This week, the California Supreme Court declined to hear the Policyholder’s appeal of the Court of Appeal’s decision in The Inns by the Sea v. California Mutual Ins. Co., which we previously reported on. For those tracking the COVID-19 business interruption appellate landscape, this should come as no surprise. The Court of Appeal’s decision is well-reasoned, and it is aligned with many COVID-19 business interruption decisions across the nation that have reached very similar conclusions. Policyholder attorneys expressed it is “hard to feel hopeful at this point.” We can understand why.
Recently, we began to see real decisions being made by the appellate courts on COVID-19 Business Interruption issues. 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. Since our original blog post on this issue in October, this trend continued in December with a Tenth Circuit decision.
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.
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.
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.
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.”
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.
To read the full text of this article, please visit the Law360 website.
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.”
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”
Does an excess insurer have an absolute right to veto a settlement under a policy’s “no action” and “no voluntary payments” clauses? The Ninth Circuit has predicted that, under California law, the answer is no. In a March 21, 2017 decision, the Ninth Circuit affirmed a district court’s $6,080,568 judgment in favor of an insured in a breach of contract and bad faith lawsuit against its excess general liability insurer arising from an underlying patent infringement dispute. (Teleflex Med. Inc., v. National Union Fire Ins. Co. of Pittsburgh, PA., No 14-563666, 9th Cir., 2017 U.S. App. LEXIS 4996.)
In reaching its decision, the Ninth Circuit confirmed the California rule set forth in Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co. (1991) 227 Cal. App. 3d 563, which provides that an excess insurer has three options when presented with a proposed settlement of a covered claim that has met the approval of the insured and the primary insurer: (1) approve the proposed settlement, (2) reject it and take over the defense, or (3) reject it, decline to take over the defense, and face a potential lawsuit by the insured seeking contribution toward the settlement
Is talc the elusive “next big thing” long sought by the plaintiffs’ bar? Recent verdicts against cosmetic talc defendants, including Johnson & Johnson (“J & J”), suggest that talc litigation, at a minimum, is a material threat to talc defendants and the insurance industry. In 2016, J & J and other defendants suffered three large verdicts for exposure to its baby powder in St. Louis, Mo.: $72M, $70M and $55M. All three verdicts, in a jurisdiction considered favorable to asbestos plaintiffs, included substantial punitive damages. The plaintiffs in each of these cases alleged that exposure to talc contained in J&J’s baby powder caused them to contract ovarian cancer. Also in 2016, a Los Angeles jury awarded $18M to a plaintiff who sued a cosmetic talc defendant alleging exposure to cosmetic talc cause the plaintiff to contract mesothelioma.
Assuming talc litigation is not going away any time soon, several questions are raised. Are all talc claims the same? What is the relationship between talc and asbestos, if any? What defendants are at risk in the talc litigation? What are the insurance implications of talc claims, and are they alike or different from asbestos and other long-tail coverage claims? Continue reading “Talc Litigation and Insurance Implications”