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Business Income Cases Federalism

6th Circuit Affirms Dismissal, holding a government shutdown order does not cause physical loss

Author: Tom Baker Date: 09.23.21

6th Circuit Affirms Dismissal, holding a government shutdown order does not cause physical loss

In Santo’s Italian Café v. Acuity Ins. Co., issued on September 22, the 6th Circuit affirmed the trial court’s dismissal of a business interruption lawsuit brought by an Italian restaurant, marking the third straight victory for insurers in the federal appellate courts.

The 6th Circuit ruling was a narrow one, rejecting the restaurant’s claim that the government shutdown order, alone, caused “direct physical loss of or damage to property.”  The court noted that the policyholder had not alleged that the virus was present on the property, nor that the property was uninhabitable or unusable as a result.

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Business Income Cases CCLT Reporting Methods

K.C. Hopps v. Cincinnati to go to trial October 25; ruling reveals limits of CCLT website

Author: Tom Baker Date: 09.23.21

K.C. Hopps v. Cincinnati to go to trial October 25; ruling reveals limits of CCLT website

On September 21, 2021 U.S. District Court Judge Stephen Bough of the Western District of Missouri  issued a summary judgment ruling that sets K.C. Hopps v. Cincinnati for trial.  Judge Bough held: “Whether the virus was present on Plaintiff’s premises, whether it actually caused a physical loss or physical damage to Plaintiff’s premises, and the extent of Plaintiff’s damages due to that ‘loss’ are genuine issues of material fact which preclude summary judgment.”  Judge Bough distinguished the 8th Circuit’s ruling in Oral Surgeons on the grounds that the plaintiff had alleged facts sufficient to establish physical loss or damage under the policy and held that the plaintiff had presented sufficient evidence to get to a jury on that issue.  Accordingly, Judge Bough denied the insurer’s summary judgment motion on the physical loss or damage issue.  The trial date is October 25, 2021.  Stay tuned.

By any measure, this ruling represents a significant policyholder win, especially in the current context.  Yet, because Judge Bough granted the insurer’s summary judgment motion on the ingress/egress issue, the ruling is displayed on the CCLT website as “Insurer MSJ Granted.”  The CCLT database accurately allows summary judgment rulings to be coded as full or partial, but the trial court rulings webpage doesn’t yet reflect that distinction.  We are working to fix this.  In the meantime, readers should understand that, notwithstanding that Cincinnati’s MSJ was granted (in part), the ruling belongs in the “loss” column for insurers.

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Business Income Cases Federalism

Should New Castle v. Zurich be Categorized as a Policyholder Win?

Author: Tom Baker Date: 09.09.21

Should New Castle v. Zurich be Categorized as a Policyholder Win?

New Castle Hotels v. Zurich American Ins. Co., X07-HHD-CV-21-6142969-S (CT – Hartford Cty Sep. 7, 2021) reveals the limits of the CCLT trial court ruling box score.  The court denied the motion to dismiss as to the policyholder’s Louisiana properties but granted the motion to dismiss as to all other properties, on the grounds that the contamination exclusion barred coverage except in Louisiana.   (As many readers of this website know, Zurich policies frequently contain an endorsement with the heading “Louisiana” that, among other changes to the policy, eliminates the word “virus” from the contamination exclusion but does not specifically say that it applies only in Louisiana.  The court did not address in this ruling the argument that the endorsement applies outside of Louisiana.)

Under the CCLT coding system, the case is characterized as a partial grant of a motion to dismiss, which shows up in the box score as MTD granted.  There is a strong argument that any partial grant of a motion to dismiss should be regarded as a policyholder win.  That argument is quite strong in this case, because of the court’s ruling on the physical loss or damage issue:

Every type of coverage under the policy — for clean-up, lost business, etc. — is tied to “direct physical loss of’ or “direct physical damage to” property. But Zurich claims that there is nothing “physical” about the losses or damage flowing from the COVID-19 virus. Zurich notes that some courts in other jurisdictions have addressed this issue — remarkably even at the pleading stage –remarkably with little apparent deliberation. Yes. Zurich can cite decisions where courts, agree with it. Some of them merely note that claimants haven’t even alleged physical damage using the words “physical”. Others go further. The virus damages lungs not property, they say.

But can this merely be asserted to become true? Maybe this kind of result is the product of an expansive view of “plausibility” under the pleading standard adopted by the United States Supreme Court in Bell Atlantic Corp. v. Twombly.  But Connecticut’s standard prefers a ruling from the evidence rather than the gut. Practice Book §10-1 only requires a party to plead “a plain and concise statement of the material facts on which the pleader relies.”

New Castle has done this. Beginning at paragraph 32 of the complaint it alleges that the virus “is a cause of real physical loss or of damage to property”. It goes on to cite government and private sources to allege that the virus is extremely damaging to humans and can lie in wait for them by lingering for many hours on the surface of physical property — including for up three days on the plastic and stainless steel surfaces found in New Castle properties. It further alleges that the physical dimensions of affected physical pieces of its property can be microscopically damaged and changed by the virus. It warns of the possibility that a contaminated property can become a super-spreader viral incubator as the virus jumps from person to property to another person and back.

These are the very things Zurich says aren’t true. But of course who is right is a matter of evidence, and whatever the federal standard, Practice Book §10-1 specifically says that pleadings are to contain fact allegations and that they must not contain evidence.

 But to get judicial notice that the virus makes no physical change to physical objects, Zurich would first have to demonstrate to the court that it is generally known that the COVID-19 virus does not degrade the molecules making up a physical object and that this is readily verifiable. And it has not done so. Pointing to scientifically unsupported conclusions from other courts isn’t enough. This court has nothing in front of it that establishes these two points as a matter of unquestioned science.

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Business Income Cases Federalism

11th Circuit Affirms Dismissal

Author: JJ Dunn Date: 08.31.21

11th Circuit Affirms Dismissal

Today, in the case of Gilreath Family & Cosmetic Dentistry Inc. v. The Cincinnati Insurance Company, the Eleventh Circuit affirmed the Northern District of Georgia’s dismissal of a plaintiff’s complaint. The Eleventh Circuit becomes just the second federal appellate court to address the merits of a COVID-19 business interruption insurance case after the Eighth Circuit cursorily affirmed the trial court’s dismissal in Oral Surgeons PC. v. The Cincinnati Insurance Company.

In their per curiam, not-for-publication opinion, the Eleventh Circuit rejected the plaintiff’s argument that they should have received coverage under the “Business Income” and “Extra Expense” provisions of their policy. Applying precedent from the Georgia Court of Appeals, the Court held that “direct physical loss or damage” requires that there be “an actual change in insured property that either makes the property unsatisfactory for future use or requires that repairs be made.” (internal quotations omitted). The Court found that the plaintiffs, who own a dental practice in Georgia, had not alleged anything that would qualify as physical loss or damage to their property. Of particular importance, the Court rejected the plaintiff’s argument that the possible presence of viral particles constituted physical damage or loss to the property. For similar reasons, the court also held that the plaintiffs were properly denied coverage under the “Civil Authority” provision.

Of note, the Georgia Court of Appeals decision relied on by the Eleventh Circuit rejected a Y2K claim for business interruption coverage for loss related to the need to change a computer system from a two digit to a four digit date format.  AFLAC Inc. v. Chubb & Sons, Inc., 260 Ga. App. 306, 308 (2003).

As of right now, insurers are 2-0 in federal appeals. With many more cases sitting on the dockets of the various circuits, we will have to wait and see if other courts will follow suit.

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Business Income Cases Federalism

9th Circuit Oral Arguments — Great Advocacy!

Author: Tom Baker Date: 08.11.21

9th Circuit Oral Arguments — Great Advocacy!

Just finished listening to the oral arguments in the Chattanooga Professional Baseball, Selane, and Mud Pie cases in the 9th Circuit.  Great advocacy and an engaged and informed panel!   Certification is definitely on the table.  Judges Christen and Forrest explicitly said that they are considering certification.  Judge Annello (from the California Southern District, sitting by designation) didn’t tip his hand.  Insurer advocates emphasized the delay that comes from certification.  Policyholder advocates emphasized the unfairness that would result if the court makes an Erie guess that turns out to be wrong.

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Business Income Cases Federalism

Knutsen & Stempel on the Federal Court Rush to Judgment

Author: Erik Knutsen & Jeff Stempel Date: 07.25.21

Knutsen & Stempel on the Federal Court Rush to Judgment

When the COVID-19 virus and attendant restrictions burst on the scene during Spring 2020, contested coverage claims were expected.  What has surprised most everyone, however, is the amazing insurer success to date in defeating those claims via motion.  Insurers have prevailed more than 90 percent of the time in federal court (although “only” two-thirds of the time in state court, less if dismissals without prejudice count as a policyholder win).

Also surprising to most observers is that insurers have been winning not because of the ISO-drafted virus exclusion issued in the wake of the SARS epidemic of the early 2000s but by convincing (largely federal) trial judges that policyholder premises (air or surface) have not suffered “physical damage” and that government-mandated prohibitions on use of policyholder property are not a “physical loss.”  As a result, policyholders have thus far been unable to obtain coverage even where the policy in question lacks a virus exclusion.  Insurers, even those with strong virus exclusions, defended on the no-loss-or-damage argument, with the argument succeeding beyond expectation.

We explore this phenomenon in our recently published article Infected Judgment: Problematic Rush to Conventional Wisdom and Insurance Coverage Denial in a Pandemic, 27 Conn. Ins. L.J. 185 (2020), which went “to press” in late 2020.  Since that time, the insurer win rate has proceeded apace.  As discussed in the article, the facial, dictionary-supported textual meaning of the terms at issue provides a strong argument for coverage when government orders prevent policyholder use of property or the property is afflicted with COVID in the air or on surfaces.  To be sure, there are solid arguments to the contrary that insurers have marshalled.  But in our view, the insurer-favored arguments are nowhere near strong enough to justify their more than 90 percent win rate in federal court.

As detailed in our article, we attribute much insurer success to the industry’s early and effective public relations campaign, which appears to have been at least subconsciously accepted by federal trial courts, contending that COVID-19 coverage would financially ruin insurers.  As detailed in Infected Judgment, it is hard to find a better explanation for the disappointing performance of federal courts to date.  Their “analysis” of COVID-19 coverage disputes has too often been glib, superficial, conclusory and sometimes in de facto disregard of the ground rules of contract construction and applicable state insurance law precedent.

The problem we identified in 2020 has only gotten worse in 2021 as federal courts in the most recent decisions largely have eschewed fresh analysis in favor of treating the issue as determined by what one might term the “first wave” of trial court decisions.  At least in federal court, a cascade effect appears to have taken hold, with attendant reflexive resistance to COVID coverage rather than the closer and more sophisticated analysis the matter deserves.

Recent decisions such as Brown’s Gym, Inc. v. Cincinnati Ins. Co. (Court of Common Pleas, Lackawanna County, Pennsylvania July 13, 2021) and Schleicher & Stebbins Hotels, LLC v. Starr Surplus Lines Ins. Cos. (Superior Court, Merrimack County, New Hampshire June 15, 2021) make strong cases for coverage and rejecting pretrial dismissal of COVID coverage claims.  If the highest courts of the states share these views, a needless divide will have occurred because of federal court failure to pursue certification, a logical avenue for effectively resolving COVID claims.

The federal bench may still recover from its judgment infected by the insurer influence campaign as circuit courts weigh in on the coverage issue.  However, the one circuit court decision to date (Oral Surgeons, P.C. v. Cincinnati Ins. Co. (8th Cir. July 2, 2021) is not encouraging.  If state high courts ultimately refute the too-often simplistic assessment of federal courts, the saga of the COVID coverage wars will not reflect well on the legal system.

Categories
Business Income Cases

State courts not jumping on the federal bandwagon

Author: Jay Hauser Date: 07.21.21

State courts not jumping on the federal bandwagon

Although appeals meant to provide authoritative answers to business interruption litigation questions are pending in both federal and state courts, federal and state courts appear to be at different phases of the informal, persuasion-based jurisprudential development process. Vandelay Hospitality Group LP v. The Cincinnati Insurance Co., No. 3:20-CV-1348-D, 2021 WL 2936066 (N.D. Tex. July 13, 2021) shows a federal district court quickly accepting the majority approach to policies without a virus exclusion while Brown’s Gym, Inc. v. The Cincinnati Insurance Co., No. 20 CV 3113 (C.P. Lacka. Co. July 13, 2021), serves as an example of a state court taking pains to bolster its decision to take the minority approach.

In Vandelay, the Northern District of Texas goes with what has become the majority rule in federal district courts—that physical loss or damage requires a tangible, physical alteration of structures that cannot be fixed through routine cleaning. However, the court did not come to this decision through a lengthy, detailed, and original analysis of pre-COVID property insurance caselaw. Instead, it explicitly jumped on the bandwagon, directly lifting its view on the hot-button insurance litigation issues from other COVID business interruption rulings within the Fifth Circuit (and quoting quite a few). It was a decision to not reinvent the wheel while an appeal was pending.

The 60-page analysis in Brown’s Gym, a case currently before the Lackawanna County Court of Common Pleas in Pennsylvania, stands in stark contrast. The court began its discussion by summarizing two pre-COVID Third Circuit diversity cases ruling that contamination need not cause physical alteration of structures damage to constitute property damage, provided that the contamination causes the property to become uninhabitable, useless, or without functionality. The court then provided a summary of how state and federal trial courts in both Pennsylvania as well as other states have ruled based on this standard in COVID cases. While Pennsylvania’s federal district courts have routinely found no physical loss or damage from COVID, some Pennsylvania trial courts, other states’ trial courts, and the occasional federal district court have determined that alleging actual presence of the virus on the premises satisfies the physical damage requirement for invisible harms. The Brown’s Gym court agreed with the latter approach and concluded that, because Brown’s Gym actually alleged that COVID was present on its property, Brown’s Gym had adequately pled its claims against Cincinnati Insurance Company.

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Business Income Cases CCLT Reporting Methods

First Appeal Decided. A new CCLT box score will be coming soon.

Author: Tom Baker Date: 07.07.21

First Appeal Decided.  A new CCLT box score will be coming soon.

As every reader of this website already knows, the 8th Circuit has decided the first appeal:  affirming the trial court’s dismissal in Oral Surgeons PC v. Cincinnati Insurance Company.  That prompted us to add a new “outcome” column to the list of appeals on our appeals page.  You can sort based on that column to find cases with decided appeals.  Once there are more than a few appeals decided, we’ll be adding an appeals box score and, potentially, some visuals.  Suggestions for this and other upgrades to this website are welcome.  Send them to cclt@law.upenn.edu.

Categories
CCLT Reporting Methods Unusual cases Virus exclusions

Schleicher and Stebbins Hotels LLC v Starr Surplus Lines

Author: Tom Baker Date: 06.16.21

Schleicher and Stebbins Hotels LLC v Starr Surplus Lines

The recent summary judgement order issued in the Schleicher and Stebbins Hotel case in New Hampshire illustrates one of the limits of the judicial rulings box score on this website.  We fully and accurately code in the CCLT database many complicated insurance programs in which different insurers have different endorsements, but we don’t have the capacity to represent that complexity in the judicial rulings box score displayed on this website.

When there is an order that addresses differences among the insurance policies at issue in a case, we have to choose which policy to use as the basis for representing in the box score whether there is a virus exclusion in the policy.  When that happens, we choose the policy (or policies) that represents the largest share of the coverage at issue.

In Schleicher and Stebbins Hotel, the bulk of the coverage was written on a form of policy that does not contain any reference to “virus.”  That policy includes an endorsement that excludes coverage for physical loss or damage caused by “microorganisms,” a term which is defined to include a number of items, not including the word “virus.”  Not surprisingly (in light of the bedrock insurance law principle of contra proferentem), the New Hampshire trial court held that this microorganism exclusion does not apply to Covid 19 claims. Unlike the other insurer defendants, Axis had issued a policy to the hotel group with an exclusion that does contains a reference to “virus.”  Accordingly, the court granted summary judgment on coverage to the hotel group and against all the insurers except Axis and granted summary judgment to Axis against the hotel group.

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Business Income Cases CCLT Reporting Methods

Ja-Del Inc. SJ Order Vacated and the CCLT Database Updated

Author: Tom Baker Date: 03.18.21

Ja-Del Inc. SJ Order Vacated and the CCLT Database Updated

About a week ago, we learned that the summary judgment order granted in favor of Ja-Del Inc. in Ja-Del Inc v. Zurich American Insurance, 2016-CV11209 (Jackson Cty Circuit Ct, Missouri) (Feb. 4, 2021) had been vacated.  That was a new one for us.  There is nothing “off the rack” about the CCLT database or the CCLT website, so we had to scramble to figure out how to reflect that development.  Simply deleting the earlier Order wasn’t an option, because that Order and the court’s decision to vacate are part of the history of the litigation.  But we didn’t want the Order to continue to appear on the list of on-the-merits Judicial Orders on the website, nor did we want it to count for the box score.  Thanks to Alex Shor, we came up with a solution.  The Order remains in the database, but it no longer appears on the CCLT website.

Please keep us informed of these and other developments, particularly in state court cases.  And please be patient when those developments don’t fit neatly into our database structure.  We’re building this plane while we’re flying it!