Yet Another Win for Insurers on COVID-19 Business Interruption Claims: The Inns by the Sea California Court of Appeal Decision

 

By Max H. Stern and Holden Benon

The first California state appellate decision on COVID-19 Business Interruption coverage is now in the books, and it’s one more victory for insurers.  In The Inns by the Sea v. California Mutual Ins. Co., Case No. D079036 (Cal. Ct. App. 4th Dist., Div. 1, Nov. 15, 2021), the California Court of Appeal for the Fourth District found there was no coverage, notwithstanding the absence of a virus exclusion in the relevant policy.  The court’s 36-page opinion provides a thorough and careful analysis of several important COVID-19-related business interruption issues, some highlights of which we summarize below.

Inns-by-the Sea operates lodges in the California coastal communities of Carmel and Half Moon Bay.  In March of 2020, Inns closed its facilities in response to shutdown orders issued by Monterey and San Mateo counties.  Then, Inns made a claim under its property insurance policy for its claimed loss of business income caused by the pandemic.  (For more background on business interruption insurance, refer to one of our earlier blog posts on this topic.)  Inns’ insurer denied coverage, and Inns filed suit in Monterey Superior Court.

Continue reading “Yet Another Win for Insurers on COVID-19 Business Interruption Claims: The Inns by the Sea California Court of Appeal Decision”

California Raises the Price of Survival Actions – Will Allow Recovery of Decedent’s Pain, Suffering, or Disfigurement

By: Kathryn K. Schultz

Long-standing California law explicitly precluded recovery of damages for a decedent’s pain, suffering, or disfigurement in a survival action (i.e. a cause of action that survives the death of a plaintiff and passes to decedent’s successor in interest per Cal. Code of Civil Procedure [“C.C.P.”] § 377.30). On October 1, 2021, California Governor Gavin Newsom approved Senate Bill Number 447 amending C.C.P. Section 337.34 to permit recovery of such damages.  The new law takes effect on January 1, 2022 and will increase the price to resolve survival actions in California.

The new law applies to (1) new cases filed on or after January 1, 2022, and before January 1, 2026, and (2) to an action or proceeding that was granted trial preference pursuant to C.C.P. Sec. 36 before January 1, 2022.  Plaintiffs who recover damages pursuant to this new law are required to report to the Judicial Council, who will in turn report to the Legislature for evaluation of whether to extend or further amend the law in 2026.

Senate Bill 447 was co-sponsored by the Consumer Attorneys of California and Consumer Federation of California.  The main three arguments in support of the bill were: (1) California was one of only five states that prohibits recovery of a decedent’s pain and suffering in a survival action; (2) the prior law provided a “death discount” to defendants – creating an incentive to act in bad faith and delay trials hoping the plaintiffs will die in order to receive this discount; and (3) the incentive to delay trials created a burden on the court system.

Continue reading “California Raises the Price of Survival Actions – Will Allow Recovery of Decedent’s Pain, Suffering, or Disfigurement”

Carriers Enjoy Unanimous Success in Recent Wave of COVID-19 Business Interruption Decisions in Federal Appeals

By: Max H. Stern & Holden Benon

It has been a busy year and a half since the earliest COVID-19-related Business Interruption lawsuits were filed, and we are now seeing real decisions being made by the appellate courts on these claims.  The U.S. Circuit Courts of Appeals have established a uniformly favorable trend for insurance carriers – these courts have affirmed the district court decisions that have ruled in favor of the insurers, and in one case, the Sixth Circuit vacated a district court’s decision that ruled in favor of the policyholder.

Ninth Circuit

Starting with the Ninth Circuit (where Duane Morris’ insurance group maintains a strong presence), carriers have enjoyed successful outcomes in a trio of much-anticipated decisions.  In Mudpie, Inc. v. Travelers Casualty Insurance Company of America, Case No. 20-16858, 2021 WL 4486509, at *1 (9th Cir. Oct. 1, 2021) (applying California law), Mudpie, a San Francisco-based children’s store, brought a proposed class action asserting breach of contract and bad faith against its property insurance carrier.  As in many COVID-19 business interruption cases, the carrier had denied its insured “Business Income” and “Extra Expense” coverage in 2020, after government authorities issued public health orders in response to the COVID-19 pandemic.  Id. at *2.  (For more background on business interruption insurance, please refer to one of our earlier blog posts on this topic.)

Mudpie made the argument that its inability to use its premises amounted to “direct physical loss or damage to” its property, sufficient to bring its claim within the scope of the policy’s business interruption coverage.  Id.  The court rejected this argument, however, reasoning that the phrase “direct physical loss of or damage to” requires some kind of physical alteration to the property in question.  Id. at *5.  The court also held that the policy’s virus exclusion bars coverage for the insured’s claims.  Id. at *7.  As many policyholders have tried arguing, Mudpie claimed that its losses were not subject to the policy’s virus exclusion because its losses were caused not directly by the virus, but by stay-at-home orders that restricted the insured’s use of its property.  But the court didn’t buy this argument because Mudpie failed to meet the “efficient proximate cause” test.  Id. (“Mudpie does not plausibly allege that ‘the efficient cause,’ i.e., the one that set others in motion was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses.”) (internal citation omitted). In the end, the court affirmed the district court’s decision ruling in favor of the insurer.  Id. at *7.

Continue reading “Carriers Enjoy Unanimous Success in Recent Wave of COVID-19 Business Interruption Decisions in Federal Appeals”

Liability or Opportunity in Insuring Commercial Drones?

Developments in drone technology are often heralded as having the potential to change the landscape of business operations, most prominently in the consumer goods shipping sector. Yet, the development of federal regulation and guidance on the commercial use of drones lags behind the pace of innovation. Meanwhile, litigation highlighting the common law tort risks inherent in drone operations has been percolating in jurisdictions around the country. It is no surprise, then, that users of the technology face major uncertainty in terms of their exposure to liabilities, both known and unknown.

To read the full text of this article by Duane Morris attorneys Holden Benon and Matthew Decker, please visit the Insurance Journal website.

Insurers in Nevada Are Entitled to Reimbursement of Defense Costs Paid to Defend Non-Covered Claims

By: Dominica C. Anderson and Daniel B. Heidtke

In a 4-3 decision filed on March 11, the Nevada Supreme Court responded to a certified question from the United States Court of Appeals for the Ninth Circuit.  In Nautilus Insurance Company v. Access Medical, LLC; Robert Clark Wood, II; and Flournoy Management LLC, 137 Nev. Adv. Op. 10 (Nev. 2021), the court held that an insurer that reserves its right to seek reimbursement of defense costs paid to defend an insured may recover those defense costs from the insured upon a showing that the claim was not covered.  The court held, “when a court finally determines that the insurer had no contractual duty to defend, the insurer may ordinarily recover in restitution if it has clearly reserved the right to do so in writing.”

The coverage dispute arose out of underlying litigation between former business partners that worked together selling medical devices.  “After the partnership soured,” one of the former business partners alleged in a lawsuit that his former business partners (the insureds, in the coverage dispute) intentionally interfered with his new business, including by allegedly telling a prospective client that he was “banned” from selling medical devices.  The former business partner-insureds tendered the intentional interference claim to their insurance carrier.

Continue reading “Insurers in Nevada Are Entitled to Reimbursement of Defense Costs Paid to Defend Non-Covered Claims”

Rejection of Reasonable Settlement in Third Party Insurance Claim Not Per Se Unreasonable

In an opinion filed on March 8, the California Court of Appeal, Second District, reversed a jury verdict against an insurer because the jury failed to make an explicit finding that the insurer acted unreasonably in some respect.  In Alexander Pinto v. Farmers Ins. Exch., Case No. B295742, the court held that a bad faith claim requires a finding that the insurer acted unreasonably in some respect.  Because the jury made no such finding (because the verdict form lacked any question asking the jury to make such a finding), the court vacated the verdict in favor of the insured and remanded the case for further proceedings.

The coverage dispute arose out of a single-car traffic accident.  The victim offered to settle his claim against the vehicle owner in exchange for payment of the vehicle owner’s insurance policy limits.  The offer lapsed before the insurer accepted it.  The victim then obtained a judgment in excess of the vehicle owner’s insurance policy limits.  The vehicle owner then assigned her claims against the insurer to the victim.  The victim then sued the insurer alleging that the insurer should be held liable for its alleged bad faith failure to settle.  The victim prevailed at trial against the insurer.

At issue in the appeal was the lack of an express finding by the jury that the insurer had acted unreasonably (again, the lack of an express finding was because the jury had not been asked this question on the verdict form).  The court explained, “[t]he issue is whether, in the context of a third party insurance claim, failing to accept a reasonable settlement offer constitutes bad faith per se.  We conclude it does not.”

Continue reading “Rejection of Reasonable Settlement in Third Party Insurance Claim Not Per Se Unreasonable”

Business Interruption Insurance Lawsuit and the Virus Exclusion Related to COVID-19

By Sheila Raftery Wiggins

The District of New Jersey granted a motion to dismiss a restaurant owner’s purported class action lawsuit seeking business interruption coverage by analyzing: (1) the New Jersey Governor’s Executive Order and (2) the policy language, in a commercial all-risk property damage policy, that excluded coverage for losses covered by viruses.

In N&S Restaurant LLC v. Cumberland Mutual Fire Insurance Company, No. 20-05289 (RBK/KMW), plaintiff filed a claim for loss of business income caused by the New Jersey Governor’s Executive Order which suspended the operation of non-essential retail businesses in response to the ongoing COVID-19 pandemic.  The insurance policy provides coverage for “direct physical loss of or damage to Covered Property at the described premises . . . caused by or result[ing] from any Covered Cause of Loss.”  Plaintiff requested coverage under three separate policy provisions: (1) the “Business Income” provision; (2) the “Extra Expense” provision; and (3) the “Civil Authority” provision.

The “Business Income” provision provides as follows:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises.

The “Extra Expense” provision provides as follows:

We will pay necessary Extra Expense you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.

The “Civil Authority” provision provides as follows:

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises

The policy also denies coverage under several enumerated exclusions. Under the Virus Exclusion, Defendant “will not pay for loss or damage caused directly or indirectly by” any “Virus or Bacteria,” which is any “virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”  The Virus Exclusion includes an anti-concurrent causation preamble, which states that “[s]uch loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss[.]”

Defendant denied Plaintiff’s request for coverage, citing two primary reasons: (1) the claim was barred by the Virus Exclusion, and (2) the claim did not arise out of physical loss or damage as required by each of the applicable provisions.  Defendant asserted that because COVID-19 caused the Executive Order mandating closure of all non-essential businesses, the Virus Exclusion applies.

Plaintiff asserted that the Virus Exclusion does not apply because the “cause of Plaintiff’s loss was the Closure Orders, not the coronavirus.” Plaintiff supports this point by asserting that its claimed loss is not for decontaminating its premises as a result of a coronavirus infestation.

When analyzing Defendant’s motion to dismiss, the District Court focused on the anti-concurrent causation clause of the Virus Exclusion which specifically states that loss caused directly or indirectly by a virus is excluded. The District Court concluded that there is no doubt that COVID-19, a virus, caused New Jersey’s Governor to issue the Executive Order mandating closure of Plaintiff’s restaurant. Therefore, COVID-19 is still a cause of the closure because the Virus Exclusion specifically provides for such indirect causation.  The District Court further stated that there is no requirement, as Plaintiff suggests, for the virus to have physically caused the loss, such as via contamination of the property. The District Court analyzed that although costs for decontamination would certainly be a direct loss caused by the virus, this is not the only possible loss that would trigger the Virus Exclusion. The District Court ruled that by its plain language, the Virus Exclusion applies, barring coverage

This District Court case is one of a growing number of rulings which dismiss similar cases. We expect that this body of law will continue to develop.

California Court Dismisses COVID-19 Business Income Loss Suit

By: Gina Foran

Last week, Judge Birotte Jr. of the Central District of California dismissed a declaratory relief and bad faith action against Travelers Indemnity Company of Connecticut seeking coverage for COVID-19 business income losses. Plaintiff, a Los Angeles-based restaurant significantly impacted by COVID-19, held a policy with Travelers that it alleged provided coverage for COVID-19 losses.

Continue reading “California Court Dismisses COVID-19 Business Income Loss Suit”

Minnesota Supreme Court Issues Ruling on First-Party Bad Faith Statute

By: Gina Foran

The Minnesota Supreme Court issued its long-anticipated ruling regarding the requirements an insured must prove in order to satisfy the state’s first party bad faith statute. Minn. Stat. § 604.18 creates a direct cause of action by an insured against its insurer if the insurer fails to act in good faith. Under section 604.18, subd. 2, a court may award costs to an insured against an insurer, provided the insured can make certain showings. The court held that the statute’s two-prong test requires that: (1) the insured prove, under an objective analysis, that after conducting an investigation and fairly evaluating the evidence, a reasonable insurer would not have denied the insured’s claim; and (2) the insured prove, under a subjective analysis, that the insurer knew, or recklessly disregarded information that would allow it to know, that it lacked a reasonable basis for denying the insured’s claim for benefits.

In Peterson v. Western National Mutual Insurance Company, 946 N.W.2d 903 (Minn. 2020), plaintiff held a Western National Mutual Insurance Company (“Western National”) auto insurance policy with limits of $250,000.  After being involved in a car accident, plaintiff suffered bodily injuries, including chronic headaches, necessitating treatment. Plaintiff sued the driver of the other car and notified Western National that her damages would exceed the limits of the other driver’s insurance, such that she would seek underinsured motorist benefits under her Western National policy. After plaintiff settled with the other driver, she sent a settlement demand to Western National, seeking the policy’s limit. Plaintiff provided medical bills and authorized Western National to obtain additional medical records. The medical records showed that plaintiff experienced and sought treatment for chronic headaches after the accident. Western National failed to pay plaintiff her benefits, expressly denied plaintiff’s claim, and failed to respond to a renewed policy limits demand. Western National also failed to accept that plaintiff’s headaches were caused by the car accident.

Continue reading “Minnesota Supreme Court Issues Ruling on First-Party Bad Faith Statute”

Panel Rejects Consolidation Of All Federal Business Interruption Cases

By Damon Vocke

On July 31, the seven-member Judicial Panel on Multi-District Litigation (JPML) heard oral argument of extraordinary length on the potential consolidation of all federal cases involving business interruption coverage relating to COVID-19 and/or COVID-19 shutdown orders, totaling approximately 449 such federal cases, roughly 200 of which are putative class actions. Continue reading “Panel Rejects Consolidation Of All Federal Business Interruption Cases”