While we all continue to strive for a sense of normalcy in the midst of the ever-changing COVID-19 crisis, new arguments in support of purported coverage for COVID-19 related Business Interruption claims continue to emerge. One such recent argument is based on the April 13, 2020, ruling by the Supreme Court of Pennsylvania in Friends of Devito v. Wolf, No. 68 MM 2020, 2020 Pa. LEXIS 1987, (Apr. 13, 2020). In Friends of Devito, several businesses and one individual sought extraordinary relief from the Pennsylvania Governor’s Executive Order, which compelled closure of physical operations for non-life-sustaining businesses to reduce the spread of COVID-19.
The Petitioners argued that the order was invalid for a number of reasons including lack of constitutional authority. The Pennsylvania Supreme Court disagreed and found that the Governor did have authority for the Executive Order. In reaching its conclusion, the Court noted that the Governor had authority under the Pennsylvania Emergency Code to protect the public from natural disasters. Under the Emergency Code, the term “natural disaster” is defined to include catastrophes that result in “substantial damage to property, hardship, suffering or possible loss of life.” The Court held that the COVID-19 pandemic qualified as a “natural disaster” and fell within the same general class of disasters as the specifically enumerated “natural disasters” because they all involve “substantial damage to property, hardship, suffering or possible loss of life.”
The Friends of Devito Court went on to note that the Petitioners’ arguments ignored the nature of the virus including the way in which it is transmitted. Because the virus is transmitted by person-to-person contact, has an incubation period of up to fourteen days, can live on surfaces for several days, and carriers can be asymptomatic, the Court concluded that “any location (including Petitioners’ businesses) where two or more people can congregate is within the disaster area.” Thus, the Court rejected the argument that there had “been no disasters in the areas in which [the Petitioners’ businesses] are located.”
Based on Friends of Devito, attorneys are now raising the argument all properties are damaged just by the manner in which COVID-19 spreads. In other words, they are asserting that coverage would exist even in the absence of the actual presence of the disease at a specific location. In the same vein, policy-holder counsel are now arguing that property damage is not a necessary prerequisite to Business Interruption coverage where the policies provide coverage for Business Interruption caused by “direct physical loss of or damage to property.” They argue that businesses that were forced to close due to stay-at-home orders have suffered loss of property, regardless of whether there is actual contamination or other property damage at the business location, because the property is not available for their business use.
On the surface, both arguments are concerning for insurers faced with COVID-19 related Business Interruption claims. However, both arguments appear to conflate “loss of use of property” with “physical loss of” property. As such, they ignore the term “physical.” These types of arguments have already been rejected by several courts. These courts have held that the “physical loss” is not the same as “loss” in general because actual physical change to the condition of the insured property is required to qualify as “physical loss.” See, e.g., Ward Gen. Ins. Servs., Inc. v. Emp’rs Fire Ins. Co., 114 Cal. App. 4th 548, 556-57, 7 Cal. Rptr. 3d 844, 850-51 (2003); MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 778-80, 115 Cal. Rptr. 3d 27, 37-38 (2010); Se. Mental Health Ctr., Inc. v. Pac. Ins. Co., 439 F. Supp. 2d 831, 837 (W.D. Tenn. 2006); and Phx. Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, 825 (S.D. Iowa 2015).
While unpublished, a 2006 Washington State Court of Appeals case is instructive on the flaw in the newest COVID-19 arguments. In Washington Mutual Bank v. Commonwealth Ins. Co., the bank argued that “direct physical loss of” and “damage to” property have two separate meanings and were separated by the word “or”, such that the trial court erred in requiring actual physical damage to trigger coverage. The bank further argued that the term “loss” was broader than the term “physical damage.” The Washington State Court of Appeals rejected that argument and stated:
The language of this clause specifies that the loss must be “direct physical loss.” The clause does not use the word “loss” in the abstract. … When NWPT recommended evacuation, there was no actual physical loss to the property and no actual damage to the property. SeeWolstein v. Yorkshire Ins. Co., 97 Wn. App. 201, 211-12, 985 P.2d 400 (1999) (noting that language in a similar “all risks” policy required the insured property to sustain actual damage or physical loss to invoke coverage).
Wash. Mut. Bank v. Commonwealth Ins. Co., No. 56396-3-I, 2006 Wash. App. LEXIS 1316, at *7-8 (Ct. App. June 26, 2006).
While the actual COVID-19 coverage arguments have largely yet to be formally briefed, it seems likely that courts across the country will continue to apply the well-settled rules of interpretation for insurance policies and apply meaning to each word used in a policy instead of rendering certain language superfluous. We at Lether Law Group will continue to monitor the COVID-19 arguments and cases as they develop.
Lether Law Group is already actively defending insurers in multiple class action lawsuits filed by policyholders seeking Business Interruption coverage. We are open and available to assist in the defense of any individual or class action lawsuits that may be brought seeking this coverage.
If you would like any assistance in navigating the coverage issues involved in COVID-19 related claims, please feel free to contact us for a free discussion regarding your issues and how we can be of assistance.
As the COVID-19 health crisis continues in the United States, a number of insurers have already seen a significant increase in claim activity. This includes not only business interruption claims but also a significant increase in property claims. Unfortunately, one of the effects of any downturn in the economy will always include an increase in suspicious or fraudulent claims. Such claims will include intentionally-caused losses (for example, arson claims) and overstated claims.
Lether Law Group has already been retained in regard to a number of commercial arson fires involving businesses that were shut down due to the health crisis. We also expect that we will see a number of overstated claims in the homeowner and commercial markets.
Tom Lether began his career in 1988 primarily as an arson and insurance fraud lawyer. Over the last 32 years he has taken thousands of Examinations Under Oath, coordinated thousands of investigations, and has successfully tried a number of arson and fraud claims. This includes such claims as the Martin Pang fire loss where four Seattle firefighters were killed (still one of the most significant commercial arson losses in Washington State history), and residential arson and fraud claims such as the Martin Manglona case (the most significant homeowner’s arson fraud claim in Washington State history).
There are a number of techniques and specific skills involved with investigating fraudulent claims. Fortunately for insurers in the Northwest, the case law in the Northwest is very favorable for insurers in regard to these issues.
Lether Law Group expects that we will see a continued increase in the need to conduct Examinations Under Oath, coordinate claims investigations, defend insurers in fraudulent claims, and address any extra-contractual claims which result from claim denials.
If you are an insurer who is seeing an increase in these types of claims, please feel free to contact us for a free discussion in regard to the applicable law involving these claims, as well as some of the tools available to insurers.
As the COVID-19 crisis continues to impact every aspect of our personal and professional lives, Lether Law Group is continuing to monitor any and all new developments that may impact our clients. To the extent that you have any questions or would like to discuss any potential issues related to COVID-19 and its impacts, please feel free to contact us at any time.
One of the issues that has been persistent since the inception of the crisis is whether the commercial impacts of COVID-19 should be remedied by federal, state, and local governments or through the private sector. Specifically, and as we have previously reported, many governmental entities have called on commercial property insurers to extend Business Interruption and Civil Authority coverage to businesses closed or limited due to the COVID-19 outbreak.
However, as has now been widely chronicled, Business Interruption coverage is only available due to necessary suspension of operations due to physical damage to the insured premises. Moreover, many modern commercial property forms contain an exclusion for any losses caused by the presence, proliferation, or spread of a virus.
As a result, under most circumstances surrounding COVID-19 related business shutdowns, there would likely not be coverage available to the insured. However, that does not mean that there is no coverage available in every circumstance.
Given what appears to be clear and unambiguous policy language concerning Business Interruption coverage, what is emerging is a series of bad faith claims against insurers that are summarily denying Business Interruption claims without conducting any investigation or even in some instances, not even with a written explanation of the coverage position. Policyholders nationwide are bringing bad faith claims alleging cursory, over-the-phone denials of these claims.
As we have previously noted, we are not aware of any insurance commissioner in any United States jurisdiction that has suspended the Unfair Trade Practices Act regulations during the COVID-19 epidemic. To the contrary, rather than suspending insurance claims regulations, insurance commissioners are taking steps to ensure that those regulations are followed. By way of example, on April 14, 2020, the insurance commissioner for the State of California issued a Notice to insurers advising of complaints about cursory denials and even refusals to open Business Interruption claims. The Notice then provided as follows:
Upon receipt of a notice of claim, the insurer is required to provide the policyholder with the necessary forms, instructions, and reasonable assistance, including but not limited to, specifying the information the policyholder must provide in connection with the proof of claim and begin any necessary investigation of the claim. (Regulations, section 2695.5(e)(2).) Thereafter, every insurer is required to conduct and diligently pursue a thorough, fair, and objective investigation of the reported claim, and is prohibited from seeking information not reasonably required for or material to the resolution of a claim dispute before determining whether the claim will be accepted or denied, in whole or in part. (Regulations, section 2695.7(d).)
The California OIC’s Notice demonstrates the conflict between the public and private sectors. The OIC cannot force insurers to provide coverage so the agency is left to issue stern Notices to insurers requiring the insurers to follow the law.
Ultimately, pronouncements such as that by the California OIC do not really change anything. Insurers are still required to comply with claim handling regulations and act in good faith. That includes promptly responding to pertinent communications, conducting a reasonable investigation, and providing the insured with a written explanation of the coverage decision, etc.
Once again, if you have any questions or concerns relating to COVID-19 related claim or any other issues, please feel free to contact Lether Law Group at any time.
The State of Washington has recently clarified its list of essential services which are permitted to remain open during the current health crisis. That notification clarifies that insurance is considered an “essential service”. See notification link below. We understand that other states have similarly concluded that insurance is an essential service and any “stop work” orders or “work from home” orders do not necessarily apply to insurance companies.
This position underlines what Lether Law Group has always believed. Insurance is an essential service. Even during the worst crisis, claims continue to occur. Car accidents happen. Fire losses happen. Lawsuits are filed.
Insurance has been an integral part of the American economy since colonial days. In fact, the oldest insurers in the United States predate the formation of this country. As a result, no matter how difficult times are the insurance industry will survive and continue to be a cornerstone of the American economy.
With this in mind, it is important to remember that in most states there has been no extensions or waivers of any of the time deadlines which apply to the insurance industry. For example, it is still necessary to comply with any “Fair Claims Settlement Practices Act” regulations and the time periods set forth within those regulations. Although it is difficult when claims professionals are working from home to keep up with all of the requirements that are placed upon insurers, it is now more than ever crucial for all insurers to bear in mind that once this pandemic is over there will be a significant increase in claims activity. Insurers that have not complied with their obligations during the shutdown period will be exposed to significant extracontractual claims.
Moreover, as all insurers are aware, most departments of insurance and/or governors around the country have issued bulletins and notifications to insurance companies to provide additional services to their insureds during this time. A failure to comply with these requirements will likewise lead to extensive bad faith claims litigation.
Given the fact that insurance is an essential service, the Lether Law Group continues to operate on a daily basis in order to provide services to its insurance clients during this difficult time. If you have questions about any state-specific requirements which have been enacted due to the COVID-19 pandemic or general questions in regard to pending insurance claims and compliance with any regulatory requirements, please feel free to contact our office.
As we at Lether Law Group and the rest of Washington State enter our second day of Washington State’s Stay-at-Home Order, we hope all of you are staying safe, practicing social distancing, and doing as well as you can in these tough times. Lether Law Group is keeping busy and we remain open and available to assist you in any way that we can.
It has come to our attention that the Washington State Insurance Commissioner, Mike Kreidler, and the State of Washington Office of the Insurance Commissioner (the “Washington OIC”) has also been busy. Late yesterday, Lether Law Group received a copy of a letter from Mr. Kreidler dated March 25, 2020, which is directed to all Washington State authorized property and casualty insurers.
The letter instructs each insurer to provide the Washington OIC and policyholders with certain information on or before April 1, 2020. Specifically, Mr. Kreidler is requiring that property and casualty insurers operating in Washington State identify business interruption or business income type coverages (including civil authority) that may be available under any of their coverage forms. This is similar to requests we have seen in other states.
The Washington OIC Notice Letter requires each property and casualty insurer to do the following:
Provide the Washington OIC with the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage, and supply chain coverage the insurer wrote that was in effect on March 15, 2020. This volume is to be expressed in amounts of direct written premiums, policy types, and number of policies written of each coverage type;
Examine policies the insurer has issued and explain the coverage the policies offer with respect to COVID-19 – both presently and any potential future coverage. This information should be provided as a clear and concise explanation of benefits such that it is suitable for policy holder review. The insurer should then: 1) send copies of the explanations to its policyholders of each applicable type; and 2) send copies of the explanations to the Washington OIC along with a confirmation that the explanations have been provided to the policy holders.
With respect to the disclosure to policyholders, the Washington OIC Notice letter details what Mr. Kreidler has deemed to be all relevant information including, without limitation, the following:
What type of commercial property insurance or otherwise related insurance policy does the insured hold?
Does the insured’s policy provide “business interruption” or “business income” coverage? If so, provide the “covered perils” under such policy. Please also indicate whether the policy contains a requirement for “physical loss or damage” and explain whether contamination related to a pandemic may constitute “physical loss or damage.” Please describe what type of damage or loss is sufficient for coverage under the policy.
Does the insured’s policy provide “civil authority” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Please also describe any relevant limitations under the policy. Please explain whether a civil authority prohibiting or impairing the policyholder’s access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.
Does the insured’s policy provide “contingent business interruption” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy.
Please provide the “covered perils” under such policy. Please also indicate whether the policy contains a requirement for “physical loss or damage” and explain whether contamination related to a pandemic may constitute “physical loss or damage.”
Does the insured’s policy provide “supply chain” coverage? If so, is such coverage limited to named products or services from a named supplier or company? Please also indicate whether the policy contains a requirement for “physical loss or damage” and explain whether contamination related to a pandemic may constitute “physical loss or damage.”
For each instance of coverage described above, please provide the applicable waiting period under the insured’s policy. Please also indicate whether the amount of time coverage remains in effect once becomes active for a given incident.
March 25, 2020 Washington OIC Notice Letter at 1-2.
As noted above, the information to the Washington OIC and the policyholders needs to be provided on or before April 1, 2020. It is also required that the responses be sent via email to Policy@oic.wa.gov and have “COVID 19 SPECIAL REPORT_NAIC#” as the subject line. Both the response deadline and the subject line are considered part of the submission requirements.
Given the amount of information requested, the likelihood that insurers will have several different coverages provided via endorsement or otherwise under each coverage type, and the very limited amount of time provided for the response, we at Lether Law Group wanted to alert everyone as soon as possible.
To the extent you would like to discuss the Washington OIC Notice or any other issue, or to the extent we can be of service in any way, please contact Lether Law Group at any time.
In the mere days since our last newsletter, the social and economic impacts of the COVID-19 outbreak have undergone several seismic shifts. Lether Law Group is continuing to monitor the situation in order to develop swift and accurate responses to any questions that might arise regarding this unprecedented event. We encourage any clients or friends-of-the-firm who may have any questions or concerns to call or write at any time.
The following is a brief update on some of the issues that we are tracking:
Virtually every court in the Pacific Northwest is operated on some measure of restricted access. Here are a couple of specific updates.
The state courts in Oregon have been ordered by the Oregon Supreme Court to move to Level 3 restrictions, which effectively means that all civil trials are indefinitely continued.
The Spokane County Superior Court in Washington has ordered that all hearings will be conducted telephonically. However, at this time there is still not anything on the Court’s website providing further information.
The Los Angeles County Superior Court, the largest court system in the nation, is currently closed entirely and is not scheduled to reopen until Friday, March 20, 2020. It is our understanding that when LA County reopens, it will be on a limited basis.
Again, nearly every court system that we are aware of is experiencing some level of disruption in service. We encourage anyone with a pending matter to review your court’s website or contact the court directed before going to court.
Property Insurance – Business Income Loss
One of the questions that we have been asked to address for several clients is whether there might be Business Income coverage available under first-party property policies to cover losses associated with the widespread closures and disruptions due to governmental directives to close or restrict business.
“Business Income” coverage provided benefits for income that a business loses due to a necessary suspension of operations caused by direct physical damage to the insured premises.
The Washington Courts have addressed this coverage and have held that Business Income benefits are only available if (1) the business actually ceases all operations, and (2) the lost income was directly caused by physical damage to the insured premises. Keetch v. Mut. of Enumclaw Ins. Co., 66 Wn. App. 208, 831 P.2d 784, 1992 Wash. App. LEXIS 266.
As a result, we would not anticipate that there would be too many scenarios in which the Business Income coverage is implicated for lost revenue caused by the COVID-19 outbreak. In situations where a business has decreased revenue due to its efforts to comply with governmental directives or merely due to less customer traffic, the coverage would not apply because there is not a necessary suspension of all operations. Moreover, even where a business is forced to close, whether voluntarily or at governmental direction, that closure will likely not be caused by any direct physical damage to the insured premises.
However, we are aware of one lawsuit that has already been filed seeking Business Income coverage in the context of a restaurant closure. Cajun Conti, LLC v. Certain Underwriters at Lloyd’s, London, et. al., Civil District Court for the Parish of Orleans, Louisiana. In Cajun Conti, the restaurant claims that the property itself is contaminated with the COVID-19 virus. Thus, the restaurant claims that the closure was in fact a necessary suspension of operations due to “physical damage” to the property. This lawsuit was just filed on Monday, March 16, 2020. We will provide updates as information about this lawsuit becomes available.
One other note on this coverage is that modern policy forms may contain a virus or pathogen exclusion that could operate to preclude coverage even where there is a necessary suspension of operations due to physical damage to the property. In addition, many property policy forms will include an exclusion for losses caused by the acts or decisions of a governmental entity.
As always, for any claim the policy should be thoroughly reviewed for any and all terms, conditions, limitations, and exclusions that may be implicated.
Finally, on federal, state, and local levels, there are a number of governmental entities initiating emergency measures to assist businesses that have closed or are otherwise have been affected. We anticipate that a number of jurisdictions will begin requiring insurers to provide relevant governmental agencies with information concerning the availability of Business Interruption coverage even without any claims having been made. The New York Department of Financial Services has already ordered all property/casualty insurers providing insurance in the State of New York to provide the Department with an explanation for the potential coverage relating to COVID-19. Specifically, the NYDFS Order requires the following:
Insurer must provide NYDFS with information regarding the volume of business interruption coverage that the insurer has written, that has not lapsed as of March 10, 2020, including the amounts of direct premiums, policy types, and number of policies for each type.
Examine all policies and “explain the coverage each policy offers in regard to COVID-19.”
Prepare a clear and concise explanation of benefits suitable for policyholder review.
Send the explanation of benefits to all policyholders and to NYDFS with a certification that the explanation has been sent to all insureds.
Again, we expect other states to follow New York’s lead on this issue.
Third-Party Liability Coverage – Lawsuits Against Governmental Bodies
Several of our clients insure governmental bodies, whether directly or by participation in municipal risk pool coverage. We anticipate that the COVID-19 outbreak and the governmental response thereto will result in a substantial number of lawsuits against federal, state, and local governmental entities that individuals or entities may view as culpable for the spread of COVID-19 or for the financial impacts associated with the response to the outbreak.
In times of emergency declaration, the government’s powers are sharply increased and many of these types of lawsuits may be barred by the doctrine of sovereign immunity or by the statutes allowing for expanded governmental power in times of emergency.
From an insurance coverage standpoint, however, these types of claims will present multiple complex issues that may impact the coverage picture. For instance, under a general liability type coverage, would a governmental decree requiring the closure of a business qualify as a covered “occurrence” or “event’ as those terms are defined in the relevant policies? Or might the coverage be more properly addressed under a broad “wrongful acts” type coverage?
For any of our clients or friends that would like to discuss the coverage implications surrounding potential claims against governmental entities, please feel free to contact us at any time.
A Word of Thanks
Lether Law Group is acutely aware of the massive social, financial, and cultural disruption that this outbreak has caused. We truly wish everyone the best in these trying times and we thank all of our friends, colleagues, clients, and acquaintances for all of the support that we have received. We truly cherish all of our relationships.
As always, if there is anything that you would like to discuss about these or any other issues, please feel free to contact Lether Law Group at any time.