The coronavirus crisis has had a devastating impact on economic activity across a variety of sectors and geographic areas, and companies have already begun to look to their insurers for coverage of losses arising out of the crisis.
In our April 3, 2020 and April 15, 2020 alerts, we discussed two types of insurance that may provide coverage for coronavirus-related losses—namely, business interruption insurance and D&O insurance—and advised companies to analyze their policies to determine what events may trigger coverage and what losses may be covered. In this alert, we discuss litigation that has already arisen on the types of claims contemplated in those alerts. The theories advanced and relief sought in these cases can provide guidance to insurers and policyholders alike regarding likely paths future coronavirus-related insurance litigation may take.
Business Interruption
Policyholders in a wide variety of businesses have commenced individual and class action lawsuits against insurers alleging wrongful denial of coverage for coronavirus-related losses. These coverage actions—brought by restaurants, nightclubs, retail stores, dental practices, and law firms, to name a few—involve numerous insurers across multiple states. While the precise language of the policies at issue varies, these suits generally seek coverage under a few common provisions of property damages policies for losses arising from partial or complete business closures due to the coronavirus crisis.
An exemplary case is a class action brought by a bakery in the Eastern District of Wisconsin against Society Insurance, on behalf of all holders of comparable property damage policies, alleging that the insurer has systematically denied coverage under several different provisions of the policy for coronavirus-related losses. Rising Dough, Inc. v. Society Ins., No. 2:20-cv-00623 (E.D. Wis. Apr. 17, 2020). Rising Dough seeks damages for breach of contract and a declaration that losses resulting from closure of its and other policyholders’ businesses due to the coronavirus and related government orders are covered under the following provisions of the property damage policy: (1) Business Income coverage, covering loss due to suspension of operations following damage to property; (2) Civil Authority coverage, covering loss caused by actions of civil authorities that prohibit access to the insured’s premises; (3) Contamination coverage, covering loss of business income caused by “contamination” resulting in action by governmental authorities that prohibits access to the insured’s premises; (4) Extra Expense coverage, covering expenses incurred to minimize suspension of business and continue operations; and (5) “Sue and Labor” coverage, covering expenses incurred in the course of taking steps to protect the property from further damage. Plaintiff contends that the presence of the coronavirus constitutes physical damage to property, and that the property damage policy at issue is an all-risks policy that does not exclude or limit coverage for losses arising from viruses.
Similar actions have been brought against (i) Aspen American Insurance Co. in the Northern District of Texas by a dental practice seeking coverage for coronavirus-related losses under the Practice Income, Civil Authority, Extra Expense, and Sue and Labor provisions of its property damage policy (Berkseth-Rojas v. Aspen Am. Ins. Co., No. 3:20-cv-00948 (N.D. Tex. Apr. 17, 2020)), (ii) Selective Insurance Group Inc. in the Eastern District of Pennsylvania by a metal fabricator seeking coverage under a Civil Authority provision (C.A. Spalding Co. v. Selective Ins. Grp., No. 2:20-cv-01967 (E.D. Pa. Apr. 20, 2020)), and (iii) Chubb Ltd. in the Southern District of Florida by a restaurant chain seeking coverage under Business Income, Civil Authority, and Extra Expense provisions (Café Int’l Holding Co. v. Chubb Ltd., No. 1:20-cv-21641 (S.D. Fla. Apr. 20, 2020)), among others. At least two petitions have been filed seeking to create a federal multidistrict litigation program to consolidate the ever-increasing number of such cases. In re: COVID-19 Business Interruption Insurance Coverage Litigation, Case Pending No. 90 (Apr. 20, 2020); In re Covid-19 Business Interruption Insurance Litigation, Case Pending No. 91 (Apr. 20, 2020).
Insurers are also becoming increasingly proactive in seeking to determine the scope of coronavirus-related coverage under their policies. For example, Travelers Casualty Insurance Co. of America brought a declaratory judgment action in the Central District of California on April 20, 2020 against law firm Geragos & Geragos APC (Travelers Cas. Ins. Co. of Am. v. Geragos & Geragos APC, No. 2:20-cv-03619 (C.D. Cal. Apr. 20, 2020)). Geragos & Geragos filed multiple complaints against Travelers, including on its own behalf, alleging that Travelers has wrongfully denied coverage under all-risk policies covering business losses arising from physical loss or damage to property. Travelers seeks a declaration that its policy does not cover Geragos & Geragos’s losses, because the presence of the coronavirus has not caused “physical loss or damage” to the insured’s property. Travelers takes the position that the civil authority provision is similarly inapplicable because it requires physical loss or damage to property nearby.
As anticipated in our April 3 alert, a key question in all of these disputes will be whether, under applicable law, the presence of the coronavirus constitutes property damage or physical loss that would render the insured’s policies applicable. Indeed, the centrality of this question has caught the attention of state legislatures attempting to grapple with the magnitude of the coronavirus crisis. Several states have proposed legislation that would require insurers to cover coronavirus-related business interruption losses without regard to whether an insured business has suffered physical property damage. A Congressional caucus has similarly proposed legislation declaring the coronavirus a qualifying event for all existing business interruption policies—echoing a similar call from the governor of Oklahoma that the President declare the coronavirus an “act of god” to protect oil producers from having land leases canceled. Whether such legislation will be passed and whether it will survive legal scrutiny remains to be seen, but these proposals make clear that government intervention may further alter the landscape of coronavirus-related insurance disputes.
D&O
As discussed in our April 15 alert, a wide variety of actions may trigger coverage under D&O policies, including securities class actions, shareholder derivative cases, and government investigations. While such actions may not arise with the same immediacy as business interruption insurance litigation, the landscape of coronavirus-related litigation triggering D&O coverage is likely to evolve over time, both as the crisis continues to unfold and in its aftermath, when governmental bodies and shareholders may begin to inquire as to what went wrong. How the economy recovers may also guide the filing of securities litigation.
Still, cases that will likely implicate D&O coverage have already been commenced against companies across a wide variety of industries. A pharmaceutical company and certain of its officers and directors have been subject to both a securities class action and a related shareholder derivative suit in connection with the company’s statements regarding its ability to develop a coronavirus vaccine. McDermid v. Inovio Pharmaceuticals, Inc., No. 2:20-cv-01402 (E.D. Pa. Mar. 12, 2020); Beheshti v. Kim, No. 2:20-cv-01962 (E.D. Pa. Apr. 20, 2020). A securities class action has been brought against a cruise line and two of its officers for allegedly downplaying the risks to its business posed by the coronavirus. Douglas v. Norwegian Cruise Lines, No. 1:20-cv-21107 (S.D. Fla. Mar. 12, 2020). Similar allegations of misrepresenting risks relating to the coronavirus have been lodged against a Chinese co-living company and certain of its officers and directors in a class action filed in the Southern District of New York. Wandel v. Phoenix Tree Holdings Ltd., No. 1:20-cv-03259 (S.D.N.Y. Apr. 24, 2020).
Regulators are likewise focused on potential problems caused or revealed by the coronavirus’s impact on various businesses. For example, the SEC has issued multiple alerts warning of potential coronavirus-related fraud and opportunities to trade on material nonpublic information. In fact, the SEC has already suspended the trading of more than 20 companies’ stock due to coronavirus-related issues. The CFTC has issued similar warnings about coronavirus-related fraud. Just as past financial crises led to increased regulatory scrutiny of suddenly struggling companies, the coronavirus already appears to be attracting similar attention and may result in governmental investigations that will trigger D&O coverage issues.
Looking Forward
Coronavirus-related litigation likely carries with it a heightened sense of urgency for insurers and insureds alike. Insurers, likely inundated with claims, are in need of clarity promptly on the scope of their likely obligations. Insured businesses, suffering from the monumental economic slowdown caused by the crisis, risk losing their businesses altogether without the ability to fall back on their insurance coverage, and may be pressured by shorter statutes of limitations (often set forth in the policy) to commence coverage litigation immediately upon incurring a loss. A confounding factor in insurance litigation arising out of a pandemic, as opposed to other types of natural disasters, is the widespread closure of the courts, which may impede parties’ ability to promptly obtain the clarity they need with respect to the availability of insurance coverage.
Given the uncertainty about whether existing insurance policies will be applicable to pandemic circumstances, the likely urgency with which both insurers and insureds will need answers on this issue, and limitations on access to the legal system to resolve coverage disputes in such circumstances, going forward companies particularly susceptible to pandemic-related losses may wish to consider obtaining pandemic-specific insurance coverage. The Wimbledon tennis tournament provides an illustrative example: following the 2003 SARS outbreak, the tournament organizers obtained coverage for losses if the tournament were to be canceled due to a pandemic. This policy has reportedly paid out approximately $141 million for the cancellation of this year’s tournament due to the coronavirus outbreak. As this example shows, pandemic coverage may provide companies the benefit of clarity that their losses will be covered and avoid coverage disputes when time is of the essence.
Takeaways
Extensive litigation is already underway to determine whether business interruption policies cover losses arising out of the coronavirus crisis, with a key issue in dispute being whether the presence of the virus constitutes physical damage to property. Insurers and insureds considering commencing litigation to either disclaim or demand coverage should review the terms of their policies to determine whether the policies contain language that provides more clarity as to whether virus-related losses are covered thereunder. While actions that may implicate D&O coverage have not yet reached the fever pitch of business interruption insurance litigation, such litigation has already commenced and companies across industries should consider the terms of their policies in preparation for an increase in D&O triggering actions as the coronavirus crisis continues to unfold.
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