Category: Beyond the U.S.

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Beyond the U.S. Business Income Cases Federalism

Dan Schwarcz on How To Get Unsettled Coverage Questions Into the State Courts — Where They Belong

Author: Daniel Schwarcz Date: 10.12.21

Dan Schwarcz on How To Get Unsettled Coverage Questions Into the State Courts — Where They Belong

Insurers and policyholders have different perspectives on whether ordinary business interruption policies cover losses stemming from pandemic-induced shutdowns.  But both groups should be able to agree that the judicial process for resolving these disputes makes no sense.   After thousands of lawsuits, hundreds of judicial opinions, and a year-and-a-half of attorneys’ fees, clarity regarding insurers’ coverage obligations remains elusive.  Although insurers have prevailed in a significant majority of the motions to dismiss that they have filed in these cases, policyholders have also scored a meaningful number of victories.  This is particularly true in state courts, which will ultimately have the final word on the proper interpretation of business interruption policies.  It is way too early, in other words, to declare insurers the victors in these coverage contests.

This costly and indeterminate process for resolving pandemic business interruption disputes was entirely predictable. In many ways it echoes the decades-long litigation over prior widespread coverage disputes, like those involving CGL insurers’ coverage obligations for liability arising under CERCLA.  But the chaotic resolution of pandemic business interruption disputes may not have been inevitable.

That, at least, is the possibility suggested by the United Kingdom’s innovative “test case” scheme for resolving its own pandemic business interruption coverage disputes. Under that scheme, the country’s primary market conduct regulator for insurers, the Financial Conduct Authority, asked the British courts to find coverage under a representative sample of insurance policies that covered business interruptions caused by the presence of disease or denial of access to property.  Within about 6 months, the country’s high court definitively resolved this test case, in the process providing “authoritative guidance for the interpretation of similar policy wordings and claims.” Since early 2021, the coverage obligations of most U.K. insurers for pandemic-induced shutdowns have thus been quite clear.

To be sure, there are crucial distinctions between the British and American settings that would make a test case scheme unworkable in the U.S.  Still, the contrasting experiences of the two countries suggests some ways to improve the U.S. system by adopting elements of the British approach.   After all, the insurance coverage questions raised by the pandemic are hardly the first example of widespread coverage disputes in the U.S. being inefficiently resolved through hundreds of lawsuits that generate mass uncertainty and span years, if not decades.   And absent broad-ranging reforms, they will certainly not be the last.

Taking that possibility seriously, my new Article suggests that states should empower their insurance regulator and attorney general to request that federal courts adjudicating cases raising novel coverage questions implicated in emerging and widespread coverage disputes certify those questions to the state’s supreme court. Unlike the UK’s test case scheme, this proposal would focus public state actors solely on identifying a set of pending coverage disputes wherein the exercise of federal courts’ long-standing certification authority would be most likely to help. Public officials would play no role in litigating the merits of these coverage disputes, leaving that task to private parties already embroiled in existing litigation. Not only could this proposal help  limit the uncertainty and costs produced by litigation like the pandemic BI coverage cases, but it could also affirm the primacy of state, rather than federal, courts in deciding highly consequential and contested questions of state insurance law.

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Beyond the U.S.

A Decision in the FCA Test Case

Author: Tom Baker Date: 09.15.20

A Decision in the FCA Test Case

The High Court released its decision today.  It’s 150+ pages long and covers a host of issues.  The FCA reports that the court generally found in favor of the policyholders.  Notably, the insurance policy provisions that the court considered were the “non-damage wordings,” many of which differ significantly from the policy provisions at issue in the U.S. business interruption cases.  While there is much grist for the mill in the decision (and I particularly enjoyed the court’s discussion of principles of interpretation), the decision does not address the key threshold issue in the U.S. cases: can the policyholders demonstrate that they have satisfied the “physical loss of or damage to property” requirement?

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Beyond the U.S. Business Income Cases

Causal requirements and “non-damage” policy wordings in the FCA test case

Author: Jordan Einstein Date: 07.30.20

Causal requirements and “non-damage” policy wordings in the FCA test case

Reading the Particulars of Claim and transcripts from the FCA test case proceeding in the UK, I learned about another important difference between the test case and the US cases. The scope of the test case is limited to non-damage policy wordings. That means the court in that case will not address potential interpretations of “physical loss of or damage to property” and similar wordings that insurers rely heavily on in the US cases.

For example, in Gavrilides Management Company et al. vs. Michigan Insurance Co., the presumptive first Covid-19 insurance coverage case decided in the US, Judge Joyce Draganchuk granted the defendant insurance company’s Motion for Summary Disposition. Judge Draganchuk granted the motion on the procedural grounds that the plaintiff failed to allege any “physical loss of or damage to” property, not on the merits of the argument that there was “physical loss of or damage to property.” Nevertheless, she made her views of the merits of that argument plain. Watching the video of the argument on YouTube, I heard her say (as the transcript confirms), “The plaintiff just can’t avoid the requirement that there has to be something that physically alters the integrity of the property. There has to be some tangible, i.e., physical damage to the property.” I heard that as suggesting that she didn’t think restaurants could make that showing. Judge Draganchuk was unimpressed with the argument that “the physical requirement is met because people were physically restricted from dine-in services,” calling it “nonsense.”

Because the plaintiff didn’t allege physical loss or damage, Gavrilides doesn’t tell us much about how other cases or judges will come out. Our reading of the motions to dismiss and other documents filed in other cases shows that there are many different arguments (and defenses) courts have yet to hear. Moreover, case law interpreting the “physical loss” and/or “physical damage” requirements is still relatively undeveloped in the US, and some lawyers claim that it differs between states. Such causal requirements are likely to be the center of gravity in many cases in the US, but the UK test case won’t provide much, if any, guidance on that issue.

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Beyond the U.S.

Freedom and Social Responsibility in Insurance Coverage Cases

Author: Tom Baker Date: 07.23.20

Freedom and Social Responsibility in Insurance Coverage Cases

When I teach insurance law, I always remind my students that private insurance can implicate our most important values.  Here is a statement from QC Edelman in the FCA test case that illustrates this point:

“In times of emergency and crisis, the public understands the difference between what the government was telling them to do in March of this year, and exhortations like to eat more fruit and vegetables and drink less alcohol. Behind the government’s announcement telling people what they must do was an appeal to comply voluntary in order to avoid or minimise the government being enforced to invoke the law. I want to say the fact that in a free society governments impose their will in this way, rather than operating as if is this was a Police State, is what marks us out as a society where people realise that freedom comes with social responsibility.“

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Beyond the U.S. Business Income Cases

The FCA Test Case and the Difference Between “All-Risk” and “Insured Peril” Policies

Author: Jordan Einstein Date: 07.22.20

The FCA Test Case and the Difference Between “All-Risk” and “Insured Peril” Policies

There is at least one big difference between the insurance policies at issue in the UK test case currently taking place in the High Court in London and those at issue in the US cases. In the US, insurance companies typically issue “all-risk” property insurance policies, meaning insurers cover losses not explicitly excluded. By contrast, insurers in the UK commonly issue “insured peril” policies (sometimes called “named peril” policies), which cover only those losses caused by the “perils” specifically named in the policy (such as fire, lightning, wind, public authority). Thus, while many of the broad issues in dispute are the same in the business interruption litigation in both countries, some of the arguments for each side look quite different.

With an all-risk policy, the policyholder starts with an important advantage in the litigation.  All the policyholder has to do is to prove that there was the right kind of harm – typically “physical loss of or damage to” insured premises.  Then the burden shifts to the insurer to prove that an exclusion in the policy – such as the virus exclusion – applies to eliminate coverage for the loss or damage.

In contrast, with an insured peril policy, the policyholder has to prove, not only that there was the right kind of harm, but also that the harm was caused by one of the perils specifically named in the policy.  Only then does the burden shift to the insurer to prove that the loss or damage is specifically excluded.

The nature of the “insured peril” is already a hotly contested issue at trial in the test case. The FCA – relying on a number of different policy wordings in public authority, prevention of access, and disease clauses, among others – contends that the “insured peril” is Covid-19 broadly and that policyholders’ losses result from a combination of these causes which are all connected. Conversely, the insurers seek to define the “insured peril” more narrowly.

This fundamental difference in the structure of the coverage in the policies sold on the other side of the Atlantic means that a favorable outcome for an insurer in the UK test case may not be persuasive to US courts.  By contrast, because policyholders face a more difficult burden of proof in the UK test case, a favorable outcome for policyholders could prove quite persuasive to US courts.

Here is a link to the transcript of the first day of the FCA proceeding.

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Beyond the U.S.

The UK’s Financial Conduct Authority Test Case

Author: Jordan Einstein Date: 06.24.20

The UK’s Financial Conduct Authority Test Case

As the individual claims and class action complaints we are collecting pile up in the U.S. court system, attention in the UK has turned to a test case between the Financial Conduct Authority (“FCA”) and eight large insurance companies. The FCA is an independent financial regulatory body responsible for protecting consumers and financial markets, as well as promoting competition.

In mid-March, the FCA sent letters to insurance companies outlining expectations for handling COVID-related business interruption claims, followed in mid-April with a letter to insurance company CEOs. On May 1st, the FCA announced its intention to bring a test case in the High Court in London.  The FCA collected and analyzed information from insurance companies about their business interruption policies and wordings, as well as their intentions and decisions to approve or deny related claims. From those submissions, the FCA identified a representative sample of policy wordings and solicited arguments from policyholders about why particular wordings should provide coverage. The FCA then compiled and released a list of 17 commonly used policy wordings from policies issued by 8 leading insurers that, in the FCA’s view, encompassed a majority of the key disputed issues.  The FCA also released a proposed set of assumed facts, proposed questions for determination, and a proposed issues matrix.

Proceedings in the High Court officially began on June 10th when the FCA filed its Claim Form and Particulars of Claim, which serve as its pleading. The first case management conference took place on June 16th, at which the Justice ordered that the case be expedited. Insurers are expected to file defenses on June 23rd, with a second case management conference set on the 26th to resolve any outstanding procedural matters before trial. Replies and skeleton arguments are scheduled for the first half of July, followed by an 8-day court hearing on July 20-23 and 27-30.

As of now, the closest parallel to the FCA test case in the U.S. are the competing MDL aggregation applications in Philadelphia and Chicago. While the procedure is completely different, the benefits of case aggregation through the MDL process overlap with the benefits of the UK test case (i.e., efficiency, timeliness, lower litigation costs). It will be interesting to see if either MDL application gets approved and if so, which will prevail. A subsequent blog post will compare and contrast the UK test case procedure with the MDL procedure in the U.S.