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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).

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.