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.”
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.
In the bellwether case of Joseph Tambellini, Inc. v. Erie Insurance Exchange, the Pennsylvania Supreme Court was petitioned under its King’s Bench powers to assume plenary jurisdiction of an insurance coverage dispute that had been filed in the Court of Common Pleas, Allegheny County, Pennsylvania. The high court was asked to decide critical legal issues that would have impacted thousands of other insurance claims that might arise in the future from the COVID-19 pandemic. Duane Morris was retained by insurer trade associations, including APCIA, NAMIC, PAMIC, and the Insurance Federation of Pennsylvania (the “Insurance Industry Amici”), to oppose this extraordinary petition. Continue reading Duane Morris Helps Insurance Industry to a Major Win on COVID Losses for Business Interruption Before the Pennsylvania Supreme Court
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 (here and here), and the constraints that state and federal governments should face were they to compel such coverage. We also previously detailed nationwide efforts aimed at enacting legislation compelling business interruption and contingent business interruption insurance for COVID-19 losses.
As of the date of this update, eight states have proposed a number of bills relating to business interruption insurance. Continue reading An Update on Congressional Efforts to Compel Coronavirus Business Interruption Insurance
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