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”
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”
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”
We previously wrote about the growing number of lawsuits by insureds seeking business interruption insurance coverage for business losses in response to the novel coronavirus and ways that state and federal governments were beginning to consider ways that they might compel such coverage.
The potential cost of business continuity losses is enormous. The Congressional Research Service issued a report to Congress on the financial impact to insurers for the cost of covering business interruption claims. The report explains that some industry sources estimate that the cost of covering business interruption claims ranges from $110 billion to $290 billion per month. In a more recent letter, insurance industry leaders explained, “recent estimates show that business continuity losses just for small businesses of 100 or fewer employees could amount to between $220 billion to $383 billion per month. Meanwhile, the total surplus for all of the U.S. home, auto, and business insurers combined to pay all future losses is only $800 billion.” Continue reading “Lawmakers Continue Efforts to Compel Coronavirus Business Interruption Insurance”
By Damon N. Vocke and Mark A. Bradford
As if COVID-19’s initial challenges related to claims, renewals, and exclusions, all while operating in a remote environment, were not enough, ceding and assuming companies face risk associated with their counterparties’ ability to survive the proverbial economic storm. This risk will only be heightened if other severe events develop in the near term including CAT losses or cyber occurrences. As business moves forward from and through the pandemic, insurance and reinsurance professionals need to pay attention to the solvency of counterparties, including captives and fronting carriers, in light of the stress that COVID-19 will impose on claims and investment portfolios.
Doing business with a counterparty operating in or near the zone of insolvency can unwittingly create risk, especially because the amounts associated with an insurance insolvency are often significant. E.g. Jo Ann Howard & Assocs., P.C. v. Cassity, 395 F. Supp. 3 1022, 1194 (E.D. Mo. 2019) (entering $102 million judgment in favor of receiver of insolvent insurance company following four week bench trial which followed appellate reversal of prior jury trial that had resulted in $390 million verdict in favor of receiver). In one instance, an insurer or reinsurer may face claims that it precipitated an insolvency as a result of not having timely honored claims. While in another, insurers and reinsurers, alike, may face accusations of disguised insolvency to perpetuate a counterparty and thereby further the solvent company’s own business interest to the detriment of the insolvent company’s creditors.
The term “zone of insolvency” is somewhat amorphous, and leading courts have struggled with a precise definition. Generally speaking, the term means a distressed company with a deteriorating fiscal condition, minimal reserves, marginal surplus, and little ability to invest in future operations. Think of a company who might not be able to obtain a loan from a commercial lender or a company whose reserves and financial position might cause a regulator heartburn during an examination. While insolvent counterparties are not easy to spot, and there is often at least some plausible deniability, claims and account executives may hear stories from their counterparts or senior personnel may have learned that a counterparty has taken a large hit or is fighting a bet the company series of claims.
Beyond claims that a transaction or course of conduct caused or disguised an insolvency, struggling companies create risk to the extent that state insurance codes and federal bankruptcy law allow receivers and trustee to void payments made within a certain time period, typically three months to a year depending upon the jurisdiction, preceding an order of liquidation or rehabilitation. Receivers sometimes have years to initiate proceedings to claw back payments such that a company who thought its books were settled could face claims down the road. Creditors similarly may have claims under state law to claw back payments. E.g. Gen. Fidelity Ins. Co. v. WFT, Inc., 837 S.E.2d 551, 556-57 (N.C. Ct. App. 2020) (affirming judgment in favor of creditor of dissolved company). If a counterparty transfers its assets, dissolves, or is placed into receivership, it makes sense to immediately evaluate what claims may be brought against the insolvent counterparty and how to make claims against the insolvent estate in any state receivership or federal bankruptcy proceedings, in the event one is opened, in addition to considering defensive posture.
Third-party liability claims can ensnare.
Aiding and abetting is a powerful and often utilized tool in a receiver’s, bankruptcy trustees’, or creditor’s kit. Counterparties, including reinsurers, and professional advisors such as actuaries, attorneys, accountants and consultants are prime targets for third-party liability claims even if their conduct or advice was not the reason for the insolvency. E.g. Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 217, 320-21 (Del. Ch. 2015) (sustaining certain aiding and abetting claims brought by liquidator of captive insurer while dismissing others), aff’d 2015 WL 6672222 (Del. 2015). Liquidators and creditors may bring claims, either in concert or in competition with one another, targeting the going concerns who have the ability through their own funds or insurance coverage to satisfy a judgment.
Choice of law matters.
Some jurisdictions limit the duties owed to creditors or at least restrict direct claims, as opposed to derivative actions, by creditors. E.g., North Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101-02 (Del. 2007) (holding creditors could not assert direct action). However, other jurisdictions impose obligations before the moment of insolvency when the company was operating in the ill-defined and difficult to pinpoint “zone of insolvency”. For example, Vermont, which is one of the leading domiciles for captives with over 575 active captives and over $22 billion in annual gross written premium, imposes a duty to creditors “not only when the corporation is technically insolvent, but also when the corporation operates in the vicinity or zone of insolvency.” Gladstone v. Stuart Cinemas, Inc., 178 Vt. 104, 117 (Vt. 2005).
A counterparty may be domiciled in a jurisdiction other than where its personnel are located. It is a good idea to take stock of counterparties’ domiciles and form of organization, e.g. stock company, mutual, reciprocal, etc., including those operating domestic or foreign captives, and if necessary, to engage counsel to evaluate what duties may be owed and to whom.
Insolvency Can Create Competing Claims and Extended Statutes of Limitations.
Generally speaking, insurance companies are excluded from federal bankruptcy and are rehabilitated or liquidated under the auspice of state receivership statutes. This can create a patchwork of potential laws and competing liquidating authorities each laying claim to assets or claims. For example, an insolvent counterparty may have as its parent a non-insurance holding company, or in the case of a captive a non-insurance insured, who would be liquidated under the bankruptcy code and one or more operating entities that write insurance or reinsurance and that would each be subject to liquidation in their state of domicile. In re First Assured Warranty Corp., 383 B.R. 502, 521 (Bankr. D. Colo. 2008) (holding that bankruptcy court had jurisdiction over non-insurance affiliate) (“domestic insurance companies are ineligible for bankruptcy relief.”) In these types of competing claimant situations, it is important to observe contractual formalities and obtain releases from all potentially interested parties if possible. See Stephens v. Nat’l Distillers & Chem. Corp., 70 F.3d 10, 12 (2d Cir. 1995) (vacating and remanding for additional proceedings regarding claim by liquidator of reinsurer against non-insurance holding company for return of dividend payments).
Receivership can also extend the time in which a counterparty’s liquidator can assert claims. Fla. Stat. §631.042 (tolling and extending statute of limitations as to claims by receiver of insolvent insurance company); In re Diamond Benefits Life Ins. Co., 907 P.2d 63, 67 (Ariz. 1995) (holding that insurance receiver pursuing claim for conversion of company funds was exempt from statute of limitations). It may also allow a receiver to void arbitration and forum selection provisions. Taylor v. Ernst & Young, L.L.P., 958 N.E.2d 1203, 1211 (Ohio 2011) (holding that insurance liquidator was not bound by insolvent company’s arbitration agreement). This means that a company whose counterparty goes into rehabilitation or liquidation may face claims years beyond what may have been anticipated or reserved and may do so in a forum that was not anticipated at the time of contracting. Against this background, it may be well worth exploring options with liquidators early in the receivership process such as a commutation or a loss portfolio transfer and wrapping such transactions with a general release so as to avoid later claims or issues.
Tips and takeaways.
Medical professional liability, nursing home, business interruption, and director and officer coverage, among other lines, may see increased claim activity as losses develop in relation to crisis and pandemic planning and management and as claims develop against insureds who provide professional or other services to persons inflicted with the novel coronavirus. However, companies principally writing in other lines are not immune to investment losses and credit risk and can be a source of potential counterparty liability.
While each counterparty potentially in the zone of insolvency presents a unique set of circumstances, there are general tips that apply universally:
- Document in writing the arm’s length nature of the relationship and any transactions;
- Make certain to disclose any transactions to regulators that are required to be disclosed and obtain regulatory approval or written buy-in, if possible;
- Avoid deals that seem too good to be true or deals that seem to unduly advantage a counterparty’s insiders at the potential expense of the company or its creditors.
On Wednesday, French Laundry and Bouchon Bistro, two high-end Michelin star Napa Valley restaurants, filed the first California coverage suit for COVID-19-related losses including lost business income. Plaintiffs, represented by the same firm that filed the first COVID-19 coverage lawsuit in New Orleans two weeks ago, allege that the Napa County stay-at-home order related to COVID-19 caused them to lose business and furlough over 300 employees.
Plaintiffs allege they carry a property, business personal property, business income and extra expense policy issued by Hartford Fire Insurance Company. Plaintiffs allege that the policy’s “Civil Authority” insuring agreement entitles them to “the actual loss of business income sustained and the legal, necessary and reasonable extra expenses incurred” due to the Civil Authority’s order prohibiting access to the businesses. The “Civil Authority” is the Napa County Health Officer, Karen Relucio, a named defendant who is alleged to have issued the stay at home order. Like many similar orders around the state, the order restricts restaurant services to take out and delivery.
It is important to note that the policyholders in this case allege that the policy contains a Property Choice Deluxe Form that specifically extends coverage to direct physical loss or damage caused by virus. The policyholders do not cite the specific policy language at issue and are not seeking any determination in their suit that their facilities are directly damaged by the virus.
Duane Morris’ insurance and reinsurance group continues to monitor COVID-19-related events.
We previously wrote about the growing likelihood that insurance companies would face claims for business interruption and contingent business interruption insurance claims as their insureds looked to cope with the broad effects of the novel coronavirus outbreak and response. Heating Up: New Orleans-Based Oceana Grill Seeks Insurance Coverage for Coronavirus-Caused Business Interruption. Now, state and federal governments are beginning to consider ways that they might compel such coverage.
Last week, members of the federal government wrote to insurance industry leaders urging them to expand commercial business interruption coverage for COVID-19 losses. In response, the insurance industry leaders replied, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” Continue reading “Statutes Compelling Coronavirus Business Interruption Insurance Should Face Constitutional Constraints”
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.
On February 27, 2020, the Illinois State Senate referred SB2330, which if enacted would create the Data Transparency and Privacy Act (the “Proposed Act”), to its Judiciary Committee. The Proposed Act would apply to “businesses”, including insurers, intermediaries, and other third-party service providers, who collect or disclose the personal information of 50,000 or more persons, Illinois households, or a combination thereof or who derive 50% or more of their business’s annual revenue from the sale of personal information. As currently drafted, SB2330 may apply to insurers and other affiliates who write a limited number of policies in Illinois but meet the statutory thresholds through business written outside of Illinois. While the Proposed Act contains a carve-out for personal information collected, processed, sold, or disclosed under the Gramm-Leach-Bliley Act, SB2330 may still have applicability to many insurers and reinsurers admitted to write business in Illinois and may also be of particular note to surplus lines carriers from both an enterprise and an underwriting perspective.
Under SB2330, Illinois consumers, including policyholders who meet the statutory definitions, would have several broad rights concerning personal information: (1) the right to transparency, (2) the right to know, and (3) the right to opt out, correct, and delete. SB2330, 101st Gen. Assemb., Reg. Sess., §§15, 20, 25 (Ill. 2020). Businesses who meet the statutory definition would be required to establish a procedure for collecting consumers’ requests and also for authenticating the consumer making each request. Id. at §30(a). The Proposed Act would mandate a response to a consumer’s request within 45 days. Id. at §30(e). Each impacted business would be required to post links on its website and mobile applications for the purpose of processing consumer requests. Id. at §30(b).
A violation of the Proposed Act would be statutorily deemed an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act. Id. at §40(b). Whether such a finding is constitutionally permissible is something which may need to be tested if the Proposed Act is enacted depending upon regulatory guidance and interpretation. The Illinois Attorney General would be tasked with enforcement of the Proposed Act in terms of alleged violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. Id. Consumers would also have a right of action in the event of “an unauthorized access and exfiltration, theft, or disclosure as a result of the business’ violation of the duty to implement and maintain reasonable security procedures and practices . . . .” Id. at §40(a).
As of March 4, 2020, the Proposed Act has not been scheduled for hearing and has only received a single reading, in a single chamber of the General Assembly. The Illinois Constitution mandates that each bill shall be read by title on at least three different days in each house. ILL. CONST. art. IV, §8(d). It is unclear whether the Proposed Act will meet a similar fate as previous data privacy legislation proposed in recent Illinois sessions. As the Proposed Act has an effective date of July 1, 2021, as currently drafted, it is unclear whether data privacy is something that might have legs in the regular session or something that could be resurrected in the veto session following this November’s election. Either way, SB2330 and similar proposed legislation in other States are of note particularly for insurers who write in multiple jurisdictions and may face an obligation to comply with data privacy laws, each with their own nuance, across multiple jurisdictions.
In an opinion filed on the last day of 2019, the California Court of Appeal, Third District, reversed a trial court’s holding that an additional insured was not bound by an arbitration agreement in an insurance policy. In Philadelphia Indemnity Insurance Company v. SMG Holdings, Inc., Case No. C082841 (certified for publication on January 28, 2020), the court held that an arbitration agreement in a commercial general liability policy (“CGL”) issued by Philadelphia Indemnity Insurance Company (“Philadelphia”) bound SMG Holdings, Inc. (“SMG”), a “third party beneficiary” under the policy that was also “equitably estopped” from avoiding the arbitration clause. The court reversed the trial court, vacated its order denying Philadelphia’s petition to compel arbitration, and directed the trial court to order arbitration of the coverage dispute. Continue reading “California Court of Appeal: Third Party, Additional Insured Bound by Policy’s Arbitration Clause”