Archive for the 'PA – Coverage Issues' Category

DENYING COVERAGE AFTER REPRESENTATIVES CONFIRMED COVERAGE IS BASIS FOR BAD FAITH (Western District)

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In this case, the insured made a water damage claim, as well as claims for roof damages. She hired a public adjuster to pursue the claims. The insured alleged her public adjuster met with the carrier’s adjuster, and the carrier’s adjuster authorized the insured to proceed with remediating the water damage. Five months later, the carrier sent out its own contractor to inspect the insured’s roof, and that contractor informed the public adjuster that the insured’s roof claims were covered.

The carrier subsequently denied all coverage and refused to pay on any claims. Once the insured retained counsel, however, the carrier agreed to pay part of the claim (for water damage).

The insured sued for breach of contract and bad faith, along with a variety of other claims. (The court allowed a negligent misrepresentation claim to stand against the carrier, rejecting the carrier’s gist of the action argument, on the basis that duties outside the contract were assumed and potentially violated.)

The carrier moved to dismiss the bad faith claim. It asserted that its contractor had no power to bind on coverage, and that it offered to pay the insured’s water damage losses after the insured retained counsel. The court rejected these arguments and allowed the bad faith claims to proceed.

The insured first pleaded coverage was due and her claim was denied. She then specifically alleged that two of the carrier’s representatives agreed coverage was due, establishing that the insurer was without a reasonable basis to deny coverage. This met the first bad faith element.

Next, as to proving the second element concerning the insurer’s intent, plaintiff had alleged the carrier’s two “representatives, upon reviewing [the] insurance claim and/or observing the Property, determined that the damage at issue was covered under the Policy. … These facts, if true, support a finding that [the insurer] knew or recklessly disregarded that it lacked a reasonable basis to deny [the] insurance claim, i.e. that [it] knew, through its representatives, that the damage at issue was covered under the Policy but still chose to deny benefits.”

Eventually offering to pay part of the insured’s claim did not eliminate potential bad faith, as the insured pleaded there was no reasonable basis to deny the entire claim.

The court did agree that the insured could not recover compensatory damages for unpaid insurance benefits under the bad faith statute, but this relief was available under other counts.

Date of Decision: June 3, 2020

Nelson v. State Farm Fire & Casualty Co., U.S. District Court Western District of Pennsylvania 2:19-cv-01382-RJC, 2020 U.S. Dist. LEXIS 97239 (W.D. Pa. June 3, 2020) (Colville, J.)

 

NO BAD FAITH WHERE POLICY PROPERLY TERMINATED (Philadelphia Federal)

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This case centered on whether the insurer’s notices of lapse and termination were effective to terminate the policy. The policy required the carrier to “send” these notices. There was no dispute that the insurer caused the required notices to be mailed, but the insured denied ever receiving them.

The insurer argued mailing alone was sufficient to meet the “send” requirement, but the insured argued the policy further required that the notices actually be received. The term “send” was not defined in the policy. Judge Wolson looked to dictionary meaning of “send,” along with case law on mailing required documents. He concluded that “send” did not mean sent and received. Thus, the insurer’s mailings alone were sufficient to terminate the policy, whether or not the insured received the notices.

The insured also alleged bad faith in terminating the policy. Judge Wolson rejected this claim on the simple ground that there was a reasonable basis to terminate the policy, stating:

Pennsylvania’s law creates a cause of action against an insurance company “if the court finds that the insurer has acted in bad faith toward the insured.” 42 Pa.C.S. § 8371. Pennsylvania courts have defined “bad faith” as “any frivolous or unfounded refusal to pay proceeds of a policy.” Rancosky v. Washington National Ins. Co., 642 Pa. 153, 170 A.3d 364, 365 (Pa. 2017) (quotation omitted). A threshold question in a bad faith action is whether the employer had a reasonable basis for denying benefits under the policy. See Condio v. Erie Ins. Exch., 2006 PA Super 92, 899 A.2d 1136, 1143 (Pa. Super. Ct. 2006). As discussed above, [the insurer] had a reasonable basis for denying benefits. Thus, [the insured’s] bad faith claim fails.

Date of Decision: May 20, 2020

Wetty v. AXA Equitable Life Insurance Co., U.S. District Court Eastern District of Pennsylvania Case No. 2:18-cv-04756-JDW, 2020 U.S. Dist. LEXIS 88550 (E.D. Pa. May 20, 2020) (Wolson, J.)

NO BAD FAITH BY DEFINITION IF COVERAGE DENIAL IS REASONABLE (Western District)

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“When an insurer’s coverage denial was reasonable ‘on the basis of the plain meaning of the Policy and relevant exclusions and definitions,’ there can be no ‘bad faith’ as a matter of law.”

Unlike the Eastern District’s recent decision in Smith v. AAA Interinsurance Exchange, the Pennsylvania Supreme Court’s decision in Gallagher v. Geico did not void the household exclusion under the facts of this case. The court thus found no UIM coverage due, and because the auto insurer “properly denied coverage, Plaintiffs’ tag-along claims for bad faith and violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. Stat. Ann. § 201-1, et seq., also fail.”

The insured was injured on a motorcycle she owned. The motorcycle was covered by Progressive. The insured owned two other vehicles covered by Mid-Century, the present defendant. The insured waived UIM coverage under the Progressive policy. She still sought coverage under the Mid-Century policy, relying on Gallagher, because she had not executed a stacking waiver in connection with the Mid-Century policy.

Gallagher does not apply where stacking is not at issue

The insured’s claim against Mid-Century failed. Gallagher stands for the proposition that the household exclusion cannot limit stacking without a stacking waiver. In this case, however, the insured had waived UIM coverage under her Progressive policy, so there was no stacking at issue. Rather, she was seeking primary UIM coverage against Mid-Century. Thus, Gallagher did not apply, and Mid-Century properly relied on the household exclusion to deny coverage.

No coverage due means no bad faith by definition

In dismissing the bad faith claim, the court found plaintiffs could not make out the first prong of the bad faith test, i.e., that the denial was unreasonable. “When an insurer’s coverage denial was reasonable ‘on the basis of the plain meaning of the Policy and relevant exclusions and definitions,’ there can be no ‘bad faith’ as a matter of law.” “Put differently, if Mid-Century properly denied coverage, which the Court finds it did, it could not, by definition, have acted in bad faith by denying coverage.”

Any other putative bad faith claims were dismissed for merely making conclusory allegations.

UTPCPL claim fails for variety of reasons

Lastly, the court dismissed plaintiffs’ Unfair Trade Practices and Consumer Protection Law (UTPCPL) claims for a variety of reasons. First, there was no improper conduct. Next, even if there was misconduct, the UTPCPL only applies to conduct in connection with issuing the insurance policy, not the performance of the insurer’s obligations under the policy after it is issued. Third, even assuming arguendo the plaintiffs could have overcome these two hurdles, they solely pleaded nonfeasance, and the UTPCPL only applies to claims of malfeasance.

No leave to amend was given, and judgment on the pleadings was entered for the insurer.

Date of Decision: May 19, 2020

Dunleavy v. Mid-Century Insurance Company, U.S. District Court Western District of Pennsylvania No. 2:19-cv-1304, 2020 U.S. Dist. LEXIS 88024 (W.D. Pa. May 19, 2020) (Ranjan, J.)

Our thanks to Attorney and Mediator Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.

BAD FAITH PLAUSIBLE WHERE INSURER DENIED COVERAGE 11 DAYS AFTER CLAIM MADE SOLELY BASED ON A POLICY EXCLUSION IT KNEW OR SHOULD HAVE KNOWN HAD BEEN VOIDED BY PENNSYLVANIA’S SUPREME COURT (Philadelphia Federal)

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The insurer denied a UIM claim 11 days after it was submitted. Denial was based solely on the policy’s household exclusion. Many months earlier, however, Pennsylvania’s Supreme Court had generally voided the household exclusion’s application under Pennsylvania law in similar circumstances. Gallagher v. GEICO Indemnity Co.   Thus, the exclusion was an invalid basis to deny coverage.

The insured brought breach of contract and bad faith claims, and the carrier moved to dismiss the bad faith claim for inadequate pleading. The court denied the motion, and found a plausible bad faith claim stated.

First, the court found that the insurer was fully on notice that the household exclusion was invalid in Pennsylvania in these circumstances. Even if the carrier somehow was otherwise unaware of the case, the insured’s counsel brought it to the carrier’s attention in making the claim for coverage. Thus, the household exclusion was a plainly invalid basis to deny coverage, but the carrier denied coverage anyway.

The insurer attempted to argue the Supreme Court’s Gallagher decision only applied to Gallagher’s unique facts. Magistrate Judge Wells found this argument patently incorrect on the face of the Gallagher opinion itself.

Second, the court reasonably inferred from the facts pleaded that the carrier did nothing to investigate the claim before denying coverage. Specifically, the court inferred that the defendant carrier did not even know what the other insurers would be paying the insured toward her injuries for purposes of evaluating its own potential share due to the insured. Moreover, she found the defendant insurer made no effort to evaluate the case itself. Thus, at the time it denied the claim, the carrier could not have known if the insured was fairly compensated or was due further payment.

The facts pleaded supporting these conclusions are that the carrier did not require a medical examination, nor did it produce any contrary medical documents; that it denied the claim in only 11 days; and the insured had not even settled yet with the other insurers at the time the claim was denied.

In sum, the court stated the claim denial “was based solely upon a patently false statement of Pennsylvania law, hence, it is plausible that a jury could find [the denial] decision frivolous and issued in bad faith. …. Furthermore, since it can be inferred that [it] made no effort to value the case, it is plausible that [the insurer] violated its duty of good faith and to deal fairly with Plaintiff, its insured.”

Decision: May 6, 2020

Smith v. AAA Interinsurance Exchange of the Automobile Club, U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 20-768, 2020 U.S. Dist. LEXIS 79489 (E.D. Pa. May 6, 2020) (Moore Wells, M.J.)

NO BAD FAITH WHERE NO BENEFITS DENIED; NO PRIVATE ACTION UNDER UIPA OR UCSP REGULATIONS; NO DECEPTIVE CONDUCT IN NOTICE OF NEW ENDORSEMENT (Philadelphia Federal)

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In this case, the court makes clear that “Bad faith claims cover a range of conduct relating to the improper denial of benefits under the applicable contract.” The court quotes the Pennsylvania Supreme Court’s decision in Toy v. Metropolitan Life Ins. Co., 593 Pa. 20, 928 A.2d 186, 199 (Pa. 2007), to highlight the point that statutory bad faith claims must relate to a denial of benefits: “’In other words, the term [bad faith] captured those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss that failed to satisfy the duty of good faith and fair dealing implied in the parties’ insurance contract.’”

This first party property damage case centered on a policy endorsement changing the scope of coverage for access work done to repair leakage.

In 2015, the insureds had a homeowners policy with the carrier. In August 2015, while the policy was in effect, the carrier provided the insureds with notice of a new endorsement that would take effect on September 27, 2015. The notice stated that the new endorsement would potentially reduce coverage, and that “[a]lthough not intended to change coverage, this change could potentially reduce or eliminate coverage depending on how it is interpreted and, in that regard, should be viewed as either an actual or potential reduction in or elimination of coverage.”

The insureds renewed their homeowners policies in the ensuing years, apparently without ever questioning this endorsement. The property damage at issue occurred in September 2018, when the insured homeowners had their plumber do certain repair work to fix a leak, including access work to get to damaged plumbing. The insureds allege that the carrier improperly refused to pay the full bill for the access work, while the carrier relied on the 2015 endorsement in justifying its lower than hoped for payment.

The homeowners brought individual and class action counts, seeking declaratory relief, as well as claims for breach of contract, violations of the Unfair Trade Practices and Consumer Protection Law (UTPCPL), the Unfair Insurance Practices Act (UIPA), Pennsylvania’s Unfair Claims Settlement Practices regulations (UCSP), and for statutory bad faith. The insurer moved to dismiss all claims.

Declaratory judgment and contract claims dismissed without prejudice

The insureds argued the 2015 endorsement was unconscionable and should be rendered void; but even if enforceable, it still required greater payment than the carrier made for the cost of the access work. The court, however, dismissed the declaratory judgment claim and breach of contract claim on these grounds, but without prejudice if plaintiffs could plead additional facts to support these claims.

Bad faith claim dismissed without prejudice

The essence of the insureds’ bad faith claims is that the notice accompanying the 2015 endorsement promised greater coverage, but gave less coverage. The court found this could not state a bad faith claim because these claims did not involve the denial of a benefit. “Section 8371 encompasses a variety of insurer conduct, but such conduct must be related to the denial of benefits.” Though “’the alleged bad faith need not be limited to the literal act of denying a claim, the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits.’”

In this case the “Plaintiffs’ allegations do not relate to the denial of coverage of the access bill, they relate to the Endorsement notice’s language and how Defendant engaged in alleged misrepresentation because of the purportedly confusing notice.” A “claim that the drafting of policy language was in bad faith is not actionable under Pennsylvania law….” In making this point, the court relied on Mitch’s Auto Service Center, Inc. v. State Automobile Mutual Insurance Co. As stated above, it relied on Toy v. Metropolitan Life for the fundamental point that statutory bad faith claims must include the denial of a benefit.

The court also specifically observed the complaint was “devoid of any facts indicating Defendant lacked a reasonable basis for denying benefits under the policy.” Likewise, there were no plausible allegations that the insurer “knew or recklessly disregarded its lack of reasonable basis.” The insureds argued that the 2015 notice language could be the basis of a bad faith claim. The court failed to see, however, “how that notice, provided to Plaintiffs three years prior to the water damage here, shows that Defendant knew or recklessly disregarded its alleged lack of reasonable basis in denying Plaintiffs’ entire costs for the plumber’s access bill.”

Still, the court dismissed without prejudice if the insureds could replead a plausible bad faith claim.

UIPA and UCSP regulations claims dismissed with prejudice

The insureds conceded that there is no private cause of action under Pennsylvania’s UIPA, 40 P.S. § 1171.1, or UCSPR, 31 Pa. Code §§ 146.1. The court cited Leach v. Northwestern Mut. Ins. Co., 262 F. App’x 455 (3d Cir. 2008), Swan Caterers, Inc. v. Nationwide Mut. Fire Ins. Co., No. 12-0024, 2012 U.S. Dist. LEXIS 162305, 2012 WL 5508371 (E.D. Pa. Nov. 13, 2012) and Connolly v. ReliaStar Life Ins. Co., No. 03-5444, 2006 U.S. Dist. LEXIS 83440, 2006 WL 3355184 (E.D. Pa. Nov. 13, 2006) for the proposition that there is no private cause of action under the UIPA or UCSP regulations, and the statute and regulations can only be enforced by the insurance commissioner.

UTPCPL claim dismissed without prejudice

The court dismissed the UTPCPL claim without prejudice, finding the 2015 notice did not constitute a deceptive act, because “the notice’s language explicitly states that the policyholder should treat the change as a reduction in coverage.” The court further found justifiable reliance was not pleaded, as there were no allegations that the insureds relied on any alleged misconduct causing them to purchase the policy.

Dates of Decision: March 27, 2020 (Report and Recommendation) and April 22, 2020 (District Court Order)

Velazquez v. State Farm Fire & Casualty Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-cv-3128, 2020 U.S. Dist. LEXIS 55854 (E.D. Pa. Mar. 27, 2020) (Sitarski, M.J.) (Report and Recommendation), approved and adopted by the District Court (April 22, 2020) (Quiñones Alejandro, J.)

 

(1) NO COVERAGE DUE MEANS NO BAD FAITH AS A MATTER OF LAW ON COVERAGE DENIAL; (2) REASONABLE RELIANCE ON ENGINEERING EXPERT NEGATES BAD FAITH INVESTIGATION CLAIM (Philadelphia Federal)

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The insured church’s roof collapsed. The insurer denied coverage on the basis that its engineer determined the causal factors were “a combination of deferred maintenance, improper roof slope, and poor drainage,” and none of these collapse factors are covered causes of loss under the policy.

The insured sued for breach of contract and bad faith.

The church’s evidence for coverage came from its public adjuster. He testified (1) there was heavy wind and rain “close” to the date of loss; (2) there was no long term damage from roof leaks; and (3) and even if so, he doubted any such leaks were the “main factor” in the roof’s collapse. The public adjuster, however, “did not offer an opinion as to what caused the roof’s collapse,” and the church did not produce “any other evidence suggesting the cause of the roof’s collapse was a covered event under the policy.”

The insurer successfully moved for summary judgment on both counts.

No Coverage Due

In granting summary judgment on the breach of contract claim, Judge Robreno stated the church “failed to produce any evidence, beyond mere speculation, that the roof’s collapse was caused by a wind and rain event.” Thus, there were no facts sufficient to show the roof’s collapse fell within a covered cause, and it could not meet its burden of proof.

Bad Faith Claim Analyzed for both Improper Coverage Denial and Inadequate Investigation

On the bad faith claim, the church alleged both improper denial and failure to conduct a proper investigation. The court noted that because a number of courts have held statutory bad faith claims are not contingent on the outcome of the breach of contract claim, the court would consider the inadequate investigation claim as a separate basis for plaintiff’s statutory bad faith claim. The court further observed Pennsylvania’s Supreme Court has not decided this specific issue.

[We have noted before on this Blog that a failure to investigate, standing alone, is arguably not a cognizable claim under the Bad Faith Statute based on the Pennsylvania Supreme Court’s 2007 decision in Toy v. Metropolitan Life.]

As to improper denial, the court found for the insurer as a matter of law. “A finding that denial of the claim under the policy was warranted is inconsistent with a claim that [the insurer] acted in bad faith in denying the claim.”

As to the inadequate investigation claim, Judge Robreno observed that “[i]nsurance companies act reasonably, and do not exercise bad faith, when they deny claims based upon engineering experts’ reports.” He relied on his 2011 decision in El Bor v. Firemen’s Fund, and Western District Judge Fischer’s decision in Palmisano v. State Farm.

The court then examined the reasonableness of the insurer’s reliance. There was no dispute the engineer’s report pre-dated the carrier’s claim denial. Further, there was no support in the record for the insured’s assertions that the report was “’devoid of facts, experiments, measurements, testing, and scientific principles.’” Rather, the report was based on an actual property inspection, and that the engineer provided the carrier “with photographs and measurements of the property.”

On the other hand, in its denial letter the carrier asked the church if it could provide any additional information supporting coverage. It gave the insured 30 days to provide any further information supporting coverage, but nothing was forthcoming.

The court stated that under these facts, there was no evidence that the insurer relied on the report in bad faith, observing that even if an insurer’s expert were incorrect, that alone “’is not evidence that his conclusions were unreasonable or that Defendant acted unreasonably in relying upon them.’”

Date of Decision: April 7, 2020

Gethsemane FBH Church of God v. Nationwide Insurance Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-03677, 2020 U.S. Dist. LEXIS 60780 (E.D. Pa. April 7, 2020) (Robreno, J.)

 

NO BAD FAITH: (1) NO BENEFIT DUE; (2) NO ESTOPPEL UNDER THE UIPA OR UCSP REGULATIONS; (3) AN OVERSIGHT CAUSING DELAY IS NOT BAD FAITH (Philadelphia Federal)

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The court described this as the case of the missing email. The insurance policy at issue covered various cars. The insured emailed its broker to add another vehicle to the policy. The broker claims it never got the email, and thus never asked the insurer to issue an endorsement adding the new car to the policy. As things sometimes go in life, the new car was involved in a collision, damaging another vehicle as well as its own new car.

The insured reported the claim. However, the insured identified its vehicle as one of existing cars listed in the policy, rather than the new unlisted vehicle. The insurer accepted coverage, and even paid damages to the other driver. The insurer later reversed itself on coverage once its appraiser determined the insured’s vehicle was not the car identified in the claim form, and was not covered under the policy.

The police report did list the correct vehicle. The insurer had the police report at the time it initially provided coverage, and only reversed itself when its appraiser realized that the damaged car was not the car on the claim form and was not listed in the policy.

The insured sued for breach of contract and bad faith, among other claims against the insurer as well as the broker. The insurer moved for summary judgment, which the court granted.

There is no breach of contract, or estoppel under the UIPA or UCSP regulations

First, there was no breach of contract, as the vehicle at issue never became part of the policy. The insured argued, however, that the insured was estopped from denying coverage under the Unfair Insurance Practices Act (UIPA) and the Unfair Claims Settlement Practices (UCSP) regulations governing “Standards for prompt, fair and equitable settlements applicable to insurers”. The insured relied on 31 Pa. Code § 146.7(a)(1), which states that, “Within 15 working days after receipt by the insurer of properly executed proofs of loss, the first-party claimant shall be advised of the acceptance or denial of the claim by the insurer.”

Judge Wolson rejected the statutory/regulatory argument for three reasons:

  1. There is no private right of action under the UIPA and UCSP regulations, and only Pennsylvania’s Insurance Commissioner can enforce the UIPA and UCSP regulations.

  2. The policy itself did not incorporate the UIPA or UCSP obligations or impose those obligations on the insurer. “Absent the incorporation of these obligations into the Policy, their potential violation does not breach the Policy.”

  3. The doctrines of waiver or estoppel cannot “create an insurance contract where none existed.”

THERE IS NO BAD FAITH

  1. The broker is not an insurer subject to the bad faith statute

First, the court recognized that there was no sustainable statutory bad faith action against the broker because it was not an insurer.

  1. There is no bad faith where no benefit is denied

Next, as to the insurer, “To prevail on a bad faith claim, a plaintiff must present clear and convincing evidence that, among other things, an insurer ‘did not have a reasonable basis for denying benefits under the policy’ or that an insurer committed a ‘frivolous or unfounded refusal to pay proceeds of a policy.’” Because the insurer had no contractual obligation to pay its refusal could not have been unreasonable, and the claim failed.

  1. The UIPA and UCSP regulations do no prevent changing a coverage decision based on new information

The court rejected another argument based on the UIPA and UCSP regulations cited above. The insured argued the failure to pay was unreasonable once the insurer accepted coverage. The court found, however, the UCSP regulations did not “prevent an insurer from changing a coverage determination based on new information.”

More importantly to the court, the insured adduced no case law adding such a gloss to section 146.7, i.e. a mandate that once coverage was accepted it could never be denied under any circumstances. Thus, it was reasonable for the insurer to interpret that regulation to permit an insurer to revise a coverage decision based on new information.

  1. A Delay based on an Oversight is not the Basis for Bad Faith

Finally, any delay in revising its coverage determination was likewise not bad faith. Citing the 2007 DeWalt decision, the court observed that an “insurer’s actions in allegedly delaying investigation did not constitute bad faith under Pennsylvania law [when] there was no evidence that such delay was deliberate or knowing, or was unreasonable.”

While the carrier “probably could have been more diligent” in determining which vehicle was involved in the collision by looking at the police report earlier, “an insurer ‘need not show that the process used to reach its conclusion was flawless or that its investigatory methods eliminated possibilities at odds with its conclusion.’” There was nothing in the record to establish the insurer “acted with reckless disregard of its obligations or otherwise fell so short that it acted in bad faith.”

Date of Decision: April 1, 2020

Live Face on Web, LLC v. Merchants Insurance Group, U.S. District Court Eastern District of Pennsylvania Case No. 2:19-cv-00528-JDW, 2020 U.S. Dist. LEXIS 56852 (E.D. Pa. April 1, 2020) (Wolson, J.)

Our thanks to attorney Daniel Cummins of the excellent Tort Talk Blog for bringing this case to our attention.  We also note the Tort Talk Blog’s three recent posts on post-Koken motions to sever and stay bad faith claims in the Western District, York County, and Lancaster County.

Some Important Insurance Coverage Issues for COVID-19 Business Loss Claims

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COVID-19 is a potential $1,000,000,000,000+ catastrophe for businesses. Insurance coverage demands for COVID-19 business interruption losses are exploding. Many insurers are denying coverage, and insureds’ lawsuits for coverage and bad faith have begun.  Questions of what business interruption losses should be covered by insurance even reached the COVID-19 daily briefing this past Friday.

Various states, including, e.g., Pennsylvania (Pennsylvania House Bill 2372) and New Jersey (Assembly, No. 3844), are seeing proposed legislation that would require insurers to pay for billions or trillions of dollars in business interruption losses, even if the insurance policies otherwise would not provide such coverage. These proposals usually have a plan tying insurer payments to a fund that would at least partially reimburse insurers for such payments, so they are not bankrupted. On the federal level, the idea is circulating for a “Pandemic Risk Insurance Act” that “would create a reinsurance program similar to the Terrorism Risk Insurance act for pandemics, by capping the total insurance losses that insurance companies would face.”

While these efforts may ultimately overwrite disputes that would otherwise wind up before every state and federal court, we are only discussing the law as it currently stands on a few COVID-19 coverage issues.

The “Loss Due to Virus or Bacteria” Exclusion

A central starting point is whether policies have a “Loss Due To Virus Or Bacteria” exclusion. This ISO drafted exclusion was originally promulgated in 2006, and is typically numbered CP 01 40 07 06. A copy of the exclusion can be found here.

Paragraph B of the exclusion states, “[w]e 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.” Paragraph A provides, “[t]he exclusion set forth in Paragraph B applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.” The exclusion’s language makes clear, however, it does not displace other exclusions addressing claims not subject to the virus and bacteria exclusion. Foley v. Wisconsin Mutual Insurance Co., 915 N.W.2d 455 (Wis. App. 2018).

ISO issued a July 6, 2006 circular entitled, “New Endorsements Filed To Address Exclusion Of Loss Due To Virus Or Bacteria,” explaining the exclusion. The drafters write, “[t]he exclusion … applies to property damage, time element and all other coverages….” The circular’s introduction gives three specific examples of excluded viruses, “rotavirus, SARS, [and] influenza (such as avian flu).” The drafters further observe that “[t]he universe of disease-causing organisms is always in evolution.” As we all now know, the original SARS virus and COVID-19 are part of the same virus family.

The introduction adds, “[d]isease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property. When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property … cost of decontamination … and business interruption (time element) losses.”

Under the heading “Current Concerns,” the circular states, “[a]lthough building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case.” Exclusions addressing “specific exposures relating to contaminating or harmful substances … enable elaboration of the specific exposure and thereby can reduce the likelihood of claim disputes and litigation.”

The authors clearly were thinking of pandemics in drafting this exclusion. They state, “[w]hile property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.” To address these concerns, ISO is “presenting [the Loss Due to Virus or Bacteria] exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.”

In one recently filed COVID-19 case from the District of Columbia, Washington’s mayor had issued an order forbidding table seating at restaurants. The restaurant-plaintiff suffered business losses. The insurer denied coverage, and the owner filed a declaratory judgment complaint seeking coverage. A copy of the Complaint in Proper Ventures, LLC v. Seneca Insurance Co., can be found here.

Among other grounds for denial, the insurer relied on the “Exclusion of Loss Due to Virus or Bacteria.” The complaint alleges, however, this exclusion does not apply. While this seems implausible per the above discussion, the plaintiff asserts that the “loss of Business Income is not otherwise excluded under the Policy. … [because the] loss of Business Income was not ‘caused by or resulting from’ a virus as its loss occurred as a result of the Mayor’s Order.” The plaintiff essentially argues for coverage solely based on a civil authority closure, by contending that the government action in closing the premises cuts off the virus as a causal factor. Once civil authority causation supersedes virus causation, so the argument goes, the exclusion falls by the wayside.

As set forth above, the exclusion’s Paragraph A specifically provides that “[t]he exclusion set forth in Paragraph B applies to all coverage under … forms or endorsements that cover business income, extra expense or action of civil authority.” The insured will have to overcome this express policy language in the first instance to be able to proceed on its argument.

If insureds making this superseding cause argument can get past the language in Paragraph A on “action of civil authority,” courts addressing the intervening cause issue would look to the governing law on interpreting the exclusion’s “caused by or resulting from” language. E.g., in various jurisdictions, some courts may measure this by a proximate cause standard, others by a “but for” standard, and others by a substantial cause standard (somewhere between “but for” and proximate cause). Under any causation standard, however, insureds making this argument are still depending on courts eliminating the “why” in the chain of events leading civil authorities to issue closure orders.

General Comments on the Property Damage, Business Interruption, and Civil Authority Closures

The 2006 ISO circular foresaw that in the absence of the virus and bacteria exclusion (i) “the nature of the property itself would have a bearing on whether there is actual property damage: and (ii) “[a]n allegation of property damage may be a point of disagreement in a particular case.”

The property damage issue includes two basic prongs: business interruption coverage and coverage for the acts of civil authorities. In the former, there must be “direct physical loss or damage”; and in the later, there must be damage to other property within a specified distance from the insured’s property, or in the “immediate area” of the insured’s property.

There is some case law, in other fact scenarios, addressing the concept of whether unseen or gaseous substances contaminating property can constitute direct physical damage or loss. For example, a 2014 New Jersey federal case, Gregory Packaging, Inc. v. Travelers Property Casualty Co., addressed ammonia contamination, and a 2016 Oregon federal case, Oregon Shakespeare Co. v. Great American Ins. Co. (later vacated by the parties’ agreement), addressed smoke from forest fires closing down plaintiff’s business operations. In a 2015 case involving an odor of cat urine permeating a condominium, New Hampshire’s Supreme Court gathered cases on both sides of the issue in evaluating what degree of physical alteration is needed to find a direct physical loss. Mellin v. Northern Security Ins. Co. That court held an alteration affecting the sense of smell was a physical alteration. This contrasted with a 2010 Michigan federal court decision finding strong odors and the presence of mold insufficient to constitute direct physical loss. Universal Image Prods. v. Chubb Corp.

The reality is that the decision concerning direct physical damage or loss, and property damage, may well ride on the judge’s own intellectual framework for addressing the physical nature of real, but invisible, phenomena. We can expect courts to address issues as to whether the presence of the virus on a surface is sufficiently intermingled with the surface material as to alter that property, or whether it is separate from the surface. For example, if the virus is on all the tables in a restaurant, and successfully can be cleared off with a disinfectant in an hour, was there direct physical damage or loss? If so, did it only exist for an hour?

What if the virus has reached more difficult to clean parts of the same restaurant, the owner-insured cannot be certain all potentially exposed areas have been sanitized, and the restaurant stays closed because of the risk? Moreover, how does the insured prove the virus is actually present on any surface in the restaurant at all, or how long that presence persisted? Imagine that proof issue in a much larger scenario, like a warehouse, where one employee out of hundreds develops COVID-19, and the entire warehouse might have to be closed and sanitized. It is unlikely that there is going to be testing to determine where the virus actually might be located before sanitizing takes place. There may not even be testing to determine whether the virus is even present at all on any surfaces inside the facility, but only fast action to eliminate potential risk.

The experts required to answer questions of what is physical, or whether matter has been altered on a microscopic level, may well be biochemists or physicists in addition to virology experts, though some of these concepts appear to verge on metaphysics.

Another issue is the duration of any direct physical damage or loss, or any property damage. Even in cases of demonstrable physical loss or damage through viral presence on the premises, those damages can likely be remediated through sanitizing the insured’s property. While the sanitized premises may be cleaned and the damage cured, the remediation might mean very little if the same pattern of contamination will regularly repeat itself every time people are allowed back on the premises, as employees or customers.

More significantly, greater economic business losses may well be based upon contamination events that have not happened. Such losses arise only because the insured, public, and government are trying to prevent that contamination from ever occurring in the first instance, i.e., much of the real economic business loss is the consequence of prophylactic action to avoid risk, rather than the virus’ actual presence on an insured’s premises.

What if there is no Arguable Property Damage, and a Business is Closed because of Fear or as a Prophylactic Measure?

Thus, the broader economic question may involve those circumstances where the virus is not actually on or in the insured’s property, or on or in any property within the distance necessary to invoke civil authority coverage. Rather, the insured’s business is closed, either voluntarily or by government order, out of fear the premises might become contaminated, or that the business premises might simply act as a meeting ground for spreading infection among employees and customers independent of whether any part of the premises is contaminated. The prevention rationale may reach even further outside a concern for direct physical loss or damage, e.g., reasoning that if businesses are closed people will not be taking public transportation to visit the business, or milling about on the streets to walk to a busines

In one New York federal case dealing with the “direct physical loss or damage” language, the court found that “[t]he words ‘direct’ and ‘physical,’ which modify the phrase ‘loss or damage,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.” Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014). (Emphasis added)

Another New York federal case addressed coverage in a dispute involving purely economic damages resulting from the events of 9/11. Philadelphia Parking Authority v. Federal Insurance Co., 385 F. Supp. 2d 280 (S.D.N.Y. 2005) (interpreting Pennsylvania law). In that case, the plaintiff parking garage operator lost business at the Philadelphia airport due to diminished air travel after the 9/11 tragedy. It sought coverage from its insurer for these economic losses. The court found that the business impacts flowing from 9/11 could not serve as the source of a covered loss. These economic business losses lacked the predicate of direct physical loss or damage to the insured’s property. Rather, the insured’s loss of business itself was the only damage to the insured. Similarly, an Iowa federal court ruled that a putative loss of use in business operations occasioned solely by the “threat” of a flood was not physical loss or damage. Phoenix Insurance Co. v. Infogroup, Inc. 147 F. Supp. 3d 815 (S.D. Ia. 2015).

Was Insurance Available to Cover Business Losses before the Current Outbreak?

Another issue will likely be whether insurance coverage was available for viral pandemics before the COVID-19 outbreak. For example, an insured may argue that its reasonable expectations require reading business interruption or civil authority coverage to include pandemics, as there is no other means to obtain insurance coverage for these potential epidemics, making the policy’s coverage somehow illusory. Among other things, insurers may respond that insureds could have purchased coverage for pandemics before the COVID-19 crisis; therefore, the policy language should not be read beyond its ordinary meaning to provide coverage where coverage does not reasonably exist under the policy’s plain language.

In an April 3, 2020 declaratory judgment filing in Texas, the plaintiff theater and restaurant owner seeks coverage under a “Pandemic Event Endorsement.” A copy of the complaint in SCGM, Inc. v. Lloyds of London, U.S. District Court Southern District of Texas, No. 4:20-cv-01199, can be found here. The complaint alleges “[f]ollowing the 2014 Ebola crisis, many insurance carriers made specific exclusions for Ebola and other communicable diseases and viruses. Lloyds sought to take advantage of the exclusions in coverage by rolling out a Pandemic Event Endorsement that claimed to ‘fill in the gaps that [other insurers] creatively exclude or do not address’ that may relate to future pandemics.”

The endorsement, attached as an exhibit to the complaint, defines “pandemic event” to include either “(a) the actual presence of an Infected Person within a Covered Location; or, (b) the announcement by a Public Health Authority that a specific Covered Location is being closed as a result of an Epidemic declared by the CDC or WHO.” The endorsement limits “covered disease” to 25 specifically listed “pathogens, their mutations or variations” and a 26th category for other diseases designated by Lloyds. The complaint alleges Lloyds took the initial position that COVID-19 “is not covered under the Pandemic Event Endorsement as it is not a named disease on that endorsement.” Plaintiff counters that “Severe Acute Respiratory Syndrome associated Coronavirus (SARS-CoV) disease” is specifically named, that SARS-CoV-2 is the virus causing COVID-19, and that SARS-CoV-2 is a variant of SARS-CoV-1, i.e., a named pathogen.

[We note here that the World Health Organization has stated the International Committee on the Taxonomy of Viruses “announced ‘severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2)’ as the name of the new virus on 11 February 2020.  This name was chosen because the virus is genetically related to the coronavirus responsible for the SARS outbreak of 2003. While related, the two viruses are different.” Thus, this litigation may also involve whether the relationship constitutes a mutation or variation sufficient to come within the list.]

Even assuming some level of coverage on any of the above discussed grounds, there will likely be additional issues arising in COVID-19 cases that will require analyzing a wider range of a policy’s terms, conditions, sublimits, etc. In evaluating whether to fight the above-described battles, both insureds and insurers should look at the practical consequences of each and every particular policy language battle. The meaning of success should be measured against how things could stand at the end of the war, and not just any one battle.

For any additional information on these issues, you can contact S. David Fineman, dfineman@finemanlawfirm.com or Lee Applebaum, lapplebaum@finemanlawfirm.com.

 

 

(1) NO BAD FAITH WHERE COVERAGE LAW UNCERTAIN (2) BAD FAITH POSSIBLE FOR DELAY AND DENIAL OF ALLEGEDLY UNADDRESSED CLAIM (Philadelphia Federal)

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This case involved a highly disputed factual issue on coverage, with no clear guidance in the case law. The court denied summary judgment on the insured’s breach of contract claim, and rendered a split decision on the two bad faith claims.

The Close Coverage Call

Coverage existed if a roof was damaged by wind, allowing water to enter a building. The issue was whether a tarp could be considered part of a roof. The insurer denied coverage on the basis the tarp at issue was a temporary stopgap when blown off during a windstorm. The insured argued the tarp was sufficiently stable and integrated to be part of a roof system when it was blown off.

The court looked at local and national case law on when a tarp might be part of a more permanent structure, and thus part of a roof. The court found the issue highly fact-driven under this case law, and inappropriate for summary judgment. A jury had to decide the issue after hearing the disputed evidence and expert opinions.

The Bad Faith Claims

On the bad faith claims, the court stated that both denial of a benefit and/or improper investigative practices could constitute bad faith.

[As we have written on this Blog ad naseum, the idea that statutory bad faith covers anything other than benefit denials arguably runs contrary to Pennsylvania Supreme Court case law. In the 2007 Toy v. Metropolitan Life decision, Pennsylvania’s Supreme Court strongly appears to state that only denial of a benefit creates a cognizable statutory bad faith action, whereas matters like poor claims handling would be evidence of bad faith. See this article.

A few months later, the Supreme Court seems to confirm this conclusion. In Ash v. Continental Insurance Company, citing Toy, the Supreme Court states, “The bad faith insurance statute, on the other hand, is concerned with ‘the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharge[s] its obligation of defense and indemnification in the third party claim context or its obligation to pay for a loss in the first party claim context.’” (Emphasis added)

While it appears highly likely Pennsylvania’s Supreme Court made clear 13 years ago that section 8371 is limited to claims for denying benefits, numerous subsequent opinions conclude that there can be other bases for statutory bad faith. These cases typically do not address Toy or Ash in reaching this conclusion.]

In the present case, the insured allegedly made two separate claims, 19 days apart. The first had to do with wind damage to roof shingles, and the second addressed the issue concerning the tarp and interior water damage.

Bad Faith Possible for Undue Delay

On the first claim, the insured alleged it gave proper notice of loss, and the insurer failed to respond at all to the claim. The insurer alleged it had no notice, but in any event took the position that its denial letter addressed both the roof shingle and tarp claims.

The court found that there was an issue of whether the insurer had constructive notice of the first claim, even without formal notice. The adjuster was made fully aware of the event, but it is unclear if the insurer thought of this as a distinct event or just part of the continuum in a single claim. It was also unclear whether the denial letter actually addressed the shingle damage as such.

Thus, bad faith had to go to the jury. “If a jury were to conclude that Defendant was aware that Plaintiff had made a claim for the April damage, but ignored it, that could be seen as an objectively unreasonable, frivolous, intentional refusal to pay (or to otherwise resolve the claim in a timely fashion).”

[While there are certainly claims handling issues here regarding delay and responsiveness to an insured, this claim ultimately includes the denial of a benefit. Thus, the issue of whether there can be statutory bad faith without the denial of a benefit is not actually before the court.]

No Bad Faith where Governing Law is Uncertain

As to the second claim, the insurer won summary judgment. This gets back to the dispute over whether the tarp constitutes a roof. “An insurer who makes a reasonable legal conclusion based on an uncertain area of the law has not acted in bad faith.” Thus, “[w]ith no binding guidance from the Pennsylvania Supreme Court or the Third Circuit, and numerous fact-intensive cases on the subject, Defendant reasonably interpreted the membrane, and not the tarp, to be the roof. Even if that call is ultimately found to have been incorrect, Defendant did not act in bad faith by denying the claim.”

Date of Decision: March 18, 2020

Harrisburg v. Axis Surplus Ins. Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 19-1213, 2020 U.S. Dist. LEXIS 48115 (E.D. Pa. Mar. 18, 2020) (Beetlestone, J.)

TWO EASTERN DISTRICT CASES ON INADEQUATE PLEADINGS - (1) BARE-BONES CLAIM WITH NO FACTUAL SUPPORT DISMISSED EVEN THOUGH CONTRACT CLAIM PROCEEDS; (2) COMPLAINT DEVOID OF FACTUAL SPECIFICITY CANNOT STAND

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Case 1

In Park v. Evanston Insurance Company, the insureds successfully pleaded a breach of contract claim, but not a bad faith claim.

The insured alleged the nature of the loss, putative damages, and the policy covered the loss. The court agreed these allegations withstood the insurer’s motion to dismiss the breach of contract claim. Though not detailed in the opinion, the court obviously concluded that the facts as pleaded would fall within the policy’s coverage terms.

On the bad faith claim, however, no plausible claim was pleaded.  The court dismissed the claim without prejudice, giving leave to amend if possible.

The flawed complaint asserted that the insurer had no reasonable and sufficient basis to deny coverage, but did “not contain any factual allegations that relate to why Defendants’ alleged acts or omissions were unreasonable.” The court cited a number of decisions for the proposition that “bare-bones allegations of bad faith such as these, without more, are insufficient to survive a motion to dismiss.” These include the Third Circuit’s Smith decision, and the Eastern District decisions in McDonough and Atiyeh.

Date of Decision: March 4, 2020

Park v. Evanston Ins. Co., U.S. District Court Eastern District of Pennsylvania CIVIL ACTION No. 19-4753, 2020 U.S. Dist. LEXIS 37778 (E.D. Pa. Mar. 4, 2020) (Schiller, J.)

Case 2

In Shetayh v. State Farm Fire & Casualty Company, the insureds alleged the insurer fraudulently denied coverage, falsely alleging a property was used for business purposes. They sued for breach of contract and bad faith.

The insureds alleged that the insurer knew the business purpose allegation “was false, fraudulent and misleading and made solely for the purpose of denying coverage and preventing Plaintiffs from obtaining the benefits owed under their policy of insurance.” The insureds remaining bad faith averments were generic in nature, e.g., the insurer was unreasonable in withholding benefits, conducted an unfair investigation, failed to keep the insureds adequately advised, etc.

As the insurer stated in moving to dismiss the bad faith count, “these generic averments … could fit any category of insurance claim….” In response, the insureds simply repeated the allegation that the insurer’s agent knew his statement about business purposes was false, as adequately underpinning the entire bad faith claim.

The court agreed with the insurer.

Bad faith plaintiffs “must plead specific facts as evidence of bad faith and cannot rely on conclusory statements.” Judge Leeson cited the Third Circuit’s Smith decision, just as Judge Schiller did in Park. Judge Leeson found the complaint “devoid of factual specificity”, relying solely on conclusory allegations. Thus, the complaint could not survive a motion to dismiss.

As in Park, dismissal was without prejudice and with leave to amend. The court made clear, however, that “any amended complaint must specifically include facts to address who, what, where, when, and how the alleged bad faith conduct occurred.”

Among other cases, Judge Leeson relied on the following decisions in reaching his conclusion: MBMJ (which had virtually identical paragraphs in the bad faith count); Rosenberg; Fasano; and Alidjani.

Date of Decision: March 6, 2020

Shetayh v. State Farm Fire & Casualty Co., U.S. District Court Eastern District of Pennsylvania No. 5:20-cv-00693, 2020 U.S. Dist. LEXIS 39036 (E.D. Pa. Mar. 6, 2020) (Leeson, J.)