Category: Business Income Cases

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Business Income Cases Federalism

Michigan intermediate appellate court affirms dismissal of Gavrilides on three grounds

Author: JJ Dunn Date: 02.03.22

Michigan intermediate appellate court affirms dismissal of Gavrilides on three grounds

The Michigan Court of Appeals affirmed the dismissal of the plaintiffs’ complaint, finding coverage was properly barred on three grounds:

First, the court held that the plaintiff did not allege direct physical loss or damage to their property. While acknowledging that the damage need not be permanent, the court held that “the word ‘physical’ necessarily requires the loss or damage to have some manner of tangible and measurable presence or effect in, on, or to the premises.” The court was skeptical of the plaintiffs’ argument that this requirement could be met through damage to “the environment within a building, such as the air, even in the absence of any detectable alteration to the structure or other property” finding that this would constitute indirect damage. Nevertheless, the court noted that they did not need to rule on this argument because the plaintiff had not alleged the virus was on the premises and instead only alleged partial or complete closure by executive order. Thus the plaintiffs’ did not properly allege physical loss or damage under the court’s definition.

Second, the court held the coverage was properly denied under the ordinance or law exclusion in the policy. The court presumed that the executive orders at issue constituted “any enforcement or law” within the policy and found that “plaintiffs effectively claim to have suffered losses as a consequence of the closure of their restaurants due to the enforcement of a law.”

Finally, although the trial court did not rule on this portion, the court found that coverage was barred by the virus exclusion in the policy.

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Business Income Cases

Indiana Court of Appeals affirms summary judgment for Cincinnati in Indiana Repertory Theatre case

Author: JJ Dunn Date: 01.04.22

Indiana Court of Appeals affirms summary judgment for Cincinnati in Indiana Repertory Theatre case

In Indiana Repertory Theatre Inc. v Cincinnati Casualty Company, the Court of Appeals today affirmed the denial of the plaintiff’s motion for summary judgment and the grant of the defendant’s motion for summary judgment.  The court found that loss of use of the theater, alone, was not enough to satisfy the “physical loss or damage” requirement in the policy. Significantly, the court rejected the plaintiff’s reliance on out-of-jurisdiction cases holding that loss of use alone to be enough because these cases involved “policies that included language providing protection from ‘risk of’ loss.'” The court held that, absent that language, the plaintiff was required to show that the property was “destroyed or altered in a physical way that would require restoration or relocation.”

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Business Income Cases Federalism

Ohio’s 5th Appellate District agrees with the 6th Circuit’s Erie guess

Author: Tom Baker Date: 12.07.21

Ohio’s 5th Appellate District agrees with the 6th Circuit’s Erie guess

In Sanzo Enterprises LLC v. Erie Insurance Exchange, 2021-Ohio 4268, the 5th Appellate District of the Ohio Court of Appeals affirmed the trial court’s dismissal, agreeing with the 6th Circuit’s Erie guess in Santo’s.  The Ohio intermediate appellate court stated that “the plain and ordinary meaning of the phrase ‘direct physical loss of or damage to’ unambiguously requires a tangible and structural damage to the property,” and concluded that the deprivation of certain uses of the property did not qualify.  The court also ruled that the civil authority coverage did not apply because “appellant has not alleged the Orders were issued in response to dangerous structural, material, or tangible conditions; rather, the Orders were designed to prevent spread of
the virus.”

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Business Income Cases Virus exclusions

Second intermediate state court decision released today: Ohio’s 8th affirms dismissal of The Nail Nook

Author: Tom Baker Date: 12.02.21

Second intermediate state court decision released today: Ohio’s 8th affirms dismissal of The Nail Nook

The Court of Appeals of Ohio, Eighth Appellate District, County of Cuyahoga affirmed the dismissal of The Nail Nook v. Hiscox Insurance Company.  The trial court had dismissed the case based on the presence of a virus exclusion in The Nail Nook’s policy.  The Ohio Court of Appeals affirmed, holding “we agree with the trial court that, ‘[u]nder the policy’s clear and unambiguous virus exclusion, Nail Nook’s alleged losses are excluded from coverage.'”  Notably, the court went further than necessary, concluding that The Nail Nook “could not prove, ‘direct physical loss of or damage to Covered Property.'”  The court concluded by quoting the 6th’s Circuit’s recitation of the classic “responsibility to future claimants” claims story:

Efforts to push coverage beyond [the policy’s] terms creates a mismatch, an insurance product that covers something no one paid for and, worse, runs the risk of leaving insufficient funds to pay for perils that insured’s did pay for.

Santo’s Italian Cafe LLC, 2021 U.S. App. LEXIS, at 22-23.  See Tom Baker, Constructing the Insurance Relationship: Sales Stories, Claims Stories, and Insurance Contract Damages, 72 Tex. L. Rev. 1395, 1410 (1994).

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Business Income Cases

CCLT in the Wall Street Journal and Inns by the Sea

Author: Tom Baker Date: 11.16.21

CCLT in the Wall Street Journal and Inns by the Sea

It’s been a good 24 hours for the Covid Coverage Litigation Tracker!  This morning Leslie Scism’s latest update on the litigation in the WSJ cited CCLT: Covid-19 Insurance Lawsuits Move Toward High-Stakes Phase.  Yesterday California’s 4th District Court of Appeal cited CCLT in its Inns by the Sea decision.  The CCLT team is grateful to be regarded as the leading trusted source of objective information about this landmark litigation.

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Business Income Cases

California Mutual wins in first state court appellate decision

Author: Tom Baker Date: 11.16.21

California Mutual wins in first state court appellate decision

California’s 4th District Court of Appeal yesterday affirmed the demurrer in the Inns by the Sea case, ruling that Inns’ business interruption loss was caused by government shut down orders, not by the presence of the virus on the premises and, thus, there was no “direct physical loss of or damage to” the premises.  Notably, the court cited to the Couch treatise whose accuracy has recently been called into question.  The court declined to grant Inns the opportunity to amend its complaint, reasoning that any additional scientific information about the impact of COVID-19 on premises would not change the court’s view on causation.

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Business Income Cases

The Key Jury Instructions in K.C. Hopps

Author: Tom Baker Date: 10.29.21

The Key Jury Instructions in K.C. Hopps

Thanks to Lex Machina, I was able to get quick access to the jury instructions.  Here are the key ones (italics added by me):

INSTRUCTION NO. 19

Wherever in these instructions the term direct physical loss or physical damage are used, that means that property has suffered some physicality to the loss or damage to the property – e.g., a physical alteration, physical contamination, or physical destruction.

INSTRUCTION NO. 21

Your verdict must be for the defendant if you believe that the physical loss or physical damage to the plaintiffs properties by SARS-Co V-2 from Instruction 19 was caused directly or indirectly by an Ordinance or Law regulating the use of any building or structure regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

INSTRUCTION NO. 22

Your verdict must be for the defendant if you believe that the physical loss or physical damage to the plaintiff’s properties by SARS-Co V-2 from Instruction 19 was caused by or resulting from acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body, unless you determine that a portion of the physical loss or physical damage to the plaintiff’s properties by SARS-CoV-2 was caused by physical loss or physical damage other than these acts or decisions. However, this exclusion does not apply if the acts or decisions were by any person other than the plaintiff or beyond the plaintiffs direction or control.

INSTRUCTION NO. 23

Your verdict must be for the plaintiff if you believe

First, the defendant issued its policy to plaintiff on ten different properties covering direct physical loss or physical damage at one of more of those properties from March 2020 to March 2021 ; and

Second, such property suffered direct physical loss or physical damage due to SARSCo V-2; and

Third, the plaintiff suffered actual loss of business income due to the necessary suspension of the plaintiffs operations during a period of restoration that was caused by direct physical loss or physical damage to the plaintiffs properties.

Unless you believe the plaintiff is not entitled to recover by reason of Instructions 21 or 22.

INSTRUCTION NO. 24

Your verdict must be for the defendant unless you believe:

First, the defendant issued its policy to plaintiff on ten different properties covering direct physical loss or physical damage at one of more of those properties from March 2020 to March 2021; and

Second, such property suffered direct physical loss or physical damage due to SARSCo V-2; and

Third, the plaintiff suffered actual loss of business income due to the necessary suspension of the plaintiffs operations during a period of restoration that was caused by direct physical loss or physical damage to the plaintiffs properties.

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Business Income Cases

K.C. Hopps Jury Finds for Cincinnati

Author: Tom Baker Date: 10.29.21

K.C. Hopps Jury Finds for Cincinnati

The first jury to decide a Covid Coverage case found today for the insurer, Cincinnati.  Here is an image of the jury’s verdict form:

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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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Business Income Cases Litigation strategy

From Crying Wolf to Crocodile Tears: The Devolution of Insurer Pleas of Potential Poverty

Author: Jeffrey Stempel Date: 10.08.21

From Crying Wolf to Crocodile Tears: The Devolution of Insurer Pleas of Potential Poverty

At the outset of the COVID-19 pandemic, insurers were quick to argue that covering COVID-related business interruption claims would push the insurance industry to the brink of insolvency.  These claims seemed exaggerated from the outset.  The insurance industry is larger than the economies of all but a few countries and enjoys enormous capital and continuing profitable underwriting and investment on policies not implicated by the pandemic.  It has survived asbestos, pollution, and hurricane claims.  It probably could have handled even a strong wave of policyholder success.  In addition to financial strength, property/business income insurers are protected by policy limits and sub-limits, time limits (for civil authority claims) and period-of-restoration/loss mitigation requirements as well as the ability to recoup losses through increased future premiums.

But even if insurers were completely right about the danger they faced in March 2020, subsequent events have largely erased those concerns.  Most obviously, insurers have to date overwhelmingly prevailed in the coverage litigation.  Even if this trend should reverse as more state courts decide the issue, many if not most insurer federal court victories will be subject to claim preclusion by the time any significant body of pro-coverage precedent emerges.

Regardless of whether the federal court decisions denying coverage are correct, they have established a litigation bulwark that will be reduced only gradually if at all.  Insurers are not at risk of being forced to pay large sums in a short time frame.  Policyholders, if successful in future litigation, will be making house-to-house gains in the ongoing COVID coverage wars, giving insurers additional investment income and avoiding any rapid depletion of reserves.

In addition, the policies in question typically contain provisions requiring that claims be made within two years after loss, or sometimes as little as a year.  Insurance policy limitation clauses shortening that time are generally enforced – and the two year anniversary of the pandemic’s inception is well in sight.

Whatever force the insurance industry’s fears of economic disaster may have once had, that force has by now dissipated, if not evaporated.  But insurance industry briefs in COVID coverage cases continue to plead poverty, an assertion that has moved from barely possible to highly exaggerated and now to non-existent.

Image:  By Francis Barlow – http://mythfolklore.net/aesopica/barlow/59.htm, Public Domain, https://commons.wikimedia.org/w/index.php?curid=14476836