Category: Business Income Cases

Author: Tom Baker Date: 10.04.21

The First Circuit panel was ready for action today in Legal Seafoods v. Strathmore Ins. Co.  The judges had hypotheticals at the ready.  They asked probing questions about the relationship between Legal Seafoods and Verveine Corp. v. Strathmore Insurance Co. (the case that the Massachusetts SJC just took on a sua sponte transfer from the Massachusetts Appeals Court). They asked detailed questions about precedent. And they pressed counsel with detailed questions about the allegations in the complaint.

Needless to say, the argument went well over the assigned time. While the judges appeared ready to grapple with the issues themselves, some of Judge Barron’s questioning suggested that the panel may consider certifying a question to the SJC.  If so, the First Circuit would be the first federal appellate court to take this step in the Covid coverage litigation.

Author: Tom Baker Date: 10.01.21

The 9th Circuit today affirmed the three decisions argued in August:  Mud Pie, Chattanooga Baseball, and Selane.  This leaves policyholders (and Erie v. Tompkins?) with a batting record of .000 in federal appellate court.  The 9th Circuit panel discussed certification in oral argument, but then chose to go with an Erie guess that the California Supreme Court would reject the loss of use = physical loss theory.  Perhaps they’re waiting for a case in which the policyholder made the kind of factual allegations about virus on the premises and physical alterations that have allowed cases like P.F. Chang, Ross Stores, and Goodwill Industries to survive motions to dismiss in California state court? Time will tell.

Author: Tom Baker Date: 09.30.21

Following on the heels of the recent decision in Santo’s Italian Cafe, the U.S. Court of Appeals for the 6th Circuit summarily reversed the N.D. Ohio decision granting summary judgment to the policyholders in Henderson Road Restaurant Systems, Inc. et al v. Zurich American Insurance Company, on the grounds that Judge Polster’s Henderson Road decision is inconsistent with the 6th Circuit’s Erie guess in Santo’s Italian Cafe.  (It is.)

I’ve been thinking hard over the last few days about why the 6th Circuit is rushing to get ahead of the Ohio Supreme Court on Covid coverage law.  In Santo’s Italian Cafe, the 6th Circuit relied on the Ohio Court of Appeal’s Mastellone decision (175 Ohio App. 3d 23) to make an Erie guess about what the Ohio Supreme Court would say about the Covid coverage cases.

Any of the law students on my outstanding research team could easily distinguish Mastellone from Santo’s Cafe and Henderson Road on both the policy language and the facts. Readers will have their own views on whether the distinctions are persuasive. I’m not taking a position here, because I’m waiting to here from the court that’s in charge of such questions:  the Ohio Supreme Court.

As readers who are deep into the pandemic litigation will know, the Ohio Supreme Court is presently considering a certified question in Neuro Communication Services that will provide that court with the opportunity to explain whether the differences in the policy language and the facts in Mastellone matter or not to the pandemic cases.   Why the 6th Circuit didn’t wait for that decision (or certify to the Ohio Supreme Court the closely related question in Santo’s and Henderson) is a mystery.

I understand that the Ohio state courts have stayed all their Covid business interruption coverage cases pending the Ohio Supreme Court’s decision in Neuro Communication Services.  (Readers, please correct me if I’m wrong.)  Why the federal courts deciding Ohio law cases haven’t done the same is another mystery.

Author: Date: 09.30.21

Daniel Schwarcz has just posted on SSRN his forthcoming article in the annual Clifford Symposium issue of the DePaul Law Review: Redesigning Widespread Insurance Coverage Disputes: A Case Study of the British and American Approach to Pandemic Business Interruption Coverage.  Although the main focus of the article is how to do better next time, I don’t want readers to miss the fact that Professor Schwarcz is now the third leading insurance law professor (along with Professors Knutsen and Stempel) to criticize the federal courts for using their larger coterie of clerks and smaller caseloads to usurp “the primacy of state, rather than federal, courts in deciding highly consequential and contested questions of state insurance law” (at p. 6).

Coming on the heels of the 6th Circuit’s extraordinary decision to make an Erie guess about a question of Ohio state law that is  closely related to the certified question presently before the Ohio Supreme Court (rather than waiting for the Ohio Supreme Court to speak on that related question), I sense an emerging concern among insurance law academics that, at least when it comes to insurance, Erie may be broken.

Author: Tom Baker Date: 09.23.21

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.

Author: Tom Baker Date: 09.09.21

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.

Author: JJ Dunn Date: 08.31.21

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.

Author: Tom Baker Date: 08.11.21

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.

Author: Erik Knutsen & Jeff Stempel Date: 07.25.21

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. (8^th 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.