Why Leaders Need to Resist Rewriting Insurance Contract Language

Gregory V. Serio | Insurance Journal

Soon after the attacks on the World Trade Center and other locations on the morning of September 11th, President Bush declared that the atrocities were “an act of war.” That statement prompted a call to me from a friend and influential member of Congress from Buffalo, John LaFalce, during which we both concluded that the attacks, those horrific, did not constitute an act of war. At least not in the insurance sense.

Of course, Bush was not speaking in terms of–or even thinking–the war exclusion contained in most property/casualty coverages. That language largely excludes coverage for acts of war by a sovereign. If he had meant it so, that could have meant that the insurance industry would not be on the hook for any of the losses arising from the attack. He surely meant it more figuratively, more to drive a point home and provide a sense of what we were up against. He did not mean that the industry would not have to go on to pay the $30-40 billion or more that they did shell out for everything from the business interruption claims to the rebuilding of the World Trade Center complex.

Over the weekend, our nation’s current chief executive, President Donald Trump, waded more deliberately into yet another discussion concerning business interruption coverage in times of crisis. As reported in Claims Journal and elsewhere, the President said that, of course, business interruption claims should be paid for COVID-19 losses. After all, businesses have paid lots of money into business interruption policies over the years, so why shouldn’t they cover the losses that have arisen in recent weeks. Only if a policy excluded “pandemic” would they be beyond reach, he opined, even acknowledging the presence of exclusions in typical insurance policies.

As the person who had to tell then-New York governor George E. Pataki that the WTC disaster was one event, not two, I consider myself somewhat practiced in the high art if not science of interpreting insurance contract language notwithstanding the populist pull of giving the people what they want regardless of what the contract might say.

Just like President Bush, perhaps you would expect nothing less from a President who is a former businessman who has an uncanny ability, critics aside, to actually understand much of what is actually happening on Main Street and to tap into the sentiment surrounding that reality.

One Event, Not Two

As a business owner I would want to agree wholeheartedly. My partners and I pay property/casualty insurance premiums, and it’s always nice to get a return somewhere along the way for all that investment. But as an insurance lawyer, former insurance regulator, and defender of the rule of law and the import of adhering to contracts that are drafted and signed by two parties committing to certain obligations, I am far less agreeable to the President’s position. As the person who had to tell then-New York governor George E. Pataki that the WTC disaster was one event, not two, I consider myself somewhat practiced in the high art if not science of interpreting insurance contract language notwithstanding the populist pull of giving the people what they want regardless of what the contract might say. The Governor, for his part, sought the right answer to the question and not the expedient one, even if it meant that $ 3.5 billion in insurance funds would not be forthcoming to the State.

The President, just like President Bush and so many other leaders, is paid to lead the country in times of crisis and they both have done well in that respect. But he is not an insurance contract expert, has not had experience from the other side of the claims table and was not thinking to himself when he said those words that he was providing a dispositive legal opinion on whether longstanding insurance policy language was sufficient to support a claim for business interruption benefits. He was giving a classically-Trumpian opinion as a long-time businessman and champion of Main Street as to what he thinks should be done with these policies. Of course, you would also not want him to opine or articulate that he thought that business interruption coverage does not apply. That opinion would suffer from the same shortcomings—from an insurance perspective—as well as be seriously politically tone-deaf.

His voice is certainly the loudest, but by no means is it the only one in the business interruption coverage debate. Many states have seen the introduction of legislation to virtually re-write business property coverages regardless of years of jurisprudence, regulatory oversight and industry practice. Some have even tried to annex the workers compensation system by presuming exposure to COVID-19 to be an industrial hazard. Lawsuits are already hitting the closed doors of courts around the country like newspapers thrown on one’s front stoop. The froth is palpable and the parties highly motivated to continue the drumbeat of a message that insurance is an untapped resource. Of course, if we had adopted this same philosophy to compel insurers to pay for the flood damage of any one of a number of recent storms that is clearly not in the typical property/casualty policy, or asked them to underwrite any war fitting into the exclusion definition within such contracts, this current discussion would be merely academic for there would be no property/casualty industry to target.

Federal Response

Ironically, the early recognition of the limitations in business interruption coverage in this crisis is likely to have served as a catalyst for the swift federal response to the burgeoning crisis in the form of the three pieces of relief legislation, including that to deliver relief checks to much of the population, and that to provide payroll protection and a long-term line of credit to businesses.

As in other instances, this crisis is likely to lead to changes in the way we cover pandemics. Some of that change may be reflected in new insurance contract language, a federal program like the terrorism or flood insurance programs, or some other special purpose entity. But that is for after the crisis, and not during it. Let the President continue to champion the needs of the public during this time in his speeches and tweets, but let’s not go crazy thinking that he is lending anything more to the claims process than President Bush did when he correctly said we were at war. These contracts will continue to be interpreted as they should be, will be upheld by a judiciary largely of Mr. Trump’s remaking, and a great many will be seen as not providing the kind of coverage the President might like to think they do.

Additional Insights for Insurers From New COVID-19 Coverage Suits

Scott Seaman and Judith Selby | Hinshaw & Culbertson

Since our prior post from last week, additional COVID-19 coverage lawsuits have been filed throughout the United States, and themes and insights concerning theories of coverage continue to emerge.

At least four new coverage actions have now been commenced in Indiana, Florida, Texas, and Illinois. The Indiana and Florida suits were filed in state court, while the Texas and Illinois cases were filed in federal district courts. The policyholders seek coverage for business losses under policies providing business interruption, business income, extra expense, civil authority, and/or ingress/egress coverage. Statutory or common law bad faith claims were made in three of the four lawsuits.

In all four cases, the insured provided notice of a claim to the insurer. Two of those claims were denied. In one case, the carrier responded that it was investigating the claim under a full reservation of rights. In another case, the carrier had not denied the claim prior to the filing of the lawsuit.

As in earlier complaints, the insureds in three of the new actions appear to contend that the absence of a virus exclusion means that the claims are covered. In the SCGM matter, the insureds seek coverage under a Pandemic Event Endorsement, which is triggered by the occurrence of certain enumerated diseases. Although the insurer did not deny the insured’s claim, the insured filed suit and asserted a claim for “Breach of Contract-Anticipatory Breach/Repudiation” based on a statement by an alleged “agent” of the insurer to the insured’s broker, stating that COVID-19 is not a named disease on the endorsement. The insured also asserted a common law bad faith claim, based on an alleged “internal, high-level directive to automatically deny all pandemic-related business interruption claims,” as well as a claim for “Gross Negligence and/or Malice.”

In Mace Marine, the insured asked the court to rule that COVID-19 contamination constitutes direct physical loss or damage to property, and asserted a bad faith claim based on the insurer’s alleged “general business practice of willful, wanton, immoral, unlawful, malicious and/or deceptive claims handling practices.” In Sandy Point Dental, the insured based a statutory bad faith claim on allegations that the carrier denied coverage without conducting a reasonable investigation and failed to provide reasonable and accurate explanations for the denial of the claim.

In addition, what may have been the first COVID-19 wrongful death lawsuit was filed in Illinois state court on April 6 by the estate of a Walmart employee who died from coronavirus. Walmart Inc. and the owner of the shopping center where the store was located were named as defendants. The plaintiff asserted claims for negligence and willful and wanton misconduct based on, among other things, the alleged failure to cleanse and sterilize the store, failure to implement, promote, and enforce social distancing guidelines, and failure to provide the decedent with personal protective equipment.

Statutes of Limitations Are Moving Targets During the COVID-19 Pandemic

Rebecca Brazzano and Martine C. Wilson | Thompson Hine

Key Notes:

  • Carefully review the raining orders that address tolling of the statutes of limitations in your jurisdictions.
  • Be mindful of governing choice of law provisions.
  • Best practices include using tolling agreements and dusting off the defense of equitable tolling.

One of the tried and true defenses to a claim is that the statute of limitations has expired. Before COVID-19 this was a simple determination, now it is not. As state executives and the judiciary across the United States rapidly issue orders tolling certain statutes and rules, and then extend those same orders, lawyers and clients must continuously track them. Every time we thought our analysis was “done,” another order dropped, and we then reviewed each of the prior orders to confirm that we have real-time information to share. That said, the information we provide here as it applies to civil statutes of limitations is up to date through April 7, 2020.

The first item to note is there is no consistency at the state level. Given the swift pace at which these tolling orders are rolling out, the best approach appears to be the path taken first by Kansas, whose Supreme Court issued an administrative order on March 18 that “suspended until further order” all statutes of limitations deadlines. Connecticut followed, with Governor Ned Lamont issuing an executive order effective March 19 suspending statutes of limitations for the duration of the of “this public health and civil preparedness emergency.” By extending the limitations period from a specific date to a date in the future that can be easily tracked, Kansas and Connecticut have given durability to their statutes of limitations tolling. In contrast, the Rhode Island Supreme Court issued an order on March 17 that gives less than clear direction, offering that “[r]equests for extensions to applicable statutes of limitations necessitated by the current health crisis shall be entertained by the respective courts after thirty (30) calendar days from the date of this Order.” As April 16 approaches, affected parties must be diligent in checking and rechecking to see if another order is issued that yet again extends the limitations period. Rhode Island’s order is particularly concerning for clients, as it appears to give the state’s judges a certain degree of discretion once these requests to extend certain limitations periods are heard in the various courts. As the current Stay-at-Home Executive Order 20-13 issued by Rhode Island Governor Gina Raimondo expires on April 13, further action will likely be needed. As states take differing approaches to tolling their civil statutes of limitations, litigants will be looking at jurisdiction advantages moving forward. For example, if a claim can be litigated in Rhode Island or New Jersey, a party may want the certainty of the New Jersey Supreme Court’s definitive order (described below) over the discretion provided in Rhode Island.

New Jersey has taken a unique approach. On March 27, its Supreme Court ordered that “[i]n the computation of time periods under the Rules of Court and under any statute of limitations for matters in all courts, for purposes of filing deadlines, the additional period from March 28 through April 26, 2020 shall be deemed the same as a legal holiday, thus extending the tolling established by the [earlier] March 17 Order,” making March 16 through March 27 a legal holiday. For clients and lawyers, this provides a degree of certainty; at least they know that this period is considered a legal holiday for statutes of limitations purposes.

A number of states have done nothing, which is puzzling. Equally perplexing is why there has been no movement on the federal level. Lawyers and clients are increasingly frustrated by what “governing rules” means. Currently, in the federal courts, litigants must consult the Federal Rules of Civil Procedure, then the local district and appellate courts’ rules, and then individual judges add their own rules to the pile.

The randomness of the state courts’ tolling starting and ending dates continues. In its March 22 order, the Supreme Court of Appeals of West Virginia stated:

Statutes of limitations and statutes of repose that would otherwise expire during the period between March 23, 2020 and April 10, 2020 are hereby extended until April 11, 2020. Deadlines, statutes of limitations, and statutes of repose that are not set to expire between March 23, 2020, and April 10, 2020, are not extended or tolled by this order. Proceedings previously scheduled between March 23, 2020, and April 10, 2020, are continued until a later date determined by the presiding judicial officer. The Court may extend this Order in the event the public health crisis continues.

West Virginia Governor Jim Justice declared a state of emergency on March 16 and later issued a Stay-at-Home Order effective March 24 at 8:00 p.m. It appears that litigants in the gap between the two directives are not shielded by the tolling of the limitations period in West Virginia. Litigation to determine fair application of these orders from the start of a state’s declared state of emergency until that declaration is lifted is expected.

Neighboring Virginia took yet another approach, which requires counsel to chase the limitations tolling period again and again. On March 16, the Supreme Court of Virginia ordered “[p]ursuant to Va. Code § 17.1-330, a judicial emergency was ordered; effective March 16, to April 6, 2020 (all deadlines are hereby tolled and extended, pursuant to Va. Code § 17.1-330(D), for a period of twenty-one (21) days).” Virginia’s declaration of a state of emergency was issued on March 12, but statutes of limitations were not tolled until March 16. Litigants will have to contend with the differing gaps. As April 6 approached, Virginia’s Supreme Court had to again address its statutes of limitations tolling by issuing a new order on March 27 that provides an extension of the statutes of limitations tolling for the “duration of this Order,” from April 6 to April 26. This order excepts certain claims, too many to list here, creating even less clarity.

Georgia’s tolling offers relief from March 14 through April 13, suspending, tolling, extending and “otherwise grants relief from any deadlines or other time schedules or filing requirements imposed by otherwise applicable statutes, rules, regulations, or court orders, whether in civil or criminal cases or administrative matters, including, but not limited to any: (1) statute of limitation.” The Georgia Supreme Court saw April 13 as fast approaching and issued another order extending the tolling to May 19. Multiple executive and judicial orders are being issued to stretch the original orders’ expirations while stay-at-home orders continue in place.

Learning from its neighboring states’ patchwork of expiring orders, on March 27, the Ohio Supreme Court issued an order tolling statutes of limitations in conformance with Am. Sub. H.B. No. 197, which was signed into law by Governor Mike DeWine on March 27. It immediately tolled, retroactive to March 9, all statutes of limitations, time limitations and deadlines in the Ohio Revised Code and the Ohio Administrative Code until the expiration of Executive Order 2020-01D or July 30, 2020, whichever is sooner. Ohio’s retroactive application of tolling to March 9 has a reasonable relationship to the state of emergency Governor DeWine issued on March 10.

Per Executive Order 202.8 issued by New York Governor Andrew Cuomo on March 20:

[A]ny specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state, including but not limited to the criminal procedure law, the family court act, the civil practice law and rules, the court of claims act, the surrogate’s court procedure act, and the uniform court acts, or by any other statute, local law, ordinance, order, rule, or regulation, or part thereof, is hereby tolled from the date of this executive order until April 19, 2020.

With April 19 approaching, Governor Cuomo issued another executive order on April 7 tolling all dates covered by the previous executive order to May 7.

For those states that explicitly do not toll statutes of limitations in their respective orders (Alabama, Idaho and Indiana (trial courts may petition where necessary to toll “for a limited time all laws, rules, and procedures setting time limits for … all other civil and criminal matters before all State of Indiana trial courts”)) and the states that do not even address statutes of limitations in their orders[1] (Alaska, Arizona, Arkansas, California, Colorado, Florida, Hawaii and Illinois), while most have declared states of emergency and issued stay-at-home orders, their silence on the tolling issue is inexplicable and disadvantageous to litigants.

Advising on best practices during this pandemic is a day to day, and at times, hour by hour, challenge. While it is unclear why the Kansas/Connecticut/Ohio approach has not caught on, the orders and amended orders being issued make docketing and tracking all the more painstaking. Although we do not address the thousands of other orders issuing from state judiciaries and individual courts on scheduling issues, court closures and openings, and discovery extensions, individual judges issuing their own personal emergent COVID-19 orders is a morass that lawyers need to navigate carefully.

State supreme courts need to take a pause and consider issuing a single order governing their civil statutes of limitations that expires coextensively with their declared state of emergency plus 30 days. It is not practical to have the thousands of filings that have not been filed during the pendency of these tollings snap back and everyone filing the date that tolling expires in any particular jurisdiction. Given that many state civil courts are effectively closed, absent extraordinary relief being sought, the judiciary is already facing a backlog of cases whose proceedings are already in the queue. Rather than burdening an already taxed system, counsel should be proactively reaching out to their current and potential adversaries and entering into simple tolling or standstill agreements as a best practice with one caveat. A tolling agreement does not, except in very complex cases, need to be a complicated 20-page agreement. The parties can simply agree to toll the filing of claims to a specific date that is tied to the governing state of emergency that has been declared in the jurisdiction where the parties are litigating or plan to litigate. This will eliminate the need to check executive and judicial orders almost daily. The agreement should include language stating that the defendant or potential defendant is waiving the right to challenge the claim on the grounds that the limitations period passed. In addition to buying more time and protecting litigants’ rights, tolling agreements can lower litigation costs and support settlement negotiations.

Another best practice is to review existing contracts. The pandemic’s consequences for supply chains and essential businesses will cause ripple effects. Review choice of law provisions in agreements and put them in summary form where the data is readily available, which allows quick retrieval of contracts for review of relevant choice of law and force majeure clauses that will impact potential disputes moving forward. Keep in mind that some states are allowing individual trial courts to determine if a statute of limitations is tolled, and it is prudent to determine if such orders apply to potential disputes.

Finally, consider equitable tolling as a standard defense moving forward. The principle of equitable tolling is that a litigant should not be precluded from bringing a claim when, due to unexpected circumstance, it was prevented from pursuing the claim before the expiration of the statute of limitations. A litigant is entitled to equitable tolling where it has diligently pursued its claim and some extraordinary circumstance prevented a timely filing. It is important to review the relevant jurisdiction’s case law regarding equitable tolling, as it varies by jurisdiction.

And Yet One More Thing to Add to Your List of “Uncertainties”

Garret Murai | California Construction Law Blog

We’re at war. One fought from the confines of our homes. As we enter into week four of California’s “shelter in place” order, and with experts saying that we may not be able to loosen (let alone, withdraw) restrictions until May at the earliest, many are thinking about what they can do in the event of an extended period of economic inactivity. One area businesses are giving thought to is insurance, in particular, the business interruption provisions of their policies.

For companies involved in construction, most are familiar with the panoply of insurance required on construction projects including commercial general liability insurance, workers’ compensation insurance, employers liability insurance, automobile liability insurance and, if you are performing design work, professional liability insurance. Each of these types of insurance are intended to cover third-party claims. That is, claims against the insured, as opposed to claims by an insured.

Business Interruption Coverage

In addition to third-party liability insurance, most businesses also carry property insurance, intended to cover damage to property, including damage caused by business interruptions. Property insurance covers first-party claims. That is, claims by an insured.

Business interruption coverage typically comes in two flavors:

  1. Business interruption coverage for losses incurred as a result of disruptions to an insured’s business; and
  2. Contingent business interruption coverage for losses incurred as a result of disruptions to an insured’s business customers or suppliers.

Both, however, typically require “direct physical loss of or damage to” property by a covered cause of loss, for coverage to be triggered. And, this is where it gets murky.

Direct Physical Loss or Damage

First, courts have not settled on a uniform set of rules as to what constitutes “direct physical loss of or damage to”” property. Certainly, most courts are in agreement that “direct physical loss of or damage to” property includes physical damage or loss of property by a covered cause of loss that results in disruptions to an insured’s business such as by flood or fire.

However, what about the coronavirus, which, one could argue, does not cause physical damage or loss of property?

Some are already testing the waters, such as celebrity chef Thomas Keller, owner of the world-renown French Laundry in Yountville, California, who has sued his insurers in the Napa County Superior Court claiming that the coronavirus triggers coverage under the business interruption provisions of his policy because the virus while it can’t be seen does in fact cause damage to property and is therefore covered. Keller’s attorney has acknowledged that the lawsuit is a test case to establish legal precedent in California.

Virus or Bacteria Exclusion

Second, for those of you who have read your insurance policies, you know that your policy basically covers everything unless it’s excluded, and that list of exclusions is long indeed. One of the exclusions found in many policies is an exclusion for “virus or bacteria.”

Incorporated into their policies by insurance companies in the wake of the SARS epidemic nearly 15 years ago, the exclusion typically states that the carrier “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

But states may step in to override insurers. Pennsylvania became the fifth state last week, following the lead of New York, New Jersey, Ohio and Massachusetts, to introduce legislation to override the “virus” exclusion, while a group GOP Senators wrote a letter to President Trump on Friday urging him to protect insurers against state legislative intervention.

To date, California has not stepped into this debate, although the California Department of Insurance’s website has stated that it is conducting a mandatory request to insurance companies for data about the number and type of small businesses with business interruption coverage and the scale of both covered and uninsured business losses, which suggests that it might.

Disruptions Caused by Civil Authorities

Third, under the property coverage of some policies, there is coverage for losses resulting from government actions that impair or prohibit access to an insured’s business premises. California’s mandatory “shelter in place” order has clearly impacted the ability of many construction companies and project owners from accessing their businesses. However, like business interruption coverage, civil authority coverage provision often requires “physical loss” for the coverage to be triggered, which, of course, like the protagonists of Franz Kafka’s The Castle or Joseph Heller’s Catch-22,  depending on your literary sensibilities, simply leads you right back to square one.

In short, and while the term “uncertainty” has been bandied about a lot as of late, there is uncertainty on the insurance front about how courts will interpret the applicability of insurance provisions to the coronavirus pandemic and what states will do to guide those decisions.

Virus Exclusion? – Don’t Abandon Hope for Coverage Just Yet

David G. Jordan | Saxe Doernberger & Vita

Companies across all industries have been deeply impacted by the social-distancing protocols and economic slowdown caused by the COVID-19 pandemic. Naturally, competent business owners have looked to their commercial business and property insurance programs to determine what coverage, if any, they may have to offset the financial losses being suffered. To their dismay, many such entities have discovered that their policies specifically exclude losses related to virus. While this exclusionary language may seem to be the death blow to any chance of recouping losses from insurance, policyholders with virus exclusions should not give up hope for insurance recovery. First, some polices that broadly exclude losses from virus provide (or give back), by way of a coverage extensions, limited coverage for decontamination costs and/or communicable disease coverage. When in doubt as to whether any such coverage applies, businesses should provide notice of a claim. By doing so, some coverage might be obtained that otherwise would have been lost, but even where claims are denied, such businesses would be no worse off than if they had not tendered. Second, even where losses from virus are completely excluded, compensation may still ultimately become available.

History has shown that in times of crisis our federal and state governments have not turned a blind eye to the plight of hurting individuals of businesses; the very engine that drives our economy. Even now, certain states, such as New York, New Jersey, Massachusetts and Ohio, have proposed legislation aimed at forcing insurers to cover COVID-19 related losses, irrespective any policy exclusions that may bar such claims. Certainly, such initiatives will be met with strong objection by the insurance industry and will be the subject of legal challenge. However, while these legislative attempts to force insurers to cover otherwise uninsured risks face significant obstacles, the core idea of creating a means of establishing relief to particular (adversely impacted) groups of society is not without precedent.

In the wake of 9/11, for example, a fund was established to help cover injuries to those that responded to the collapse of the World Trade Center. Again, in Connecticut, legislation was passed to create a fund to help homeowners that were victims of crumbling foundations due to faulty concrete, as these losses were deemed excluded by insurance and the concrete suppliers went bankrupt (per the legislation, as small surcharge was added to homeowners’ insurance premiums to fund the program). Funds have also been created in the aftermath of natural disasters, such as Hurricane Katrina. Alternative remedies may involve grants, such as what FEMA provides to storm damage victims that do not have flood insurance. A Pandemic Risk Insurance Act is also being discussed in Congress (albeit to address risks of future pandemics – not COVID-19). Therefore, it is very possible, if not probable, that some sort of program (or various programs) will be established to address the economic damage caused by Coronavirus to businesses that are without adequate (or any) insurance. Pragmatic legislators undoubtedly realize that keeping our economy healthy hinges upon keeping businesses afloat.

What such program looks like and how it will operate is difficult to predict at this point. But it very well could involve a setup where major insurance companies are asked to play a role in administering claims and determining payouts. Further, and importantly, a condition of qualifying for funding could very well be proof an insurance policy that excludes losses caused by virus (thus, do not tear up or throw away that policy in frustration!). For this reason, it is important for companies to not abandon the idea that financial remedies may become available in the not-to-distant future and to document, with as much detail possible, the losses suffered a result of this crisis. The greater the ability a company can quantify its losses, the more likely it is to receive maximum recovery from any potential fund that is created in the future.