Archive for the 'PA – General Bad Faith and Litigation Issues' Category

BAD FAITH BLOG CELEBRATES 15TH ANNIVERSARY

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It has been 15 years since we started this blog, focusing on insurance bad faith law in Pennsylvania and New Jersey.  Our simple goal has been to report on court opinions as we locate them, and report on all the cases we find.

We rarely editorialize, with the notable exception concerning whether Pennsylvania permits a statutory bad faith claim to proceed where no benefit has been denied.

I have been the chief author of this blog since its inception, but wanted to give a special thanks to Jay Barry Harris for inspiring me to create the blog and pursue the effort for all these years.  As many of you know, Jay was a superb lawyer, and even better human being, who tragically passed away in 2016.  Rest in peace my friend.

Lee Applebaum,

Fineman, Krekstein & Harris, P.C.

THE ROLE OF BAD FAITH IN AN EQUITABLE SUBROGATION CASE (Third Circuit – Pennsylvania Law)

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In this case, the Third Circuit addresses the elements of equitable subrogation between insurers, a useful opinion for coverage counsel dealing with insurer vs. insurer disputes.  Here, we only mention the role bad faith played in the court’s analysis.

This case involves the tragic Salvation Army building collapse in Philadelphia, where six people died and thirteen others were injured.  The neighboring property owner had hired a contractor to do construction work on its property. The improperly carried out work ultimately caused the building to collapse onto the neighboring Salvation Army building.

The property owner had a commercial general liability (CGL) policy on which it was a named insured.  The contractor also had its own insurance policy. This policy appeared to provide coverage to the property owner as an additional insured.

Over time, the CGL carrier, through counsel, repeatedly demanded that the contractor’s insurer provide a defense to the property owner as an additional insured.  The CGL carrier stated in one communication that a defense was due to the property owner as an additional insured, and that failure to provide such a defense was bad faith.

The contractor’s carrier eventually agreed to provide a defense to the property owner as an additional insured, under a reservation of rights. Eventually, the additional insured carrier withdrew its defense, and obtained a judgment rescinding its policy based on material misrepresentations the contractor made in the insurance application.

A court eventually found the contractor’s policy void ab initio. The contractor’s carrier, however, already had paid over $667,000 in defense costs for the property owner as an additional insured. The additional insurer brought the present claims for equitable subrogation and unjust enrichment against the property owner’s CGL carrier.

The district court rule in favor of the additional insurer, and had awarded almost all of the damages sought. The Third Circuit affirmed.

On the bad faith related issues, the Third Circuit found the following.

First, an insurer seeking equitable subrogation against another insurer has to show that in providing a defense and coverage, it acted to protect its own interest, and that it did not act as a volunteer.  In this case, while the contractor’s insurer might have believed the policy should have been rescinded, it did not have any judgment to that effect. Moreover, it had been threatened with a bad faith claim by the CGL carrier’s counsel.  The Third Circuit found this sufficient to establish that the contractor’s carrier acted in its own interest, and not as a volunteer, in providing a defense.

Second, the CGL carrier argued that the contractor’s carrier had unclean hands, and therefore could not obtain equitable relief. The Third Circuit rejected this argument. The panel observed that the unclean hands doctrine requires proof of fraud, unconscionable conduct, or bad faith affecting the balance of equities. The court could not find that the carrier’s conduct was unconscionable or affected the balance of equities between the two carriers.

Date of Decision:  April 27, 2021

Berkley Assurance Co. v. Colony Insurance Co., U.S. Court of Appeals for the Third Circuit No. 20-2673, 2021 WL 1625521 (3d Cir. Apr. 27, 2021) (Ambro, Rendell, Restrepo, JJ.)

TRIAL COURT ABUSED ITS DISCRETION IN ALLOWING INSURED TO AMEND AT TRIAL TO ADD A NEW JERSEY BAD FAITH CLAIM AFTER INSURER HAD CLOSED ITS CASE (Superior Court of Pennsylvania) (Non-precedential)

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At trial, the Pennsylvania court permitted plaintiff orally to amend her claims to add a count for bad faith under New Jersey law, after the insurer had closed its case.  The trial court had earlier dismissed a Pennsylvania statutory bad faith claim, without prejudice.  That claim was never re-asserted.

The Superior Court reversed.

After carefully reviewing the case history and trial proceedings, the appellate court found the trial court abused its discretion in permitting this late amendment in light of the prejudice to the insurer. “Prior to trial, [the insured] never amended her complaint to bring a bad faith claim under New Jersey law following the dismissal of her Pennsylvania bad faith claim. As a result, [the insurer] stipulated to certain damages and chose its trial strategy believing that the only claim it was defending against was for breach of contract.” The insured unfairly used this stipulation at trial by claiming that the insurer chose not to put on evidence regarding the reasonableness of its conduct. However, “it did not present evidence on reasonableness because its conduct was not at issue.”

“Given that [the insurer] based its trial strategy on defending against a breach-of-contract claim only, the trial court abused its discretion in allowing [the insured] to amend her complaint to add a bad faith claim under New Jersey law after [the insurer] had rested its case. Accordingly, we reverse the trial court’s decision to permit that amendment. Consequently, we also reverse the trial court’s award of punitive damages and attorney’s fees … which were based upon a finding of bad faith.

Date of Decision: February 22, 2021

Salmon v. The Philadelphia Contributionship Insurance Company, Superior Court of Pennsylvania No. 416 EDA 2020, 2021 WL 653030 (Pa. Super. Ct. Feb. 19, 2021) (Bender, Lazarus, Stephens, JJ.) (Non-precedential)

THREE DISCOVERY OPINIONS OUT OF THE MIDDLE DISTRICT: (1) PLAINTIFFS CAN DEPOSE EXPERT USED TO INVESTIGATE CLAIM, NOT HIRED IN ANTICIPATION OF LITIGATION; (2) PLAINTIFFS CAN DEPOSE POLICE INVESTIGATOR; (3) PLAINTIFFS CAN DEPOSE UNDERWRITER WHO MAY HAVE HAD A ROLE IN CLAIM HANDLING (Middle District)

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Middle District Magistrate Judge Joseph F. Saporito, Jr. recently issued three discovery opinions arising out of a first party fire property damage case.  The insureds claimed a total loss, and sued for breach of contract and bad faith.

  1. Expert may be deposed when her investigation is part of ordinary claims handling, and not done in anticipation of litigation.

In the first opinion, Magistrate Judge Saporito addressed a subpoena directed to a fire analyst. This expert did not work directly for the insurer, but an independent investigation company. The insurer engaged this expert solely to determine the cause and origin of the fire.

The insurer argued that the fire analyst was not hired as a testifying expert, but as a non-testifying consulting expert. It moved to quash the subpoena “because she is an expert hired by it in anticipation of the possible litigation of the plaintiffs’ claim.” It relied on Federal Rule 26(b)(4)(D).

In opposition, the insureds argued this fire analyst was being deposed as a fact witness, not an expert witness, “regarding her communications with the defendant after the issuance of her expert report, her communications with the plaintiffs and their representatives, public authorities, including those associated with the City of Harrisburg Police and Fire Departments, and the Pennsylvania Department of Insurance.” Moreover, the insured contended the fire analyst was not retained in anticipation of trial, and thus Rule 26(b)(4)(D) did not apply.

Magistrate Judge Saporito first observed the liberal discovery standard and that “[t]he burden is on the objecting party to demonstrate in specific terms why a discovery request is improper. The party objecting to discovery must show that the requested materials do not fall within the broad scope of relevance or else are of such marginal relevance that the potential harm occasioned by discovery would outweigh the ordinary presumption in favor of broad disclosure.”

The court found that the fire analyst’s work was not done in anticipation of litigation, and was thus outside Rule 26(b)(4)(D)’s protections.  While the expert did carry out a wide and ongoing investigation after the fire, this alone did not mean the investigation was done in anticipation of litigation.  Magistrate Judge Saporito cited a number of cases for the proposition that claim investigation and evaluation “is part of the regular, ordinary and principal business of insurance companies.”He further stated, “[g]enerally, documents and reports produced by or at the request of an insurer before arriving at a claims decision which consist of information reasonably related to the evaluation of a claim are presumed to have been produced or used for claims evaluation, not for litigation preparation.”

Magistrate Judge Saporito found on the facts that the fire analyst’s investigation, report, and communications all “clearly preceded a final claims decision by the defendant insurer.” (Emphasis in original) “Her investigation and report were an integral part of the insurer’s claims evaluation process, which ultimately culminated in a decision to pay the claim on or about May 1, 2019. Thus, it is presumed that [her] investigation was conducted, and her report was prepared, in the ordinary course of the defendant insurer’s business of claims evaluation, not in preparation for litigation.”

Magistrate Judge Saporito rejected the argument that given the circumstances of the fire, it was likely at the time of the expert’s retention coverage could be declined, which would then result in litigation. He found this argument “conclusory” and insufficient to overcome the presumption that the expert’s retention and work were to evaluate the coverage decision, and not to prepare a litigation defense.

Thus, he denied the motion to quash.

Date of Decision:  January 29, 2021

MAZER v. FREDERICK MUTUAL INSURANCE COMPANY, U.S. District Court Middle District of Pennsylvania No. 1:19-CV-01838, 2021 WL 311229 (M.D. Pa. Jan. 29, 2021) (Saporito, M.J.)

  1. Carrier lacks standing to challenge subpoena of police detective, nor can it obtain a protective order regarding his deposition testimony.

The second opinion involves a motion to quash, or for a protective, order involving plaintiff’s subpoena directed to the investigating police detective.  The insured alleged the detective “acted in concert with the defendant’s privately retained fire investigator during the investigation of the subject fire loss, and both had communications with representatives of the Pennsylvania Insurance Department.” The insureds argued this was part of their bad faith claim.

The legal issue was governed by Federal Rule 45, addressing subpoenas to non-parties.

First, Magistrate Judge Saporito found the insurer generally lacked standing to object to the subpoena.  Rule 45(d)(3)(A)(iii) provides a limited exception in circumstances where the objecting party “claims a property right or privilege in the disclosed information.” That exception, however, was inapplicable, and he denied the motion to quash.

Next, Magistrate Judge Saporito addressed the Rule 26(c)(1) motion for a protective order.  The insurer asked the court to limit deposition questions “to those which plaintiffs demonstrate are relevant to the outstanding issues in this matter.”This argument failed, with the court finding, “the defendant has not shown how it would be unduly burdened or harassed by preparing for and attending [the detective’s] deposition. Therefore, we will deny the defendant’s request for a protective order.”

Date of Decision:  January 29, 2021

MAZER v. FREDERICK MUTUAL INSURANCE COMPANY, U.S. District Court Middle District of Pennsylvania No. 1:19-CV-01838, 2021 WL 311231 (M.D. Pa. Jan. 29, 2021) (Saporito, M.J.)

  1. Insured allowed to take discovery of underwriter, whose role apparently went beyond underwriting.

On this third discovery motion, plaintiffs sought to depose one of the insurer’s underwriters.  The carrier moved for a protective order, arguing that any relevant testimony would be redundant with that of the claim handler to be deposed, and that there was no underwriting issued in the case so any testimony on that subject would be irrelevant.

The insureds argued the underwriter’s testimony was relevant “because she was involved in the handling and evaluation of their claim.” The insureds supported their position by referencing three emails the underwriter authored. The court concluded from these emails that the underwriter’s role did not appear to be limited to underwriting alone.

Thus, “[t]he plaintiffs should be permitted to take [the underwriter’s] deposition to determine the nature and extent of her role in this case. Moreover, the defendant has not shown how it would be unduly burdened by preparing for and attending [the] deposition.”

While the insurer’s motion was denied, “[h]owever, as plaintiffs’ counsel has previously offered to provide defense counsel with an outline of the topics and/or areas of inquiry in a notice of deposition, we will direct that they do so.”

Date of Decision:  February 2, 2021

MAZER v. FREDERICK MUTUAL INSURANCE COMPANY, U.S. District Court Middle District of Pennsylvania No. 1:19-CV-01838, 2021 WL 357333 (M.D. Pa. Feb. 2, 2021) (Saporito, M.J.)

STATUTORY BAD FAITH CLAIMS NOT SUBJECT TO ARBITRATION (Pennsylvania Superior Court) (Non-precedential)

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This case involved the arbitrability of statutory bad faith claims.  The Superior Court relied upon its 23-year old decision in Nealy v. State Farm Mutual Auto Insurance Co., 695 A.2d 79 (Pa. Super. Ct. 1997) to resolve the issue, rather than looking at the usual principles regarding arbitrability.

The court states, “we need not address [the insurer’s] contention the bad faith claim fell within the scope of the arbitration agreement. The record does not demonstrate that the trial court found the claim to be outside the scope of the agreement; rather, it found Nealy to be binding.”

In Nealy, the Superior Court stated, “bad faith claims pursuant to Section 8371, ‘are distinct from the underlying contractual insurance claims from which the dispute arose.’” Thus, “section 8371 ‘provide[s] an independent cause of action to an insured that is not [dependent] upon success on the merits, or trial at all, of the contract claim.’”

The Nealy court then held, “Both this Court and our sister federal courts have decided a myriad of cases that impinge in some respect upon the workings of § 8371. No court, however, has squarely decided the question of whether an arbitration panel is vested with the jurisdiction to entertain such a claim. After careful consideration, we conclude that original jurisdiction to decide issues of § 8371 bad faith is vested in our trial courts.”

The court then rejected the insurer’s arguments against Nealy’s application. First, it found Nealy was not limited to UM/UIM cases. Next, the court found the complaint clearly pleaded bad faith bad on post-breach conduct, “and thus is temporally and factually distinct from its breach of contract claim.” Finally, the court ruled Nealy remained good law.

Date of Decision: September 29, 2020

KEB Hana Bank USA v. Fidelity National Title Insurance Company, Superior Court of Pennsylvania No. 207 EDA 2020, 2020 WL 5796159 (Pa. Super. Ct. Sept. 29, 2020) (Colins, McLaughlin, Panella, JJ.)

How has Covid-19 affected the number of bad faith opinions issued?

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From April through August 2020, we’ve posted 51 times on the Bad Faith Blog. Subtracting four posts during that time focusing solely on covid-19 issues without mentioning bad faith, there are 47 posts over this five month period.  During the same five month time-period in 2019, we had 49 posts.  In 2018 it was 54 posts, and in 2017 it was 55 posts.  In short, as of yet, we have not seen a significant decline in opinion writing on bad faith insurance claims during the Covid-19 pandemic.

We also note that the Pennsylvania and New Jersey Insurance Bad Faith Case Law Blog reached 1,700 posts this month, since our first post in June 2006.

THE BERG ODYSSEY HAS ENDED

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After 24 years, 22 in litigation, it appears Berg v. Nationwide finally reached an end yesterday when the Supreme Court, in a split decision, dismissed plaintiffs’ appeal.  To quote:

“PER CURIAM

AND NOW, this 25th day of August, 2020, the Court being divided in a fashion which prevents a majority disposition, the appeal is DISMISSED. The application to file a post-argument submission is DISMISSED as moot.

Justice Donohue did not participate in the consideration or decision of this matter.”

A copy of the Supreme Court’s Per Curiam Order can be found here.

Justice Wecht wrote a 60-page opinion in favor of reversal, a copy of which can be found here.  Justice Saylor wrote a 24-page opinion in favor of affirmance, a copy of which can be found here.

A summary of the Superior Court’s 2018 decision is posted here, and amendment thereto is posted here.  These are now the final rulings in this case.

A summary of Judge Sprecher’s 2014 trial court decision awarding $21,000,000, reversed by the Superior Court in its now final decision, can be found here.

Judge Sprecher’s ruling followed an earlier 2012 Superior Court decision in Berg (44 A.3d 1164), summarized here. This 2012 opinion has proven influential. A quick search shows it being cited over 70 times by courts, and tens of times in secondary materials.  The 2012 Berg opinion was authored by then Superior Court Judge Donohue, who, as Justice Donahue, did not participate in this Supreme Court decision dismissing the appeal.

If you want to get an overview on the law of removal and remand in bad faith cases, this is the case for you.

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Eastern District Judge Marston reviews three lines of U.S. Supreme Court and Third Circuit precedent in determining when, and whether, the burden of proof in establishing the jurisdictional minimum for removal purposes is “legal certainty” versus “preponderance of the evidence.”  She concludes that in cases where the insured specifically pleads compensatory damages are less than $50,000, a “legal certainty” test still applies until the Third Circuit says otherwise. This is so even if the plaintiff additionally demands punitive damages, attorney’s fees and super-interest under the bad faith statute.

In this context, a removing defendant’s allegation that punitive damages and attorneys’ fees could result in overall damages exceeding $75,000, fails to meet the legal certainty test.

[Comment: The upshot appears to be that if a plaintiff specifically alleges compensatory damages will not exceed $75,000 (typically not to exceed $50,000 in Pennsylvania state pleadings), even while additionally seeking statutory punitive damages and attorney’s fees, removal is not going to be possible.  Under Rule 11, the removing party would have difficulty averring to a certainty that punitive damages and attorney’s fees will be awarded to a legal certainty, and will use qualifying language such as “court be awarded” or “if awarded”.  Moreover, it is unlikely a defendant insurer will want to establish legal certainty by making a detailed argument against itself as to why it should be encumbered with punitive damages for its own reckless or intentional conduct.

Among the questions that arise: Why is a bad faith claim for punitive damages any less a legal certainty than a contested claim for compensatory damages? Put another way, doesn’t a contested claim for punitive damages or attorney’s fees have as much reality as a contested claim for compensatory damages?

Bad faith claims only allow for three types of damages: super-interest, punitive damages, and attorney’s fees.  There is no statutory bad faith claim for compensatory or incidental damages. Thus, to even plead a bad faith claim meeting Rule 11 standards, the plaintiff must believe that punitive damages, attorney’s fees, or super-interest are warranted, as this is the only possible form of relief provided under section 8371.

Just as a plaintiff believes and pleads it is entitled to $49,312.25 in compensatory damages — and this number is treated as an undisputed fact for jurisdictional purposes even if a defendant insurer completely rejects that sum — so too must the plaintiff believe that it is entitled to punitive damages, attorney’s fees and/or super-interest in bringing the bad faith claim.  Yet this distinct damage claim, under a separate legal theory, may come to be treated as a nullity for purposes of calculating the jurisdictional minimum.

One possibility here could be the potential damages available under section 8371 are discretionary and not mandatory. Thus, it might be that the trier of fact may not award any of these damages at the end of the day, or may make a minimal award.  It also might be the case, however, that the trier of fact will find at the end of the day that the same plaintiff’s compensatory damage claim is meritless or only a fraction of the sum requested. Yet, that number as pleaded is treated as truth.]

The Facts of the Case

Plaintiffs brought breach of contract and bad faith claims in this water damage case.  Their contract claim’s ad damnum clause sought “judgment against Defendant in an amount not in excess of $50,000 together with interest and court costs.” In the bad faith count’s ad damnum clause, Plaintiffs requested “statutory damages including interest…, court costs, attorneys’ fees, punitive damages, and such other compensatory and/or consequential damages as are permitted by law.”

The carrier removed the case from Philadelphia’s Court of Common Pleas to federal court, and Plaintiffs moved to remand.  The District Court remanded.

The court observed “’[i]t is now settled in this Court that the party asserting federal jurisdiction in a removal case bears the burden of showing, at all stages of the litigation, that the case is properly before the federal court.’”  As set out above, the issue was whether the court should set the burden at “legal certainty” or “preponderance of the evidence.”  After doing a lengthy and detailed historical analysis of each strand of case law, the court concluded that, in a case such as this where the insured specifically pleaded the compensatory damage claims were less than $50,000, the “legal certainty” test applied.

The court observed it could aggregate the demands against a single defendant in determining jurisdiction. Further, punitive damages could be considered, so long as the estimates were realistic, with all doubts construed in favor of remand.  Such an analysis must be objective and not “pie-in-the-sky”.

The compensatory damages were a little over $24,000. The insurer argued that it was “not unreasonable to expect that a punitive damage award three or four times the amount in controversy, or beyond, could be rendered by the trier of fact.” It suggested, however, that the court should apply a 2-1 ratio ($48,000) and a measure of attorney’s fees at $30,000, as that “would not be unreasonable to expect that [fee sum] over the course of an approximate ten-month litigation…” This would place the claim at over $100,000, sufficient for jurisdiction.  The court rejected the argument.

The court looked at earlier case law finding such arguments failed to reach the level of “legal certainty.” In those cases, the qualifying language presented the fatal flaw, e.g., “claims for punitive damages and attorney fees, amongst other relief…could exceed $75,000.”; “it is ‘certainly possible for the damages to meet or exceed the jurisdictional limit of $75,000.’” A “suggestion of possible future events,” however, is not enough.

In one case relied upon to support remand, the compensatory damages were $11,000 and the punitive damages needed to be six times that amount to obtain jurisdiction. The court remanded for two reasons: (1) there was no certainty the plaintiff would “recover punitive damages at all, as she has not alleged any particular facts suggesting bad faith on the part of [the insurance company], other than her assertion that she was entitled to benefits but has not received them.”; (2) the carrier “supplied no basis for the Court to find that [the plaintiff] will recover the necessary amount of punitive damages.”

[Comment: This analysis implies a number of considerations, akin to the comment above. In determining remand, the court is looking to the merits of the plaintiff’s case in evaluating whether defendant met its burden.  The court basically determined on a motion to remand that the plaintiff’s bad faith claim, as pleaded, could not withstand a federal motion to dismiss.  The court then put the burden on the defendant to make the case against itself as to why punitive damages should be awarded against it.]

Judge Marston found the instant case akin to these earlier cases. In the present case, the carrier only alleged “that it is not ‘unreasonable’ to find that punitive damages ‘could’ amount to three or four times the amount in controversy, and that it would ‘not be unreasonable’ to find that attorney’s fees ‘could’ approach $30,000.This did not “satisfy [the defendant’s] burden by pointing to the mere possibility that the [insureds] ‘could’ be awarded punitive damages and attorney’s fees above the amount in controversy threshold.” “Moreover … [the insureds] are ‘not certain to recover punitive damages at all,’ because the complaint does not allege ‘any particular facts suggesting bad faith on the part of [the insurance company], other than [the] assertion that [they were] entitled to benefits but ha[ve] not received them.’”

The court held: “Without more, we cannot find that [the insurer] has carried its burden of showing to a legal certainty that the amount in controversy exceeds $75,000, and we must remand the case. However, if on remand, [the insurer] uncovers new evidence which shows that the amount in controversy exceeds $75,000, it may again seek removal to this Court.”

Date of Decision:  August 4, 2020

Sciarrino v. State Farm Fire and Casualty Company, U.S. District Court Eastern District of Pennsylvania No. 2:20-CV-2930-KSM, 2020 WL 4470611 (E.D. Pa. Aug. 4, 2020) (Marston, J.)

BAD FAITH BLOG REACHES 14TH ANNIVERSARY

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The Pennsylvania and New Jersey Insurance Bad Faith Case Law Blog is celebrating its 14th anniversary.

We’ve posted nearly 1,700 case summaries since June of 2006, with hundreds of thousands of views.  We have taken a matter of fact approach, with our focus on presenting judges’ opinions as explained by the judges themselves, only occasionally with editorial comment.

Our view is that seeing and understanding what the courts are actually saying is vital not only for attorneys pursuing or defending bad faith actions, but essential for parties to understand how the courts will interpret their conduct.  This allows, e.g., for insurers to get a handle on the parameters of good faith claim management in Pennsylvania and New Jersey to avoid bad faith claims before they arise. It also provides an understanding to insureds that bad faith will not be measured solely from an insured’s viewpoint, which may be subject to the frustration, fear or anger naturally arising from a loss or being sued, but objectively from the totality of the circumstances, including the insurer’s perspective as well as the insured’s.

We certainly expect to see bad faith case law developing around Covid-19 coverage claims in the coming months and next few years, and will be reporting on those cases as they arise.

But most of all, we wish safety and good health for all of you.

Fineman, Krekstein & Harris

 

 

Courts Use of Telephones and Videoconferencing to Reduce Risk from the Covid-19 Virus

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The Business Courts Blog has provided an updated list of Courts across the United States directing or encouraging the use of remote teleconferencing and videoconferencing in lieu of appearing in-person for conferences and hearings, to limit health risks.  You can find that post here.