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”

Lengthy Oral Argument on Potential Consolidation of Business Interruption Coverage Cases Related to COVID-19

By Damon Vocke

On July 30, the Judicial Panel on Multi-District Litigation (the Panel) heard oral argument of extraordinary length on the potential consolidation of all the federal cases involving business interruption coverage relating to COVID-19 and/or the COVID-19 shut-down orders.  There are some 449 such federal cases, approximately 200 of which are putative class actions.

Normally, the arguments for consolidation are short.  This one was not.  This was likely due to the importance of the pandemic-related litigation, as well as the multiplicity of positions.

Several policyholder plaintiffs argued for national consolidation.  Insurer-specific consolidation was the most common fall-back position among the policyholder plaintiffs.  Several policyholder plaintiffs argued against any consolidation – most notably, David Boies.  Counsel for some of the insurer defendants argued on behalf of the industry against any consolidation. Continue reading “Lengthy Oral Argument on Potential Consolidation of Business Interruption Coverage Cases Related to COVID-19”

Bid to Invalidate Virus Exclusion in Pennsylvania Federal Court

Berkshire Hathaway and one of its units on Monday urged a Pennsylvania federal court to toss a restaurant’s suit seeking insurance coverage for losses caused by the COVID-19 pandemic, arguing that a virus exclusion “plainly applies” to the restaurant’s claims.

Berkshire Hathaway and National Fire are represented by Robert L. ByerJulie S. Greenberg and Damon N. Vocke of Duane Morris LLP.

To read the full text of this article, please visit the Law360 website.

Business Interruption Insurance, COVID-19 and Direct Physical Damage under New York Law

By Damon Vocke and David T. McTaggart

To date, approximately 150 business-interruption insurance coverage lawsuits have been filed in federal courts arising from COVID-19 and related government-ordered restrictions.  In what appears to be the first substantive ruling on the merits in these cases, the Southern District of New York recently ruled against an insured who could not meet its burden to show a likelihood of success in establishing “property damage” due to the novel coronavirus to support its claim for injunctive relief.  See Social Life Magazine, Inc. v. Sentinel Ins. Co., 1:20-cv-03311-VEC (Dkt. 24-1, S.D.N.Y. May 14, 2020).  Judge Caproni expressed sympathy “for every small business that is having difficulties during this period of time,” but concluded that “New York law is clear” in requiring actual property damage to trigger business interruption coverage. Because the insured’s coverage theory rested on a government shutdown in the absence of any property damage, the Court denied its preliminary injunction motion, reasoning “this is just not what’s covered under these insurance policies.”

Continue reading “Business Interruption Insurance, COVID-19 and Direct Physical Damage under New York Law”

Insurer Seeks Declaration that Insured not Entitled to Coverage for COVID-19-Related Losses in Excess of Aggregate Limits

by: Gina Foran

This week, U.S. Specialty Insurance Company (“USSIC”) filed a declaratory relief action in the U.S. District Court for the Southern District of Texas seeking a judicial declaration that  its insured, Gartner Group, Inc. (“Gartner”), is not entitled to coverage in excess of the Event Cancellation Insurance policy’s aggregate limit of $150 million for COVID-19-related losses.

USSIC issued an event cancellation policy to Gartner, a global research and advisory company that holds several events and conferences each year. Due to the COVID-19 pandemic, Gartner cancelled or postponed a majority of its events scheduled for 2020. In the complaint, USSIC states that it accepted Gartner’s submitted claims and that these claims will potentially exhaust the policy’s aggregate limit of indemnity of $150 million.

Gartner allegedly takes the position that it has a right to coverage in excess of the aggregate limit of $150 million based on a reinstatement of limits provision of the policy that allows the insured to request reinstatement of “that part of the Limit of Indemnity shown in the Schedule utilized by way of any potential or actual loss payment under this insurance.” USSIC states that  the reinstatement of limits provision has no impact on the aggregate limit of indemnity, which it states is capped at $150 million. Instead, USSIC states, the reinstatement of limits provision only authorizes Gartner to reinstate that part of the original limit of indemnity of an event/conference listed in the schedule of events that is eroded by payment of actual or potential loss.

USSIC additionally states that Gartner is not entitled to an increase of indemnity limits for COVID-19-related losses under the fortuity doctrine and known loss rule, as well as a prior known loss exclusion in the policy, all of which deal with whether insurance is available to an insured for known losses. USSIC states that because coverage under the requested reinstatement has not incepted, it should not be available because Gartner is aware of the COVID-19 pandemic.

Pennsylvania Superior Court Rules That Insurer Waived Coverage Defense by Not Including It in the Reservation of Rights Letter

By Lawrence E. Currier

In a split 2-1 decision in Selective Way Insurance Company v. MAK Services., Inc., et al. al., 2020 PA Super 103 (Case Number 1289 EDA 2019), issued April 24, 2020, the Pennsylvania Superior Court (the “court”) held that a reservation of rights letter from an insurer reserving its right to deny coverage after it begins to defend a claim on behalf of a policyholder must include at least some detail about potential exclusions that could apply. The court reversed an order of the trial court granting summary judgment to Selective Way, the insurer (“Selective”). Continue reading “Pennsylvania Superior Court Rules That Insurer Waived Coverage Defense by Not Including It in the Reservation of Rights Letter”

Coronavirus Business Interruption Litigation Ramping up to Include Several Class Action Suits Against Single Insurers

By Dominica C. Anderson, Philip R. Matthews and Daniel B. Heidtke

As the coronavirus cases start peaking in at least some parts of the United States, the American courts are beginning to experience mounting cases relating to claims against businesses for coronavirus infections and against insurers for alleged business interruption coverage. A few weeks ago, some well-known restaurants in the United States commenced litigation against their insurers over claims for insurance coverage stemming from business interruption. These individual cases will raise a number of issues whether there is direct physical loss to covered property and whether the virus exclusions in the policies bar coverage. As a host of other types of businesses have followed by filing a number of individual suits in several states against their insurers. Last week, however, a new form of litigation has been filed with multiple class action insurance coverage lawsuits being brought by alleged representatives against single insures who are claimed to have written business interruption policies to a number of businesses in given areas or nationwide. Continue reading “Coronavirus Business Interruption Litigation Ramping up to Include Several Class Action Suits Against Single Insurers”

Congress Proposes Bill for Coronavirus Business Interruption Insurance Coverage

As we wrote earlier this week, legislators continue their efforts to address the enormous cost of business continuity losses. Most recently, Representative Mike Thompson of California, introduced H.R.6494, labeled the “Business Interruption Insurance Coverage Act of 2020”. Continue reading “Congress Proposes Bill for Coronavirus Business Interruption Insurance Coverage”