Archive for the 'Covid-19' Category

NO COVERAGE DUE FOR COVID-19 LOSSES IN LIGHT OF VIRUS EXCLUSIONS, AND THUS NO BAD FAITH POSSIBLE (New Jersey Federal - two cases)

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Today’s post addresses two recent cases where New Jersey federal judges held Covid-19 business loss claims barred by insurance policy virus exclusions.

Case 1 (Judge Hillman)

In this Covid-19 business closure case, the insured claimed coverage was due for business interruption, and under the policy’s civil authority coverage provision.  The carrier denied coverage based upon a virus exclusion.  The insured brought breach of contract and bad faith claims, which the insurer successfully moved to dismiss.

First, after an extensive analysis and review of developing case law, the court found the Covid-19 business loss barred by the policy’s virus exclusion.

As to bad faith, the court observed that under New Jersey law, causes of action for bad faith can include a denial of insurance coverage, or conduct that goes beyond coverage denial.  In coverage denial cases, the insured has to prove the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of the unreasonableness of the carrier’s denial.

Such claims cannot survive if they are fairly debatable; nor can there be a cognizable “bad faith claim for denial of coverage if the insurer was correct as a matter of law in denying coverage.” [Interestingly here, the court cites Third Circuit case law supporting this principle where the courts were addressing Pennsylvania’s bad faith statute, and not New Jersey’s common law insurance bad faith law.  The court also cited this “Pennsylvania” case law on bad faith reaching beyond coverage denial claims.]

New Jersey Federal Judge Hillman dismissed the bad faith claim with prejudice, stating

In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiff’s property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Plaintiff has not shown bad faith in Defendant’s lack of investigation or by denying Plaintiff’s claim. Discovery on this issue would not change that conclusion. As detailed above, the Court has already concluded Defendant was correct as a matter of law in denying Plaintiff coverage. Accordingly, the Court will dismiss with prejudice Plaintiff’s bad faith claim.  …. “Because the Court has found that [the insurer] was not obligated to provide coverage under the terms of the Policy, the bad faith claim similarly fails.”

Judge Hillman looked to Judge Kugler’s 2020 Shore Options opinion, summarized here, to support this conclusion.

Date of Decision:  August 9, 2021

Z Business Prototypes LLC v. Twin City Fire Insurance Company, U.S. District Court District of New Jersey No. CV 20-10075, 2021 WL 3486897 (D.N.J. Aug. 9, 2021) (Hillman, J.)

Case 2 (Chief Judge Wolfson)

After a lengthy analysis, Chief Judge Wolfson ruled that New Jersey’s principles governing insurance policy interpretation required application of a virus exclusion to bar coverage for a group of restauranteurs asserting Covid-19 business loss claims.  She then entered a judgment on the pleadings for the insurer on plaintiffs’ bad faith claim.

We quote the Chief Judge’s bad faith reasoning in full:

In Pickett v. Lloyd’s, 131 N.J. 457, 481 (1993), the New Jersey Supreme Court enumerated two situations under which an insurance company can be held to have acted in bad faith in the context of a first party claim: (1) “denial of benefits” and (2) “processing delay.” The Court reasoned that, like all contracts, an insurance contract contained a covenant of good faith and fair dealing in its performance and enforcement. …

Thus, the Court concluded that the insured should have a remedy when the insurer breaches its fiduciary duty to its insured by acting in bad faith. Id. To prove bad faith, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard or the lack of a reasonable basis for denying the claim.” “While the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is reckless indifference to facts or to proofs submitted by the insured, neither negligence nor mistake is sufficient to show bad faith.” …. Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable. ….

In the present matter, Plaintiffs assert a claim that Defendant acted with bad faith when it denied benefits set forth in Plaintiffs’ contract with Defendant. … However, as previously discussed, Plaintiffs’ losses are barred by the Virus Exclusion. Consequently, because no coverage exists for Plaintiffs’ claims, the bad faith claim fails.

Date of Decision:  August 12, 2021

JRJ Hospitality, Inc. v. Twin City Fire Insurance Company, U.S. District Court District of New Jersey No. 320CV13095FLWDEA, 2021 WL 3561356 (D.N.J. Aug. 12, 2021) (Wolfson, J.)

[Yesterday’s post summarized a separate August 9, 2021 New Jersey Federal Court opinion, addressing the same bad faith coverage issues, though outside the Covid-19 context, likewise concluding that if no coverage is due, bad faith is not possible.]

NO BAD FAITH POSSIBLE WHERE NO COVERAGE DUE IN THIS COVID-19 CASE (New Jersey Federal)

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New Jersey Federal Judge Wolfson denied plaintiff coverage in this Covid-19 business loss case.  Judge Wolfson found the policy’s virus exclusion unambiguously applied, denied the insured’s motion for summary judgment, and granted the carrier judgment on the pleadings.

[For those interested in the detailed reasoning behind this Covid-19 coverage decision, a copy of Judge Wolfson’s opinion can be found here.  We are only focusing on the bad faith claim.]

In a closing footnote, Judge Wolfson observed:

Neither party includes in its briefing any argument with respect to Plaintiff’s bad faith claim. Nevertheless, it is well-established that under New Jersey law, “a claimant must be able to establish a right to summary judgment, as a matter of law, for coverage before asserting a bad faith claim against an insurer for their refusal to pay a claim.” Mitra v. Principal Ins. Co., No. 15-1259, 2015 WL 4139015, at *3 (D.N.J. July 7, 2015) (citing Polizzi Meats v. Aetna Life & Cas. Co., 931 F. Supp. 328, 339 (D.N.J. 1996). In other words, where the plaintiff cannot “establish a right to summary judgment, the bad faith claim fails.” Id. Accordingly, because Plaintiff has not established a right to summary judgment on its coverage claim, its bad faith claim must also be dismissed.

Date of Decision:  July 29, 2021

Metuchen Center, Inc. v. Liberty Mutual Insurance Company, U.S. District Court District of New Jersey No. CV2012584FLWTJB, 2021 WL 3206827 (D.N.J. July 29, 2021) (Wolfson, C.J.)

NO COVID-19 LOSS COVERAGE DUE, NO COMMON LAW BAD FAITH POSSIBLE (Philadelphia Federal)

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The court found no coverage due for the insured’s business interruption losses resulting from the Covid-19 pandemic.  For those interested in the court’s reasoning on this hotly litigated issue, the opinion can be found here. Today, we limit ourselves to insurance bad faith law issues only.

The insured did not pursue a statutory bad faith claim, but only a common law claim for breach of the duty of good faith and fair dealing.  Having found no coverage due, Judge Gallagher, rejected the common law bad faith claim, stating:

‘[T]o recover under a claim of bad faith,’ the insured must show that the insurer ‘did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.’ ” Amica Mut. Ins. Co. v. Fogel, … (quoting Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994)); see also Treadways LLC v. Travelers Indem. Co., 467 F. App’x 143, 147 (3d Cir. 2012) (“Though we have held that bad faith may be found in circumstances other than an insured’s refusal to pay, ‘[a] reasonable basis is all that is required to defeat a claim of bad faith.’ ” (quoting J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 367 (3d Cir. 2004))).

“Pennsylvania courts have held that if the insurer properly denied a claim, the policyholder is unable to state a bad faith claim.” Kahn, … (citing Cresswell v. Pa. Nat’l Cas. Ins. Co., 820 A.2d 172, 179 (Pa. Super. Ct. 2003)). AGLIC properly denied Boscov’s insurance claims, so it did not act in bad faith. AGLIC’s alleged “failure to investigate” the matter also does not amount to bad faith. … Simply put, there was “nothing to investigate: coverage d[id] not exist on the face of [Boscov’s] claim[s].” Clear Hearing Sols., LLC v. Cont’l Cas. Co., … (rejecting bad faith claim premised on insurer’s denial of insurance coverage “without conducting any investigation”); Ultimate Hearing Sols. II, LLC v. Twin City Fire Ins. Co., … (same).

Date of Decision:  June 30, 2021

Boscov’s Department Store, Inc. v. American Guarantee and Liability Insurance Co., No. 5:20-CV-03672-JMG, 2021 WL 2681591 (E.D. Pa. June 30, 2021) (Gallagher, J.)

NO BAD FAITH CLAIM WHERE NO COVERAGE DUE (New Jersey Federal)

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This is a New Jersey Covid-19 coverage case.  The insurer rejected business loss coverage for a law firm’s Covid-19 business interruption claims, arguing (1) there was no direct physical loss and (2) the virus exclusion applied.

The insured brought claims for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. New Jersey Federal Judge Bumb observed that “[a]ll the claims require as a threshold matter that Plaintiff is entitled to coverage under the Policy due to the circumstances outlined above, despite [the insurer’s] denial of Plaintiff’s insurance claim.”

Thus, the insured had to prove both “(1) that Plaintiff suffered “direct physical loss of or physical damage to Covered Property” and (2) that the Virus Exclusion does not apply.” The court assumed arguendo the direct physical loss element went in the insured’s favor, to solely address the virus exclusion.  Judge Bumb held the virus exclusion applied to preclude coverage for all of the insured’s claims, including allegedly breaching the duty of good faith and fair dealing.

“In sum, because (1) the Virus Exclusion is unambiguous, (2) the Virus Exclusion excludes from coverage any losses caused by a virus, (3) COVID-19 is a virus, and (4) the but for cause of Plaintiff’s alleged losses and this case is COVID-19, [the insurer’s] denial of Plaintiff’s insurance claim was appropriate. Therefore, Plaintiff’s claims in this action are legally insufficient.”

Date of Decision:  April 14, 2021

Stern & Eisenberg, P.C. v. Sentinel Insurance Company, Limited, U.S. District Court District of New Jersey No. 20-CV-11277RMBKMW, 2021 WL 1422860 (D.N.J. Apr. 14, 2021) (Bumb, J.)

NO COVERAGE FOR COVID-19 LOSSES = NO BAD FAITH IN DENYING COVERAGE (Philadelphia Federal)

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On March 30, 2021, Eastern District Judges Beetlestone and Baylson independently issued opinions finding no insurance coverage due for business losses resulting from the Covid-19 pandemic.  In both cases, plaintiffs not only demanded coverage, but asserted bad faith claims against their insurers.

Motions to dismiss were granted in both cases, with prejudice, the courts finding no coverage due for the types of losses claimed. We leave you to read these cases in detail on the issues of physical loss or damage, direct loss or damage, governmental closures, business losses, and the other issues now regularly before the courts on Covid-19 business interruption and government closure claims.

Neither court gave any lengthy address to the bad faith claims, or even an express analysis for their dismissal. By comparison, the breach of contract and declaratory relief claims over coverage were addressed in detail.

The first element of any bad faith claim is that the claim denial is unreasonable.  In dismissing the bad faith claims, with prejudice, it seems fair to infer that because the coverage denial was correct under the policy language, these courts found no bad faith possible, i.e., where the coverage denial is correct under the relevant policy language, it is impossible to prove the carrier acted unreasonably, thus precluding a finding of bad faith.

Dates of Decision:  March 30, 2021

Tria WS LLC, v. American Automobile Insurance Company, U.S. District Court Eastern District of Pennsylvania, No. CV 20-4159, 2021 WL 1193370 (E.D. Pa. Mar. 30, 2021) (Beetlestone, J.) COVID

Chester Cty. Sports Arena v. The Cincinnati Specialty Underwriters Ins. Company, U.S. District Court Eastern District of Pennsylvania No. 20-2021, 2021 WL 1200444 (E.D. Pa. Mar. 30, 2021) (Baylson, J.) COVID

NO COVERAGE DUE FOR COVID-19 CLAIMS, NO BAD FAITH CLAIM POSSIBLE (Middle District)

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Middle District Judge Jones ruled that no Covid-19 coverage was due under an all-risk policy.

He found no “direct physical loss of or damage to property,” eliminating the possibility of coverage for business income losses or claims that the business closure resulted from a government order.  Further, even if covered, the claims were subject to the policy’s virus exclusion.

Thus, Judge Jones held plaintiff failed to make out its claims for breach of contract, declaratory judgment, and breach of the implied duty of good faith and fair dealing, and granted the insurer’s motion to dismiss those claims.  Although not a bad faith case, Judge Jones observed in a footnote, “[s]imilarly, Pennsylvania courts have held that if the insurer properly denied a claim, the policyholder is unable to state a bad faith claim.”

Date of Decision: February 8, 2021

Kahn v. Pennsylvania National Mutual Casualty Insurance Company, U.S. District Court Middle District of Pennsylvania No. 1:20-CV-781, 2021 WL 422607 (M.D. Pa. Feb. 8, 2021)

NO COVID-19 BUSINESS LOSS COVERAGE DUE; NO BAD FAITH FOR DENIAL OF COVERAGE OR FAILURE TO INVESTIGATE (Philadelphia Federal)

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These two Covid-19 coverage cases ended in summary judgments against the insureds on their breach of contract and statutory bad faith claims.  Eastern District Judge Kenney decided both cases last Thursday (1/14/2021).

Case 1: Clear Hearing Solutions v. Continental Casualty

Covid-19 Business Coverage Issues

In Clear Hearing Solutions, the insured had two all-risk policies.  Plaintiffs were Pennsylvania entities, but they had hearing service stores closed in Maryland and North Carolina due to government shutdowns.  The insureds alleged they were entitled to “Business Income coverage, Extra Expense Coverage, Extended Business Income coverage, and Civil Authority coverage,” but the carrier denied coverage.

Judge Kenney observed that direct physical loss of property or damage to property were essential to all these coverages.  He followed the principles that “[t]he criteria for physical loss caused by a source unnoticeable to the naked eye is thus whether the functionality of the…property was nearly eliminated or destroyed, or whether the[ ] property was made useless or uninhabitable by that source.” (internal quotation marks omitted) The mere presence of the contaminating source material, however, “or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for first-party insurance coverage.”

Judge Kenney states:

The Court agrees with and adopts the conclusion reached by another Court in this district. In 4431, Inc. et al v. Cincinnati Ins. Cos., the Court concluded that, “under Pennsylvania law, for Plaintiffs to assert an economic loss resulting from their inability to operate their premises as intended within the coverage of the Policy’s ‘physical loss’ provision, the loss and the bar to operation from which it results must bear a causal relationship to some physical condition of the premises.” No. 5:20-cv-04396, 2020 WL 7075318, at *11 (E.D. Pa. Dec. 3, 2020) (emphasis in original). There must also be an “element correlating to [the] extent of operational utility – i.e., a premises must be uninhabitable and unusable, or nearly as such.” Id; see also Brian Handel D.M.D. v. Allstate Ins. Co., No. 20-3198, 2020 WL 6545893 (E.D. Pa. Nov. 6, 2020) (finding Port Authority and Hardinger preclude a finding of “direct physical loss of or damage to” property where it remained inhabitable and usable, albeit in limited ways). In sum, while structural damage is not required to show “direct physical loss of” property, the source that destroys the property’s utility must have something to do with the physical condition of the premises.

The Clear Hearing insureds conceded there was no Covid-19 on the premises, and their losses resulted from government directed business closures.  “Because Clear Hearing expressly denies the existence of anything affecting the physical condition of its premises, its losses are a mere loss of use untethered to the physical condition of the property itself. Reading ‘direct physical loss of or damage to property’ to contemplate mere loss of use is not a reasonable interpretation because it renders two other Policy provisions superfluous or nonsensical.”

Judge Kenney then goes into a more detailed analysis as to why there is no covered physical damage or property loss from Covid-19, which are discussed in the opinion at length.

He further observes that simply because the policy lacks a virus exclusion, this does not create coverage by implication. “But ‘[a] loss which does not properly fall within the coverage clause cannot be regarded as covered thereby merely because it is not within any of the specific exceptions….’ And it is at least plausible that the physical manifestation of some type of virus could cause covered losses. That situation is just not present here.”

Judge Kenney also finds that the Maryland and North Carolina “government orders cannot constitute a covered cause of loss under either the Business Income and Extra Expense coverages or the Civil Authority Coverage provisions.”  Further, there was no genuine factual issue “as to whether the government orders were issued due to physical loss of or damage to nearby property,” and the insured could not show access to the premises was prohibited entirely for all purposes by these government orders.

Bad Faith Issues

[Note: We have observed numerous times over the years there is a strong argument that cognizable statutory bad faith claims in Pennsylvania require that the insured must have be denied an actual benefit, i.e., a payment of first party damages due or a refusal to defend and indemnify against third party claims due.  Thus, as repeated on this blog ad naseum, there is a genuine issue as to whether an independent statutory bad faith claim for poor investigation practices is cognizable when no coverage is otherwise due under a policy. For example, see this post from January 2020, this post from August 2020, and this post from earlier in August 2020.]

The Clear Hearing opinion states that statutory bad faith is an independent cause of action from a breach of contract action. If the statutory bad faith claim, however, “is premised solely on the denial of coverage, the claim must necessarily fail if a court finds that no coverage exists.” Judge Kenney adds, “[o]n the other hand, ‘if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.’” Further, “[t]hat distinction has been accepted when, for example, an insured claims the insurer investigated his claim in bad faith in addition to a bad-faith denial of coverage.”

[Note: The legal support for these propositions goes back, in part, to the Third Circuit’s unpublished 2007 Gallatin Fuels decision, in which the court found bad faith was still possible even though there was not even a policy in effect at the time of the incident.  Here is a link to an article addressing the logic in Gallatin Fuels, and the effect the Pennsylvania 2007 Supreme Court decision in Toy v. Metropolitan Life should have had on Gallatin Fuels reasoning and authority, had the Gallatin Fuels Court looked to Toy, which was decided earlier in 2007.]

The bulk of Clear Hearing’s bad faith claims were based on coverage denials, and these claims were readily dismissed because no coverage was ever due. Judge Kenney then goes on to address the claim handling based bad faith arguments, accepting the possibility that statutory bad faith might still exist even when no coverage is due and no benefit has actually been denied.

Clear Hearing argued that there was bad faith based on the claim handling because Continental immediately denied the claim and did not conduct any investigation, while further failing to address or acknowledge the insureds’ interpretation of the policy language on direct physical loss.  Rather, Continental relied “on case law providing a restrictive interpretation of the term direct physical loss to deny its claim as part of a policy to limit the company’s losses during the pandemic.” (internal quotation marks omitted).

Judge Kenney rejected this argument:

To the extent that these allegations may be construed to extend beyond bad faith in the denial itself to bad faith in the investigatory process or process of denial, Clear Hearing has not met its burden. In the context of a claim for coverage based solely on government closure orders, and on Civil Authority orders where nearby property has not suffered direct physical loss of or damage to property and access to plaintiff’s property has not been prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Clear Hearing has not shown bad faith in Continental’s lack of investigation or by denying Clear Hearing’s claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Nor does Continental’s purported reliance on caselaw that this Court concludes correctly interprets “direct physical loss of or damage to” with respect to Clear Hearing’s claims indicate bad faith. Accordingly, Clear Hearing has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Continental’s bad faith.

Case 2: Ultimate Hearing Solutions v. Twin City Fire Insurance

Plaintiffs were Pennsylvania entities with businesses located in Maryland, Delaware, Pennsylvania, and Virginia, which were subject to government closure orders due to Covid-19.  They likewise had all-risk policies, but with a different insurer than the Clear Hearing plaintiffs.  The Ultimate Hearing plaintiffs were represented by the same counsel as in the Clear Hearing case. These plaintiffs brought similar breach of contract and bad faith claims.

On the coverage, Judge Kenney applied the same reasoning found in Clear Hearing to conclude there was no covered direct physical loss or damage to property.

There were two differences, however, between the Ultimate Hearing and Clear Hearing all-risk policies. The Ultimate Healing policies included (1) limited coverage for fungi, wet rot, dry rot, bacteria, and viruses; and (2) a virus exclusion.

In rejecting limited virus coverage, Judge Kenney stated, “the Limited Virus Coverage clearly states that the Policy only covers ‘Direct physical loss or direct physical damage to Covered Property caused by … virus.’ Plaintiffs did not allege that the coronavirus was present at any of their insured properties. They also have not shown, as discussed above, physical loss or damage to their properties.”

Judge Kenney further rejected the argument that the limited virus coverage was illusory, because “Plaintiffs fail to acknowledge that this Limited Virus Coverage provision also applies to fungi, wet rot, dry rot, and bacteria, not just viruses. While it may be difficult to think of a hypothetical situation where a virus causes physical damage to a property, it is not difficult to imagine that wet rot, dry rot or fungi can cause damage that would satisfy the ‘direct physical loss or direct physical damage’ requirement. Further, while it may be difficult to imagine, Defendants did in fact identify a case where insured property was damaged due to a virus caused by a Covered Cause of Loss.”

Judge Kenney also found the virus exclusion precluded coverage.

The bad faith arguments were similar to those made in Clear Hearing, but without reference to the insurer’s improperly relying on caselaw to deny coverage. Rather, the argument was phrased as a refusal to consider the insureds reasonable interpretation of the policy language concerning direct physical loss.

Judge Kenney rejected the bad faith claim handling argument, stating as in Clear Hearing:

In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiffs’ property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Ultimate Hearing Solutions has not shown bad faith in Twin City’s lack of investigation or by denying Ultimate Hearing Solutions’ claim “in light of the current context of mass denials of COVID-19 related business interruption claims.” Discovery on this issue would not change that conclusion. Accordingly, Ultimate Hearing Solutions has not shown its entitlement to damages on its bad faith claim or an existence of a dispute of material fact as to Twin City’s bad faith.

Date of Decision:  January 14, 2021

Clear Hearing Solutions, LLC v. Continental Casualty Co., U.S. District Court Eastern District of Pennsylvania No. 20-3454, 2021 WL 131283 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

Ultimate Hearing Solutions II, LLC v. Twin City Fire Insurance Company, U.S. District Court Eastern District of Pennsylvania No. 20-2401, 2021 WL 131556 (E.D. Pa. Jan. 14, 2021) (Kenney, J.)

Developments in Pennsylvania and Philadelphia Commerce Courts; Philadelphia Commerce Court Allows Covid-19 Business Interruption Coverage Claim to Proceed

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Yesterday, November 3, 2020, Governor Wolf signed a bill into law permitting the Superior Court and Courts of Common Pleas to create specialized Commerce Court dockets within their jurisdictions.  If the Superior Court creates a Commerce Court docket, it will be the first specialized appellate business court in the United States.

As many readers of this blog know, Philadelphia’s Commerce Court regularly hears commercial general liability coverage cases, including bad faith claims. Presumably, new Commerce Courts may include these types of disputes within their jurisdiction as well.

A summary of this significant development can be found on the Business Courts Blog, here.

We also note that Philadelphia Commerce Court Supervising Judge Gary S. Glazer recently addressed preliminary objections seeking to dismiss a restaurant’s claim for breach of contract and bad faith against its insurer.  The insured’s claims were based on the carrier’s denying business interruption losses resulting from Governor Wolf’s executive order closing non-essential businesses during the COVID-19 pandemic.

Judge Glazer overruled the preliminary objections, and allowed the case to proceed.  A summary of Taps & Bourbon on Terrace, LLC v. Certain Underwriters at Lloyd’s, London can be found on the Business Courts Blog, here.

New Covid-19 Business Loss Insurance Coverage Cases Filed in Pennsylvania (April 2020)

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Like other states, Pennsylvania Covid-19 coverage cases are rapidly expanding in the last few weeks.

Western Pennsylvania

In Western Pennsylvania, two cases were filed in the Allegheny County Court of Common Pleas on April 17, 2020, HTR Restaurants, Inc. v. Erie Insurance Exchange, a class action, and Joseph Tambellini, Inc. v. Erie Insurance Exchange. Counsel of record are the same in both cases, two of whom are from Philadelphia firms, along with one firm each in Pittsburgh and Harrisburg. The same counsel filed a separate class action less than a week later in the U.S. District Court for the Western District of Pennsylvania, Windber Hospital v. Travelers Property Casualty Company of America.

On Friday, April 24, 2020, a new Western District action was filed by two different Philadelphia firms, Chester County Sports Arena v. The Cincinnati Specialty Underwriters Insurance Company. The two Philadelphia firms in Chester County Sports are also counsel in all the Eastern District cases listed immediately below (with Alabama co-counsel in this Western District case only).

Eastern Pennsylvania

In Eastern Pennsylvania, five cases were filed in the U.S. District Court for the Eastern District of Pennsylvania, LH Dining, L.L.C. v. Admiral Indemnity Co. (April 10, 2020), Newchops Restaurant Comcast, LLC v. Admiral Indemnity Company (April 17, 2020), C. A. Spalding Co. v. Selective Insurance Group (April 20, 2020),  Jul-Bur Associates, Inc. v. Selective Insurance Company of America (April 21, 2020), and Ian McCabe Studio, LLC v. Erie Insurance Exchange (April 21, 2020). The same two Philadelphia firms are counsel in all of these cases, and a Pittsburgh firm is also counsel in the Ian McCabe matter.

Counsel have moved the Judicial Panel on Multidistrict Litigation to transfer all federal Covid-19 business loss coverage cases arising from government shutdown orders to the United States District Court of the Eastern District of Pennsylvania, requesting coordination and consolidation of all pre-trial proceedings before the Honorable Timothy J. Savage.  Other counsel seek transfer to federal courts elsewhere.

Pennsylvania Supreme Court and Covid-19 Insurance Coverage

These new cases all involve the now familiar issues concerning what constitutes direct physical loss or damages for purposes of business interruption or civil authority coverage. See our earlier article discussing the basic issues in Covid-19 coverage cases for business losses. Three of the Philadelphia cases and one Western District case, however, add the argument that Pennsylvania’s Supreme Court has already weighed in on whether the Covid-19 virus can constitute direct physical loss or damage, citing Friends of Danny DeVito v. Wolf (decided April 13, 2020). This reflects the hot debate over the impact of the Court’s reference to “substantial damage to property” in determining Governor Wolf’s power to compel “the closure of the physical operations of all non-life-sustaining business to reduce the spread of the novel coronavirus disease.”

[The Danny DeVito mentioned in the complaint is not the actor.]

The plaintiff’s perspective is that DeVito v. Wolf has virtually decided the issue for coverage purposes, while the insurer side points out the Court’s Opinion is focused on health issues and not business interruption, and that insurance coverage was in no way an issue before the Court, which did not render any decision on insurance coverage. While close legal analysis would seem to favor the insurer’s arguments, the underlying message from plaintiffs’ counsel could be that Pennsylvania’s Supreme Court may be open to finding coverage due when the time comes to rule on the issue. (There is no language in DeVito v. Wolf addressing the virus exclusion found in many policies.)

The Legislative Alternatives

Finally, as discussed in our most recent article, all of these legal disputes may be resolved by emergency legislation to create coverage where it does not otherwise exist, in return for a state or federal “backstop” to protect insurers from bankruptcy. There is a recent Pennsylvania Senate bill (No. 1114), however, that does not appear to propose such protections for insurers required to pay when coverage is otherwise not due, while still expanding the definition of direct physical loss, damage or injury to tangible property to include, “The presence of COVID-19 having otherwise been detected in this Commonwealth.” It is hard to imagine legislation passing that could financially cripple insurers when they were expressly seeking to avoid the payment risks posed by viral pandemics (for which specific risks their insureds did not pay premiums).

Further, insurers are uncertainty averse. This kind of legislation would cast a future pall over all insurers if legislatures develop a sense of empowerment to rewrite insurance coverage for any public emergencies, contrary to express policy language, to provide an involuntary alternative to a government safety net. If such legislation is imposed on insurers, they will certainly seek significantly large premium increases to anticipate uncertain future coverage risks, or argue that they will otherwise eventually go out of business.

Thus, the most likely result of any legislation likely would be some sort of compromise, rather than placing all the burden on insurers.

Posted by Lee Applebaum, Fineman, Krekstein & Harris, P.C.

 

An Insurer Brings a Covid-19 Declaratory Judgment Action

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Covid-19 coverage suits against insurers are expanding daily. We recently summarized some key litigation issues concerning the “Exclusion of Loss Due to Virus or Bacteria”; the need to establish “direct physical loss of or damage to property at the described premises” for business interruption insurance; and the same type of damage or loss to property, other than the insured’s premises, to get civil authority coverage.

On Monday (April 20, 2020), an insurer became the plaintiff when Travelers brought a declaratory judgment action against a Los Angeles law firm, asking a California federal court to “[e]nter a declaratory judgment that the Policies do not provide coverage for the losses claimed….” The case is Travelers Insurance Company of America v. Geragos & Geragos, P.C. A copy of the complaint can be found here.

Travelers begins its complaint with a statement aimed at putting its coverage denial in context: “Travelers understands that the COVID-19 Pandemic has affected the public and the vast majority of businesses throughout the country (and world) in unprecedented ways. But these challenging and unfortunate circumstances do not create insurance coverage for losses that fall outside the terms of a policyholder’s insurance contract.”

Travelers alleges the law firm’s broker told Travelers that “G&G closed its business in light of directives issued by government officials in California and New York (the “Governmental Orders”), and was suffering an ongoing loss of business income as a result of closing its law firm’s physical offices.” Travelers also alleges the firm’s CEO told Travelers that (i) “SARS-CoV-2 purportedly causes physical damage because other countries impacted by the COVID-19 Pandemic have fumigated public spaces, and scientists have found that SARS-CoV-2 is detectable in aerosols and on certain surfaces for particular periods of time”; (2) “he was claiming loss of business income due to the Governmental Orders and courts being closed”; and (3) the firm lost rental income in New York.

After reciting relevant policy terms and exclusions, Travelers sets out various bases for its position:

  1. “There is no coverage for G&G’s claimed losses of business income under the Business Income provision … because any suspension of G&G’s operations was not ‘caused by direct physical loss of or damage to property at the described premises.’”

  2. “[T]he presence of SARS-CoV-2 on a surface would not cause physical damage to that surface.”

  3. “[T]here can be no coverage for G&G’s claimed losses of business income under the Business Income provision because the COVID-19 Pandemic is not a Covered Cause of Loss.”

  4. “There is no coverage for G&G’s claimed losses of business income under the Civil Authority provision … because the Governmental Orders were not ‘due to direct physical loss of or damage to property at locations, other than described premises, that are within 100 miles of the described premises.’”

  5. “[T]he Government Orders do not prohibit all access to G&G’s premises.”

  6. “There is no coverage for G&G’s claimed losses of business income under the Business Income and Extra Expense From Dependent Property provision … because any suspension of G&G’s operations was not ‘caused by direct physical loss or damage at the premises of a Dependent Property’ within the meaning of the Policies. Any temporary closure or limitation of operations of courts in which G&G conducts litigation was the result of governmental actions taken to slow the spread of the COVID-19 Pandemic, not the result of direct physical loss or damage at the premises of a Dependent Property.”

  7. The “EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA” excludes “’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.’ SARS-CoV-2 is a virus that induces or is capable of inducing physical distress, illness or disease.”

Geragos & Geragos had earlier sued Travelers for coverage in California’s Superior Court (Los Angeles). A copy of that complaint can be found here.

When juxtaposed with Travelers’ claims, the law firm’s allegations set out the battle lines:

  1. “The global COVID-19 pandemic has physically impacted both public and private property and physical spaces around the world, as well as the right of the general public to gather and utilize retail business locations. The currently-raging pandemic has been exacerbated by the fact that the deadly virus physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days. The scientific community in the United States and indeed, across the world, including the World Health Organization, has recognized that the Coronavirus is a cause of real physical loss and damage.”

  2. “Indeed, a number of countries such as: China, Italy, France, and Spain have required the fumigation of public areas prior to allowing them to re-open. A recent scientific study printed in the New England Journal of Medicine explains that the virus is detectable for up to three hours in aerosols, up to four hours on copper, up to 24 hours on cardboard boxes, and up to three days on plastic and stainless steel. Notably, the most potent form of the virus is not airborne but rather present on physical surfaces.” (footnote omitted)

  3. The local (Los Angeles) order directing closure of non-essential businesses “specifically referenced that it was being issued based on the dire risks of exposure with the contraction of COVID-19 and evidence of physical damage to property.” Shortly after that, the Governor “issued a state-wide ‘Stay-at-Home Order’ for all residents of California. In this case, the property that is damaged is in the immediate area of the Insured Property.”

  4. “Any effort by Travelers to deny the reality that the Coronavirus causes physical loss and damage would constitute a false and potentially fraudulent misrepresentation that could endanger policyholders, such as Plaintiff, and the public.”

  5. “[T]he Policy does not include an exclusion for a viral pandemic and actually extends coverage for loss or damage due to physical loss and damage, including by virus….”

The court(s) will have to determine the scope and meaning of direct physical loss or damage to property. They will also have to address either (i) the presence of a factual dispute over whether the virus exclusion is in the applicable policies, or (ii) if present, why that exclusion might apply to discrete viruses, but not viral pandemics. There may also be an abstention issue in the federal action.

Moreover, as discussed in our previous post, all of these legal disputes may be superseded by emergency legislation to create coverage where it may not otherwise exist, in return for a state or federal “backstop” to protect insurers from bankruptcy.