Jessica E. La Londe – Duane Morris Insurance Law

March 19, 2020 by Jessica E. La Londe

Life Interrupted: Coronavirus (COVID-19) and Insurance Coverage for Business Interruption

by Max H. Stern and Jessica E. La Londe

A key issue that many insurance companies will face in the upcoming weeks and months is whether their policies provide coverage for policyholders’ business interruption losses from the COVID-19 crisis. This is not merely an academic question: the first coverage case on this issue was filed in Louisiana this week (Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al.) and legislatures are already considering legislation that may significantly impact the insurance industry (see New Jersey’s proposed legislation on insurance coverage for COVID-19 business interruption claims and letter from members of Congress to insurer trade groups encouraging the acceptance of business interruption coverage for COVID-19 losses).

As in every case, whether there is coverage for these losses will depend, in the first instance, on the policy language, which must be looked at closely. The applicable law and specific facts will add layers of complexity to the issues. Based on our experience with advising on and litigating coverage for business interruption losses, some of the following issues may be in play.

First, insurance companies will have to determine if the policy provides business interruption coverage at all (either in the policy form or by endorsement) and then whether the loss falls within the relevant scope of coverage. This may include, for example, whether the timing of the business interruption loss triggers coverage (often, the business interruption must “commence” during the policy period) and whether the coverage applies when the source of the business interruption is unrelated to the policyholder’s property.

Second, some business interruption coverage may contain exclusions that apply to the losses suffered because of the COVID-19 crisis. For example, in 2006 ISO adopted a “virus” exclusion for business interruption coverage (as a result of previous virus outbreaks, including SARS). Other types of specialty policies may provide coverage that extends business interruption coverage to pollution or biological contamination, but they may be subject to communicable disease exclusions or other limitations.

Third, in our experience, novel business interruption claims need to be closely examined with respect to the nuts of bolts of the requirements for business interruption coverage, such as:

– Issues of proof, such as demonstrating the exact amount of loss over and above expenses, taxes, etc. that would have been incurred;

– Whether business interruption loss applies when there is a complete and total loss (as opposed to a mere “interruption”);

– The point at which true business interruption begins and ends;

– Notice/reporting issues; and

– Deductible/self-insured retention and policy limits issues.

The potential coverage issues in COVID-19 business interruption claims are varied and complex and may benefit from experienced coverage counsel.

For more information, please contact Max Stern (mhstern@duanemorris.com) or Jessica La Londe (jelalonde@duanemorris.com).

April 28, 2016 by Jessica E. La Londe

Colorado Supreme Court Holds That Insurer Need Not Prove Prejudice to Enforce “No-Voluntary-Payments” Clause

In a 4-3 decision in Travelers Property Casualty Co. of America v. Stresscon Corp., 2016 CO 22 (Case Number 2013SC815), issued April 25, 2016, the Colorado Supreme Court held that an insurer seeking to deny coverage to its insured for a breach of the no-voluntary-payments provision does not need to prove prejudice, as it would under the rule applicable to the notice provision of an occurrence-based insurance policy. The Colorado Supreme Court reversed the intermediate appellate court, which had held that the high court’s decision in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005) compelled the result that prejudice was a requirement to deny coverage for a voluntary payment made without insurer consent.

To understand the Court’s decision in Stresscon and how the intermediate court came to the wrong conclusion, it is helpful to understand Friedland. In that case, Friedland (the insured) defended a CERCLA case against him and settled after four years of litigation for $20 million. Friedland, 105 P.3d at 641-642. Friedland provided first notice to the insurer (Travelers) six months after the case concluded, seeking defense costs and indemnity. Id. at 642. Travelers filed a motion for summary judgment on several bases, including late notice and the “no voluntary payment” provision. Id. The trial court granted Travelers summary judgment based on late notice and did not address the other issues. Id. at 643. In a direct appeal to that court, the Colorado Supreme Court reversed the trial court’s decision. The Court first adopted the notice-prejudice rule for liability policies that had been previously adopted in the uninsured motorist context in Clementi v. Nationwide Mutual Fire Ins. Co., 16 P.3d 223 (Colo. 2001). Id. at 645. The Court stated that the insurer must demonstrate that its “significant interests” had been prejudiced in order to deny coverage based on late notice. Id. at 643-644.

The Friedland court then held that in the situation where notice to the insurer is provided after the insured has defended and settled the case, “the delay is unreasonable as a matter of law and the insurer is presumed to have been prejudiced by the delay. However, the insured must have an opportunity to rebut the presumption of prejudice.” Id. at 641. Specifically, “the insured, despite having made a unilateral settlement without notice to the insurer, must have an opportunity to rebut this presumption of prejudice based on the specific facts of the case, before a trial court may bar the insured from receiving coverage benefits.” Id. at 648. “If Friedland successfully rebuts the presumption of prejudice, Travelers must show by a preponderance of the evidence that it suffered actual prejudice from the delayed notices of claim and suit in order to be excused from paying policy benefits.” Id. at 649. The Court concluded by stating: “What form the proceedings on remand shall take regarding in the issues of prejudice, Friedland’s unilateral settlement, and the policy coverage, we leave to the trial court’s further determination” and noted that it was not addressing the other issues raised by Travelers in its summary judgment motion because the trial court had not addressed them. Id. at 649.

In Stresscon, the insured sought indemnification from Travelers for a July 2007 construction accident. Stresscon, 2016 CO 22, at ¶ 3. Travelers was apparently notified and involved in the claim, but on December 31, 2008, “despite Mortenson’s [the claimant’s] failure to bring a lawsuit or seek arbitration against Stresscon, Mortenson and Stresscon entered into a settlement agreement without consulting Travelers.” Id. at ¶ 4. In March 2009, Stresscon filed suit against Travelers and others. Id. Travelers moved for summary judgment based on Stresscon’s settlement without Travelers’ consent, under the no-voluntary-payments provision of the policy, which stated: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” Id. at ¶ 5. The trial court denied Travelers’ motion, finding that Friedland required the insurer to show prejudice, which involved disputed issues of fact. Id. Stresscon ultimately obtained a verdict against Travelers for bad faith breach of the insurance contract and an award of the statutory amount, costs, and attorneys’ fees, and the trial court denied Travelers’ request for a directed verdict. Id. at ¶¶ 1, 4. The Court of Appeals affirmed, relying on Friedland. Id. at ¶ 6.

The Colorado Supreme Court reversed the Court of Appeals’ decision. It held that an insurer can enforce the no-voluntary-payments provision of its policy without a showing of prejudice. Id. at ¶ 2. The Court specifically stated that Friedland “did not . . . also implicitly extend our newly minted notice-prejudice rule to no-voluntary-payments or consent-to-settle provisions, as the court of appeals believed.” Id. at ¶ 9. The Court noted that, in Friedland, it had declined to decide issues that had not been addressed in the trial court, including the no-voluntary-payments issue. Id. It clarified that Friedland was limited to “extending the notice-prejudice rule announced in Clementi to liability policies . . . and tailoring the prejudice determination to the situation in which notice of a claim was given only after settlement.” Id.

In Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951 (Colo. 2015), decided by the Colorado Supreme Court last year, the court distinguished Clementi and Friedland in holding that the notice-prejudice rule does not apply to the requirement in a claims-made policy that the claim be reported during the policy period (or within a designated time period after). In Stresscon, the Court stated that: “Much of that discussion also explains why we similarly decline to judicially impose a prejudice requirement upon the enforcement of the no-voluntary payments clause of the policy in this case.” Id. at ¶ 11. The Court in Stresscon noted that, like the reporting requirement in a claims-made policy, the no-voluntary-payments provision “far from amounting to a mere technicality imposed upon an insured in an adhesion contract, was a fundamental term defining the limits or extent of coverage.” Id. at ¶ 13. The Court further stated that the no-voluntary-payments provision “actually goes to the scope of the policy’s coverage” and “makes clear that coverage under the policy does not extend to indemnification for such payments or expenses in the first place.” Id. at ¶ 14. The Court distinguished enforcement of this provision from enforcement of the notice provision, which it has said would be “reap[ing] a windfall by invoking a technicality to deny coverage.” Id. at ¶ 15 (citing Friedland and Clementi).

The Colorado Supreme Court remanded the case with directions that the jury verdict be vacated and that a verdict be entered in Travelers’ favor. Id. at ¶ 23.

By holding that an insurer need not demonstrate prejudice to enforce a no-voluntary-payments provision, Colorado joins the majority of jurisdictions that have so found.

July 30, 2015July 30, 2015 by Jessica E. La Londe

Pennsylvania Supreme Court Holds That Insured Did Not Forfeit Coverage By Settling Without Insurer’s Consent Even Though Insurer Was Defending Under a Reservation of Rights

In an issue of first impression, the Pennsylvania Supreme Court has held that an insured does not forfeit coverage by entering into a fair, reasonable, and non-collusive settlement without the insurer’s consent when the insurer is defending the insured under a reservation of rights and the insurer has declined to settle. Babcock & Wilcox Co. v. American Nuclear Insurers, — A.3d — (2015), 2015 WL 4430358, Case No. 2 WAP 2014 (Pa. July 21, 2015).

The insureds were sued in a class action over alleged bodily injury and property damage caused by emissions from nuclear facilities. Id. at *1. The insurer (which issued $320 million in coverage) defended under a reservation of rights, asserting that the policy did not cover damages not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages. Id. After an initial verdict against the insureds of $36 million, a retrial was granted. Id. The insurer refused consent to any settlement offers, believing the case could be successfully defended. Id. at *2. The insured then proceeded to settle with the class action plaintiffs for $80 million. Id.

In the ensuing declaratory judgment action, the insurer argued that there was no coverage for the settlement because the insured had violated the consent to settlement clause. Id. The insured urged the trial court to adopt United Services Auto. Ass’n v. Morris, 154 Ariz. 113 (1987), which held that, when the insurer has reserved rights, it should be liable for an insured’s settlement as long as coverage applies and the settlement is “fair and reasonable” and entered into in good faith. The insurer argued that insurers should only be responsible for such a settlement under Cowden v. Aetna Cas. And Sur. Co., 389 Pa. 459 (1957), which held that an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits. The trial court adopted the test advanced by the insureds and a jury determined that the insured’s settlement with claimants was fair and reasonable. Id. at *3. On appeal, the intermediate appellate court adopted an entirely different test (requiring the insured to have rejected the insurer’s defense and the insurer to have acted in bad faith in declining to settle) and remanded to the trial court for a new trial on these issues. Id. at *5.

The Pennsylvania Supreme Court granted review to consider this issue of first impression, described as “whether an insured forfeits the right to insurance coverage when it settles a lawsuit without the insurer’s consent, where the insurer has defended the suit subject to a reservation of rights.” Id. at *5. Declining to strictly construe the consent to settlement requirement of the insurance policy and rejecting the test applied by the intermediate appellate court, the court opted for a modified Morris standard, holding that the insurer will be on the hook “where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims.” Id. at *16. The court further held that the settlement must be “fair and reasonable from the perspective of a reasonably prudent person in the same position of [Insureds] and in light of the totality of the circumstances.” Id. The court therefore reinstated the trial court judgment. Id.

July 17, 2013September 9, 2014 by Jessica E. La Londe

In Pair of Cases, 5th Circuit Enforces 30-Day Notice Requirement in Pollution Exclusion Buy-Back Clauses; No Prejudice Need be Shown

In two separate cases – one under Texas law and one under Louisiana law – the Fifth Circuit has reinforced the principle that a 30-day notice provision in a pollution exclusion buy-back clause is strictly enforceable, and an insurer does not need to demonstrate prejudice to deny coverage. In these cases, the Court found that this outcome was consistent with the Court’s prior decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999), and the Court found that this principle of enforceability was not changed by subsequent notice-prejudice cases.

Continue reading “In Pair of Cases, 5th Circuit Enforces 30-Day Notice Requirement in Pollution Exclusion Buy-Back Clauses; No Prejudice Need be Shown”