy Rd. Partners v. Island Ins. Co., 92 Haw. 398, 422, 992 P.2d 93, 117 (2000).

An insured is not compelled to fight a “two-front war”. See Montrose Chem. v. Superior Court, 25 Cal.App.4th 902 (1994)(describing the "prejudice" that "occurs when the insured is compelled to fight a two-front war, doing battle with the plaintiffs in the third-party litigation while at the same time devoting its money and its human resources to litigating coverage issues with its carriers"); Allstate Ins. Co. v. Harris 445 F. Supp. 847, 851 (N.D.Cal. 1978); Village Management, Inc. v. Hartford Acc. Indem. 662 F. Supp. 1366, 1373 (N.D.Ill. 1987); R.E. Spriggs Co. v. Adolph Coors Co. 94 Cal.App.3d 419, 429-431 (1979).

Remote Depositions

Lee v. Dennison, No. 2:19-CV-1332-KJD-DJA, 2020 WL 4809430, at *4 (D. Nev. Aug. 18, 2020) (“[I]n light of the circumstances occurring around the world with the COVID-19 pandemic, the court will permit the deposition to be conducted via remote means ....”); Chase-Morris v. Tubby, No. 65927/2019, 2020 WL 4516920, at *4 (N.Y. Sup. Ct. Aug. 3, 2020) (“New York’s trial level courts are in accord ... [and] conclude that virtual depositions do not cause undue hardship in light of the technology currently available and the serious health risks posed by the COVID-19 virus.”).

Remote Trial Testimony

In federal court, witness testimony in bench trials has been allowed using remote transmission. See Gould Elecs. Inc. v. Livingston Cty. Rd. Comm'n, No. 17-11130, 2020 WL 3717792, at *4 (E.D. Mich. June 30, 2020) (proceeding with a bench trial via virtual testimony); In re RFC & ResCap Liquidating Trust Action, 444 F. Supp. 3d 967, 2020 WL 1280931, at *2, *4 (D. Minn. Mar. 13, 2020) (“COVID-19's unexpected nature, rapid spread, and potential risk established good cause under Rule 43(a) for conducting the final two days of a six-week bench trial by videoconference.”); Argonaut Ins. Co. v. Manetta Enters., Inc., No. 19-000482, 2020 WL 3104033, at *2-3 (E.D.N.Y. June 11, 2020) (exercising court’s discretion under Rule 43(a) over one party's objections to order that the entirety of a three-day bench trial be conducted via videoconference).

PART 6: Recent Notable Developments

Notice-Prejudice Rule

Pitzer College v. Indian Harbor Ins. Co., 8 Cal.5th 93 (2019) (applying the notice-prejudice rule to a consent provision in a first-party policy). Providence Health & Servs. v. Certain Underwriters, 358 F.Supp. 3d 1195 (W.D. Wash. 2019) (notice-prejudice rule applied in the context of a claims made and reported policy to excuse an insured’s failure to have notified its insurer of a claim within the time limits of a special reporting period); Petrosantander (USA), Inc. v. Hdi Global Ins. Co., 16-CV-01320-EFM-GLR (D. Kan. 2018) (applying Texas law and concluding that “the Texas Supreme Court would require Defendant to demonstrate prejudice resulting from Plaintiff’s alleged failure to timely notify Defendant of the [claim] prior to denying coverage based on a failure to timely to provide such timely notice”).

But see Illinois Ins. Co. v. Brookstreet Sec. Corp., 2009 WL 10671583, at *6 (C.D. Cal. Nov. 20, 2009) (rejecting insured’s argument that notice-prejudice rule should apply to ‘claims-made-and-reported’ policies where claim was reported within policy period on basis that insured presented no persuasive authority to rebut the authority that states that the notice-prejudice rules does not apply to claims made and reported policies”). Centurian Med. Liab. Protective Risk Retention Group, Inc. v. Gonzalez, 296 F.Supp. 3d 1212 (C.D. Cal. 2017).

Bad Faith Refusal to Settle

A written demand within policy limits may not necessarily be required to trigger insurer’s duty to settle. See, e.g., Planet Bingo, LLC vs. The Burlington Insurance Company, Cal.App. 4th (March 18, 2021); Boicourt v. Amex Assurance Co., 78 Cal.App. 4th 1390 (2000); Reid vs. Mercury Insurance, 220 Cal.App. 4th 262, 273 (2013). “In a number of circumstances, courts have found a conflict of interest can arise, and an insurer may be liable for bad faith refusal to settle, without a formal settlement offer.” Reid, supra, at 273.

Mixed Actions Where the Insurer Has Breached The Duty To Defend

Where the insurer has breached its duty to defend its insured in a “mixed action”, even when there is no coverage for indemnity, “an insurer must bear the entire costs of defense when there is no reasonable means of apportioning the defense costs between covered and non-covered items”. Tapestry  on Central Condominium Association v. Liberty Ins. Underwriters, 2:18–cv-04857–JJT (D. Ariz. August 11, 2020). State v. Pacific Indemnity Co., 63 Cal. App. 4th 1535 (1998) (when carrier has breached duty to defend, defense fees are presumed reasonable and necessary); Fazzino v. Insurance Company of North America, 152 Cal. App. 2d 304 (1957).

Mixed Actions Where the Policy Prescribes No Method of Allocation and Insurer Has Not Breached The Duty To Defend

Where the insurer has not breached its duty to defend its insured in a “mixed action”, and the policy prescribes no method of allocation, many courts have adopted the “reasonably related” rule. In the Ninth Circuit, the “reasonably related” rule remains the default test for allocating defense costs under a D & O policy.  Under that rule, a D & O policy covers defense costs that “are reasonably related to the defense of the insured [parties], even though they may also have been useful in defense of the uninsured [parties].”  Safeway Stores, 64 F.3d at 1289; see also Raychem Corp. v. Fed. Ins. Co., 853 F. Supp. 1170, 1182 (N.D. Cal. 1994). 

Allocation

Policyholders should be concerned where the policy prescribes allocation based on “relative legal and financial exposure”. See Pepsico, Inc. v. Continental Casualty Company, 640 F.Supp. 656 (S.D.N.Y. 1986) (“allocation of responsibility according to the relative exposures of the respective parties is therefore appropriate”). This allocation method allows the insurer to make a judgment at the inception of the case, often based on the pleadings alone, concerning the allocation of defense fees. Such an allocation ignores the reality that counsel’s activities on behalf of a covered party are often inseparable from those activities on behalf of an uncovered party.

Tags: COVID-19

Subscribe

Recent Posts

Blogs

Contributors

Archives

Jump to PageX
Close

ECJ uses cookies to enhance your experience on our website, to better understand how our website is used and to help provide security. By using our website you agree to our use of cookies. For more information see our Privacy Policy and our Terms of Use.