Covered Events

As an example, shortly before Christmas, a Georgia restaurant and event space appealed to the Eleventh Circuit Court of Appeals a ruling by an Atlanta U.S. District Court dismissing their lawsuit in which they sought coverage for their business losses. See Henry’s Louisiana Grill, Inc.  v. Allied Insurance Company of America, No. 20-14156-BB (11th Cir.). The insureds were forced to cease operations following the Executive Order declaring a “Public Health State of Emergency” issued by Georgia Governor Brian Kemp. The insureds sought coverage under the business loss and civil authority provisions of their policies. In their appeal, the insureds request the Eleventh Circuit reverse the district court’s ruling, or, alternatively, certify the question of law to the Georgia Supreme Court.

At the heart of the insureds’ appeal is their contention that the term “physical loss of” property must be interpreted differently than “damage to” property. They contend the policy is ambiguous and the “correct interpretation of ‘physical loss of’ property should include scenarios where, as here, an insured has lost the functional use of its space due to external circumstances beyond its control.”

Because the term “physical loss of” property is not defined in the policy, the insureds argue the district court should have looked to dictionary definitions for guidance, but the district court rejected the definitions of physical loss that included “diminution” or “disappearance” in value and focused on the definition of “period of restoration” contained in the provision for Business Loss coverage. The “period of restoration” was defined as the “time between the date of the loss and the earlier of:

(i) The date when the property at the described premises should be repaired, rebuilt, or replaced with reasonable speed and similar quality; or
(ii) The date when the business is resumed at a new permanent location.”

The insureds seek to persuade the Eleventh Circuit that the definition for the “period of restoration” referencing repairs should be interpreted to mean “to restore to a sound and healthy state.” As a result, the insureds contend the policy should provide coverage until “the executive order is lifted and the space is repaired and restored to its original sound and healthy state.”

In its order, District Court Judge Thrash held that the definition of “period of restoration” and its “range of contemplated harms aligns with an understanding that ‘loss of’ means total destruction while ‘damage to’ means some amount of harm or injury.” 2020 WL 5938755 at *6. Because the insureds acknowledged that COVID-19 was not present at their businesses, Judge Thrash held they cannot argue that COVID-19 caused a physical change resulting in their losses. Judge Thrash noted that the insureds’ argument was that a minute before the governor issued the order, the dining rooms were in one state, but a minute later, after the order had been issued, the dining rooms “underwent a direct physical change that left the dining rooms in a different state.”  Id. at *4. According to Judge Thrash, “[t]his interpretation of the contractual language exceeds any reasonable bounds of possible construction, pushing the words individually and collectively beyond what any plain meaning can support.” Id.

The insureds’ “physical loss of” argument is essentially a loss of use argument—because of the Governor’s executive order they lost the physical use of the dining rooms. They argue that the holding in Georgia Court of Appeals in AFLAC, Inc. v. Chubb & Son, Inc., 581 S.E.2d 317 (2003) is inapplicable because the court only addressed the definition of direct physical “damage to” property. Judge William C. O’Kelley previously rejected that argument by an insured in Northeast Georgia Heart Center, P.C. v. The Phoenix Insurance Co., 2014 WL 12480022 (N.D.GA May 23, 2014). Judge O’Kelley recognized the policy’s distinction between “damage” and “loss” as separate categories of coverage. He went on to note that “AFLAC does too; spatial displacement—the loss of possession or mysterious disappearance of covered property—may constitute an ‘actual change’ in insured property from a satisfactory to unsatisfactory state.”  Id. at *5. Judge O’Kelly specifically refused to “expand ‘direct physical loss’ to include loss-of-use damages when the property has not been physically impacted in some way. To do so would be equivalent to erasing the words ‘direct’ and ‘physical’ from the policy.” Id. at *5.

Since the pandemic forced businesses to close in March 2020, several courts across the nation have addressed and rejected insureds’ claims for coverage based on loss of use of their business space. For example, in 4431, Inc. v. Cincinnati Insurance Company, Case No. 5:20-cv-04396, 2020 U.S. Dist. LEXIS 226984 (E.D. PA Dec. 3, 2020), Plaintiffs, owners of various restaurants, sought business interruption coverage claiming the policy requirement of a “physical loss” is synonymous with loss of use of their property, which was caused in their case by the pandemic and the shelter-in-place orders. The Pennsylvania district court focused on the fact that the term “physical” preceded the word “loss” in the policy, and “surveying the legal authority” held that to constitute a direct “physical loss” an “economic loss resulting from an inability to utilize a premise as intended must:

(1) bear some connection to the physical conditions of that premise, which conditions; and
(2) operate to completely or near completely preclude operation of the premises as intended.”  

Id. at *26.  The district court in 4431, Inc. found there was no coverage because the plaintiffs had failed to allege there were any physical conditions of the premises that were altered that resulted in or affected the plaintiffs’ loss, and the plaintiffs still maintained the ability to operate at their businesses “albeit on a limited basis.”

In other opinions issued in 2020, courts have held that the “loss of” must be a permanent dispossession of the property (Long Affair Carpet and Rug, Inc. v. Liberty Mut. Ins. Co., Case No: SACV 20-01713, 2020 U.S. Dist. LEXIS 220757 (C.D. Cal. Nov. 12, 2020)) or property that is unrecoverable (Robert W. Fountain, Inc. v. Citizens Ins. Co. of Am., Case No: 3:20-cv-05441, 2020 U.S. Dist. LEXIS 231629 (N.D. Cal. Dec. 9, 2020)). Other courts have held that a temporary loss of use of insured property or the inability to access property is not a physical loss of property. See MudPie, Inc. v. Travelers Cas. Ins. Co. of Am., Case No: 4:20-cv-03213, 2020 U.S. Dist. LEXIS 175173 (N.D. Cal., Sept. 23 2020) and Sandy Point Dental, P.C. v. The Cincinnati Ins. Co., Case No: 20 CV 2160, 2020 U.S. Dist. LEXIS 171979 (N.D. Ill., Sept. 21, 2020). According to the US District Court for the Central District of California, there must be a “distinct, demonstrable, physical alteration” to the insured property to trigger coverage. Mark’s Engine Co. No. 28, Restaurant, LLC v. The Travelers Indem. Co. of Conn., Case No.: 2:20-cv-04423, 2020 U.S. Dist. LEXIS 188463 (C.D. Cal., Oct. 2, 2020).

Just recently, however, an Ohio district court found the terms of Zurich’s policy ambiguous as the coverage for business losses was “reasonably susceptible of more than one interpretation” and held that the language must be construed strictly against the insurer and liberally in the insureds’ favor. See Henderson Road Restaurant Systems, Inc. v. Zurich American Ins. Co., Case No: 1;20-cv-01239, 2021 U.S. Dist. LEXIS 9521 (E.D. Ohio, Jan. 19, 2021). The Zurich policy did not define the word “loss,” and by reviewing the standard definitions of the term, the court held the word “loss” is not limited to “permanent dispossession.” The court held that the plaintiffs had shown that their business operations were suspended by a direct physical loss of or damage to the property. As a result, the court ruled as a matter of law that the plaintiffs were entitled to recover their business losses during the period of restoration, meaning the “period ended or will end on the dates the states’ restrictions are lifted because that will constitute the date when the location where the loss or damage occurred could have been physically capable of resuming the level of ‘operations’ which existed prior to the loss or damage.” 

One federal court has opted to have a state supreme court answer the coverage question. In Neuro-Communication Services, Inc. v. The Cincinnati Insurance Company, Case No: 4:20-cv-1275, 2021 U.S. Dist. LEXIS 20069 (N.D. Ohio, Jan. 19, 2021), the district court certified the following two questions to the Ohio Supreme Court:

1. Does the general presence in the community, or on surfaces at a premises, of the coronavirus, constitute a direct physical loss or damage to property; or
2. Does the presence on a premises of a person who is infected with COVID-19 constitutes direct physical loss or damage to property at that premises?

Based on the critical coverage issues presented in Henry’s Louisiana Grill discussed above, defense attorneys and their clients will be monitoring this case to see whether the Eleventh Circuit follows the District Court rulings by Judge Thrash and Judge O’Kelly and the trend of courts in other jurisdictions or elects to certify the coverage questions to the state supreme court. The Eleventh Circuit’s decision could influence the decisions of other appellate courts, as well.

 Karen Karabinosis a partner with Drew Eckl & Farnham in Atlanta. She has been litigating cases for more the 33 years, with the last 22 focused on the complexities of first party property insurance law, including cyber insurance. She partners with her clients in their investigation and adjustment of property claims and in defending them in coverage, bad faith, arson, fraud, and property damage cases in state and federal courts throughout Georgia and the Southeast.

This type of issue is particularly likely to occur in the professional liability context when an insured has been sued by a large number of plaintiffs, such as molestation cases and cases where physicians are using their patients to perpetrate fraud on health insurers and Medicare. In such cases, the professional’s acts take place and harm people for several years before they are discovered, so there will be multiple policy periods and large damage awards.

Both Claims-Made and Occurrence Primaries with Unspecified Excess—Pastoral Abuse

In Redeemer Covenant Church of Brooklyn Park v. Church Mut. Ins. Co., 567 N.W.2d 71 (Minn. Ct. App. 1997), the court was presented with coverage under a pastoral professional liability policy (“PPL”), and its obligation to defend and indemnify a church for allegedly failing to supervise and negligent hiring of a pastor who molested several parishioners. The insured had coverage under PPL policies and CGL policies, and umbrella policies over both. The underlying claims involved seven sexual abuse actions brought in 1989 and eight abuse actions brought in 1991. All alleged that the church had been negligent in retaining and supervising the pastor. The CGL policy was written on an occurrence basis, and the PPL policies were written on a claims-made basis. The umbrella policies did not restrict coverage to occurrences that took place during the policy period.

The court first addressed the applicability of the PPL policies and found coverage for the 1989 suits under the 1989 claims-made PPL policy, and for the 1991 suits under the 1991 PPL claims-made policy. Id. at 78–79. The court also found that the PPL policies were primary to the CGL policies because the PPL policies were designed to specifically meet the type of liability asserted by the plaintiff, while the CGL policies covered that liability only incidentally. Id. at 80. However, the CGL policies did apply, and the court used the date of the abuse as to each plaintiff to determine which CGL occurrence policy was triggered. Id. at 81–82.

In determining which of the excess policies applied, the court found that the excess policies were written to be excess over specific primary policies and did not include any provision limiting coverage based on the occurrence date. The court concluded that the excess policies were on the hook when the ultimate net loss exceeded the limits of the primary policies written for the same policy period as the excess policy. Id. at 81. Thus, the coverage trigger was claims-made as to the PPL policies and occurrence based for the CGL policies.

Coverage for Interrelated Injuries—Primary and Excess

The insurance relations in Texas Farmers Insurance Co. v. Lexington Insurance Co., 2008 WL 11334592 (C.D. Cal. 2008), aff’d at 380 Fed. Appx. 604 (9th Cir. 2010), was a bit more complex. Texas Farmers issued primary medical professional liability policies covering three consecutive policy years. For the first two years, the policies had a per claim limit of $5 million, but for the third year, the limit was $1 million per claim.

Ordway Indemnity Ltd. was the insured’s excess carrier for the third policy year, with limits of $10 million excess of Texas Farmers’ $1 million limit. Lexington reinsured Ordway, providing facultative reinsurance for the same period as the Ordway.

The underlying claim involved two separate but related injuries. The plaintiff initially sought damages for eye injuries and blindness stemming from diabetic neuropathy that required dialysis. As the suit progressed, she asserted a claim for damages stemming from earlier treatment that caused kidney failure and the need for dialysis.

The Texas Farmers policy was written on an occurrence basis and specified that any “interrelated wrongful acts” would be deemed to have happened at the time of the first wrongful act. Lexington, as Ordway’s reinsurer, was required to pay the first $4 million for any claims that Ordway’s policy covered, in excess of Texas Farmers’ $1 million policy limit, if the claim fell within the last coverage year of the Texas Farmers policy. 

The underlying case was settled for $3.3 million. Texas Farmers and Lexington, as Ordway’s reinsurer, agreed to fund the settlement with Texas Farmers paying $1 million, and Texas Farmers and Lexington splitting the $2.3 million remainder, subject to the agreement to further litigate their disputed obligations for the amount in excess of $1 million.

Texas Farmers argued that since Lexington was a reinsurer, the follow the settlements doctrine required Lexington to pay when the settlement exceeded $1 million. The court rejected this, as there was no dispute between Ordway and Lexington over whether either Ordway or Lexington owed the amount in excess of Texas Farmers’ $1 million limits.

Rather, the dispute rested on whether the settlement should be attributed to the third year of the period when Texas Farmers limits were $1 million, or one of the first two years, when Texas Farmers’ limits were $5 million. The court explained, to “determine whether excess coverage is triggered, a court should first look to the terms of the primary insurer’s policy to determine whether its policy limits have been met. If Texas Farmers’ primary insurance limits were not exhausted by the settlement under the terms of its policy, … the excess insurance policy would not be triggered to fund the settlement.” Id.

The underlying case involved treatment in both the first and third Texas Farmers policy years. The treatment that allegedly led to the kidney failure occurred in the first policy period, which had $5 million limits, and the treatment related to the eye injuries took place in the last policy period, when the limits were $1 million. The court found that the kidney treatments and the eye treatments involved “interrelated wrongful acts” because without the kidney failure, the plaintiff would not have had the eye problems.

Texas Farmers argued that the court should allocate the settlement between the damages attributable to the kidney injuries and the damages attributable to the eye injuries. However, since the kidney and eye injuries were the result of interrelated wrongful acts, they were both deemed to have occurred in the earlier policy period. Since Texas Farmers’ had $5 million limits for that period, and since the Ordway/Lexington excess coverage only applied to the later policy period, its coverage was never triggered.

Claims-Made Primary, Occurrence Excess, Claims Covering Multiple Policy Periods

In Steele v. Healthcare Professionals Insurance Co., 134 N.Y.S.3d 633 (N.Y. Sup. Ct. 2020), the plaintiff was one of 255 individuals who brought suit against an orthopedic surgeon arising from treatment he rendered from 2004 to 2011. The individual plaintiff claimed injuries stemming from alleged malpractice in February 2010 and she filed suit in November 2011. As there were so many suits against the same physician, who was imprisoned for fraud during the litigation, the plaintiffs, the physician’s primary carrier and the excess carriers agreed to proceed to arbitration to resolve the various claims. The parties assigned point values for various types of injuries, each side argued for the number of points that should be assigned, and the arbitrator issued an award. The Steele plaintiff’s award was $1,031,564. The total of all awards rendered was $141,851,026 and covered malpractice claims that occurred during the period from 2004 to 2011, with claims being asserted from 2010 to 2014.

Medical Liability Mutual Insurance Company (“MLMIC”) provided primary coverage on a claims-made basis. It issued policies from 2005 to 2011, with limits of $1.3 million per person, and $3.9 million annual aggregate. The insured purchased annual tail policies for 2011 through 2014, for losses reported after the last policy. Healthcare Professionals Insurance Co. (“HPIC”) issued excess, occurrence-based professional liability policies for the policy periods from 2005 to 2011. Each policy had limits of $1 million per claim, $3 million annual aggregate.

As the claims were made from 2010 through 2014, MLMIC paid claims in its 2010 through 2014 policy periods, and exhausted its policy limits for each policy year except 2010. The primary coverage was sufficient to pay the judgment for 5 out of 255 claims, which all fell in the 2010 policy year.

As MLMIC’s limits were exhausted, the plaintiff’s attorney sought payment for the unpaid portions of the judgments from HPIC, but HPIC denied coverage. HPIC maintained that the arbitration awards only exceeded the MLMIC aggregate limits in the three tail periods, and HPIC had not issued policies in those periods. HPIC maintained that the only coverage period in which an HPIC policy was in effect and for which awards were made was in the 2010 period, when the payments were less than the MLMIC limits. Essentially, HPIC argued that none of the claims-made policies issued by MLMIC for occurrence years 2004 to 2010 had been exhausted and HPIC did not issue any policies for the years where MLMIC limits had been exhausted. 

While the MLMIC policies were all written on a claims-made basis, the HPIC policies were all written on an occurrence basis. Thus, the court summarized the issue as follows:

Where an occurrence based excess liability policy is issued following an underlying claims-made liability policy, is coverage under the excess policy triggered by exhaustion of the primary policy in the claim year, or in the occurrence year, or by exhaustion of primary policies in both the claim year and the occurrence year?

As a corollary to the principal issue, where a claim is made during a primary policy’s tail period, is coverage under the excess policy triggered by exhaustion of the primary policy in the tail period?

Id., 134 N.Y.S.2d at 644.

The court explained the difference between claims-made policies and occurrence policies, noting that claims-made policies are triggered based solely on the date the claim is made, while occurrence policies are triggered based on the date the plaintiff was injured. Where the excess policy is an occurrence policy, “coverage under the policy is triggered not by an occurrence, in the first instance, but by exhaustion of the underlying policy.” Id. at 645. However, where the primary coverage is claims-made, but the excess is an occurrence policy, there is a “mismatch of policy types” because the claim under the primary claims-made policy “is interposed in a different year than the year when the malpractice occurred, as invariably occurs.” Id. Once the correct primary policy is identified, and it is confirmed that the underlying policy is exhausted, then the question of which excess policy applies is determined by the date of the malpractice. Id.

The HPIC policies all included a condition requiring the insured to maintain underlying coverage with minimum limits of $1 million for each claimant and $3 million for all claimants. It further specified that if an underlying policy were written on a claims-made basis, any failure by the Named Insured to maintain continuous primary coverage or to obtain a fully paid tail coverage upon its termination, there would be no coverage under the HPIC policy. Id. at 647.

HPIC contended that the term “Underlying Policy” in the excess policy meant only the MLMIC policy issued in the same policy period as the excess policy, citing to the fact that the Declarations Page of the HPIC policy specified a single MLMIC policy as the Underlying Policy.

The court rejected this argument. It reasoned that by requiring the exhaustion of the Underlying Policy in effect during the occurrence year, HPIC effectively sought to “convert its policies to claims-made policies in the occurrence year or to require exhaustion of TWO Underlying Policies.” Id. at 649 (emphasis in original). The court explained that under HPIC’s analysis, for there to be coverage, the underlying policy for the year the policy was issued would have to be exhausted. However, the primary policy for the claims-made year would also need to be exhausted, because otherwise the claim in HPIC’s occurrence year would be fully covered by the underlying policy in the claims-made year. 

The court further reasoned that under an occurrence policy, the policy’s coverage was determined by the date of the occurrence, regardless of when the claim was made. Id. at 650. As the HPIC policy contemplated that it could be excess over a claims-made or tail policy, the intent was to treat claims made during subsequent policy terms as covered if the occurrence date took place in the HPIC policy period. Thus, a claim triggered the excess policy “when the individual or aggregate limits of MLMIC’s primary policy was exhausted for the year when the claim was made.” Id., at 651.

Conclusion

When incongruities arise due to mismatches between the coverage triggers for primary and excess insurance, the court must look to the terms of each policy to determine whether there is coverage under the excess or the primary policy. In each of these cases, however, even though the policies were written with different coverage triggers, in no case was the court required to alter the terms of either the primary or the excess policy to determine which policy was triggered. Even when a primary policy was claims made and the excess policy was written on an occurrence basis, both policies were construed according to their terms, but the excess policy’s underlying policy varied with the year the claim was made.

William K. McVisk is a shareholder of Tressler LLP in the firm’s Chicago office, where he focuses his practice on complex insurance coverage litigation and hospital law and medical liability. Bill has handled all areas of coverage and bad faith litigation, especially third-party bad faith and coverage litigation involving commercial general liability, professional liability coverages as well as personal lines coverages such as auto and homeowners coverages.

Biometric Privacy Statutes on the Rise

While considerable attention has been given to state and federal statutes that cover data protection and privacy issues, statutes specifically addressing the collection and use of biometric data have received less attention. That tide appears to be changing. As more businesses and people rely on biometric information in everyday life, states have enacted or are contemplating laws addressing the protection of biometric information that will likely impact insurers as well as insureds and claimants, big and small. Invasion of privacy claims arising from misuse or disclosure of biometric information is a subsection of a broader range of claims involving the improper use of or disclosure of personally identifiable information (“PII”).

Several states, including Illinois, Texas, Arkansas, and Washington, have enacted privacy laws governing various types of biometric information, such as fingerprint, retina, and facial scans. See 740 ILSC 14/1, et seq.; TEX. BUS. & COM. CODE ANN. §503.01; ARK. CODE ANN. §4-110-101; WASH. REV. CODE ANN. §19.375.020. Although New York does not have a specific biometric privacy law, in January, New York legislators proposed a limited bill that would regulate how some private businesses handle biometric information. A.B. 27, New York 244th Leg. (N.Y. 2021). Invasion of privacy claims arising from misuse or disclosure of biometric information is a subsection of a broader range of claims involving the improper use of, or disclosure of, PII. Biometric privacy laws seek to protect this subset of PII since, unlike claims involving a disclosed password, social security number, or credit card number, there is no way to merely cancel or replace a retina or a fingerprint.

Cases involving Illinois’ Biometric Privacy Act (740 ILCS 14/1 et seq.) (“BIPA”) have been the most prolific, mainly because the Act provides for a private right of action with statutory damage. This has resulted in hundreds of lawsuits being filed, some resulting in large settlements.  Although BIPA is the only law providing for a private right of action, certain other states such as Massachusetts and New York are considering proposed legislation adding such relief. S. 120, 191st Leg. (Mass 2019-2020); New York 244th Leg. (N.Y. 2021). Therefore, interest in insurance coverage for damages arising out of causes of action will likely rise. Concomitantly, policyholders and insurers will grapple with the coverage issues that are likely to ensue.

Biometric Claims Under Coverage B of CGL Policies

Many businesses have not focused on emerging biometric privacy issues and have not supplemented their general liability coverage with a cyber liability policy that is tailored to cover such claims. Therefore, they will look to Coverage B of their Commercial General Liability (“CGL”) policies to provide a defense and indemnity for any damages awarded for such claims.

Coverage Part B of CGL policies insures “personal and advertising injury” resulting from certain enumerated “offenses.” One such “offense” is “oral or written publication, in any manner, of material that violates a person’s right to privacy.”
Because Illinois is the only state currently providing a private right of action under its biometric privacy statute, it is the leading state addressing coverage for such claims under CGL policies. West Bend Mutual Insurance Co. v. Krishna Schaumburg Tan, Inc., 2020 IL App (1st) 191834 is the seminal reported decision regarding whether an insurer owes a duty to defend under Coverage B of a general liability policy and gives insight into potential coverage issues likely to arise as more states implement laws similar to BIPA. See generally id., appeal allowed, 154 N.E.3d 804 (Ill. 2020).

Meaning of “Publication” in Right to Privacy Offense

In West Bend, the insurer sought a declaration that it had no duty to defend or indemnify its insured, Krishna Schaumburg, Tan, Inc., a franchisee of a tanning salon chain, in a lawsuit alleging that Krishna violated BIPA by disclosing customers’ fingerprint data to a third-party vendor without informed consent as required by the statute. 2020 IL App (1st) 191834, *10. Among other things, the insurer argued that the allegations did not amount to a covered “offense” under Coverage B of the CGL issued to Krishna because Krishna did not engage in “oral or written publication of material.” Id. at *3.

The insurer relied on the Illinois Supreme Court decision in Valley Forge Insurance Co. v. Swiderski Electronics, Inc., 359 Ill.App.3d 872, 875 (2005) to support its argument. The insurer in Valley Forge argued that no duty to defend an underlying class action involving violation of the TCPA by faxing advertisements existed because the lawsuit did not allege an “advertising injury.” In addressing the issue of whether the alleged injury arose from “publication,” the court in Valley Forge stated that by faxing the advertisement to the proposed class of fax recipients, the insured “published” the advertisement. The court found that “publication “ is not limited to publication of material that wrongfully discloses private facts to third parties. Id. at 885–86.

The insurer in West Bend focused on the “to the public” language used by the Illinois Supreme court in Valley Forge to argue that the court defined “publication” to mean communication or distribution to the public. Id. at *33. Since Krishna did not distribute customer fingerprints to the public, the insurer argued that no duty to defend existed. Id. at *36.

The Appellate Court of Illinois, First District disagreed with the insurer, finding that the decision in Valley Forge did not define publication as requiring communication to any number of persons. The First District instead concluded that the term “publication” should be given its plain, ordinary meaning, which includes both “the broad sharing of information to multiple recipients” and “a more limited sharing of information with a single third party.” Id. at *35. Applying this definition, the First District held that a duty to defend was owed. Id. at *38. However, this is not likely the end of this particular dispute as the Illinois Supreme Court has granted review of the ruling and will likely weigh in on this specific issue in the near future.

While no other courts have addressed whether the sharing of biometric information in this context is considered a “publication,” courts have addressed the meaning of “publication” in other right to privacy claims. In that context, courts have adopted a different dictionary definition of “publication” that requires communication to the public at large.

One such decision is OneBeacon America Insurance Co. v. Urban Outfitters, Inc., 21 F. Supp. 3d 426 (E.D. Pa. 2014), filed in the Eastern District of Pennsylvania. In that case, two CGL insurers brought an action against two of their insureds, seeking a declaration that they had no duty to defend or indemnify the insureds against three underlying putative class action lawsuits alleging that the insureds impermissibly used customer’s ZIP code information in violation of state and local privacy laws. Id. at 428–49, aff’d, 625 F. App’x 177 (3d Cir. 2015).

In one of the underlying class actions, the claimants alleged that the collection of ZIP codes into the point-of-sale register system to direct market customers was violation of two District of Columbia statutory bans concerning recording or requesting credit card information. Id. at 436. The insureds claimed that the underlying class action alleged a “personal and advertising injury” because the underlying class action complaint alleged oral or written publication, in any manner, of material that violates a person’s right to privacy. Id. The insurers argued, on the other hand, that no “personal and advertising injury” existed because the class action complaint did not allege “publication” as required in the definition of the right to privacy offense. Id.

The court agreed with the insurers, pointing to the definition of “publication” found in three separate dictionaries. Id. According to the court, Black’s Law Dictionary (9th ed. 2009) defines publication as, “the act of declaration or announcing to the public.” In contrast, Merriam-Webster Dictionary, online ed. (2014), defined publication as: “(a) the act or process of producing a book, magazine, etc., and making it available to the public; (b) a book, magazine, etc. that has been printed and made available to the public; or (c) the act of printing something (such as an article or photograph) in a magazine, newspaper, etc.” Id. at 437 (citing http://www.merriam-webster.com/dictionary/publication) (last accessed by the court on May 12, 2014)). The court’s dictionary of choice, The Oxford English Dictionary, likewise made clear that “promulgation to the public, even to a limited number of people, is the essence of publication.” Id. (citing XII THE OXFORD ENGLISH DICTIONARY, 782 (2d ed. 1989)).

In further support of its decision, the court stated that under Pennsylvania law, “publication” in connection with a claim of invasion of privacy requires that “the matter be made public by communication is to the public at large, or to so many persons that the matter must be regarded as substantially certain to become public knowledge.” Id. (citing Harris by Harris v. Easton Publishing Co., 335 Pa. Super. 141, 483 A.2d 1377, 1384 (Pa. 1984)). Because the underlying class action suit did not allege that the information gathered by the retailers had been publicly disseminated, the court found the “publication” element of the invasion of privacy offense was not satisfied. Id.

Courts in Florida and Texas have likewise adopted the rule that “publication” requires dissemination to the public. See also Penzer v. Transp. Ins. Co., 29 So.3d 1000, 1005–06 (Fla. 2010); TIG Ins. Co. v. Dallas Basketball Ltd., 129 S.W.3d 232, 239 (Tex. App. 2004).

Other Considerations

Whether “publication” is alleged is not the only potential issue concerning whether biometric claims are covered under Coverage B. Many policies also contain exclusions or endorsements that further limit or preclude coverage. For example, the ISO 2013 coverage form contains an Exclusion q., which precludes coverage in connection with the “Recording and Distribution of Material or Information in Violation of Law.” Similarly, a 2014 ISO Endorsement entitled “Exclusion – Access or Disclosure of Confidential or Personal Information and Data Related Liability with Limited Bodily Injury Exclusion” (CG 21 06 05 14) could potentially limit coverage for biometric claims. See Thomas Arvantis and Haley Jauregui, "Biometric Information Privacy; Scanning the Coverage Issues," Covered Events, DRI Insurance Law Committee, 2020 Volume 31, Issue 1, https://www.nicolaidesllp.com/siteFiles/Insights/BIPADRI2020.pdf (last visited Jan. 21, 2021).

Likewise, policies may include the “Amendment of Personal and Advertising Injury Definition” endorsement (CG 24 13 040 13), which deletes the “oral or written publication, in any matter, of material that violates a person’s right to privacy” offense from the definition of personal and advertising injury. Careful consideration of all potential exclusions and endorsements and how courts are construing them is necessary when analyzing coverage for biometric claims.

The use of biometric information is no longer a futuristic methodology glorified by spy and action movies. Given the trend towards the use of biometric information, insurers, insureds, claimants, and their counsel must be apprised how different jurisdictions treat these alleged violations and whether CGL insurance coverage is afforded for such claims. As more states enact biometric privacy laws and potentially provide a private right of action for violations of biometric privacy statutes, whether disclosure of biometric information constitutes “publication” to satisfy the definition of a “right to privacy” offense will likely remain an issue at the forefront of whether coverage is provided under Coverage B of commercial general liability policies.

Danita Davis is a partner in Tressler LLP’s Chicago office and co-chair of the firm’s insurance practice group. She also practices with the litigation defense practice group. Danita represents insurers in matters regarding first party property residential and commercial disputes, commercial general liability coverage, professional liability coverage, liquor liability coverage and employment practices liability coverage, among others. She advises insurers regarding a broad range of matters involving state and federal law throughout the country.

The Massachusetts Supreme Judicial Court analyzed the application of an abuse and molestation exclusion in these circumstances in Dorchester Mutual Insurance Co. v. Krusell, 485 Mass. 431 (2020). The exclusion eliminated coverage for “[b]odily injury ... arising out of … physical or mental abuse.” The court concluded that the language of the exclusion, in the facts presented, was ambiguous and looked to the insured’s reasonable expectations, ultimately finding coverage.

The older man filed a civil complaint against Krusell, the younger man, seeking damage for “negligence, reckless indifference, intentional infliction of emotional distress, and assault and battery.” Dorchester Mutual defended the suit under a reservation of rights relating to the “intentional acts” exclusion.

At some point during the civil action, Krusell sought to settle the suit, but Dorchester Mutual refused “on the ground that it had insufficient information to reach a final determination whether the claim would be covered.” Because the insured, Krusell, had criminal charges pending, the insurer was unable to get a statement from him. Ultimately, Krusell settled the civil action for $750,000. The insurer refused to pay the settlement and filed suit seeking a declaratory judgment that it had no duty to pay the settlement.

Dorchester Mutual asserted the “abuse and molestation exclusion” for the first time in the suit, in addition to the intentional acts exclusion. The exclusion prevented coverage for “‘[bodily injury’ or ‘property damage’ arising out of sexual molestation, corporal punishment or physical or mental abuse.”

The trial court judge agreed with Dorchester Mutual that “physical abuse” “unambiguously described Krusell’s conduct, and that the exclusion thereby precluded coverage.” See generally Dorchester Mut. Ins. Co. v. Krusell, No. 1582CV01472, 2018 WL 10498494 (Mass. Super. Ct. Sept. 20, 2018). Krusell appealed, and the Massachusetts Supreme Judicial Court took the case sua sponte.

On appeal, the court discussed cases from other jurisdictions where insurers successfully relied upon an abuse and molestation exclusion involving conduct that implies that the abuser is cruel or inhumane, that is, disposed to inflict pain or suffering. Then the court discussed numerous other decisions applying a lower standard—“physically abusive conduct is a subset of physically harmful treatment.”

The court concluded that the term “abuse,” or more precisely “physical abuse,” in this context ambiguous, at least in part, because there was no judicial consensus on its meaning, noting two different lines of cases.

After surveying extra-jurisdictional interpretations of the exclusion, the court then looked to the reasonable expectations of the insured regarding the exclusion. Specifically, the court held that a reasonable insured would not interpret the exclusion to apply in the facts at issue. The determination of ambiguity was due to the word “abuse” in the context of the exclusion. The court summarized how other courts have addressed “abuse,” stating:

Some courts . . . have adopted the broad interpretation that physical abuse includes any harmful physical treatment. . . . Numerous others have concluded that physically abusive conduct is a subset of physically harmful treatment. . . .

Id. at 439 (citations omitted). The court went on to state:

In sum, as evinced by the several dictionary definitions and the varying interpretations in different courts, there appears to be no judicial consensus as to whether abuse—here “physical abuse”—connotes any conduct whatsoever that causes physical harm, or, instead, a subset of physically harmful conduct characterized by an “abusive” quality, such as an imbalance of power. In light of these diverging interpretations, we conclude that the term “abuse” is susceptible of more than one meaning and reasonably intelligent persons could differ as to which meaning is the proper one. Hence, the term is ambiguous.

Id. at 439–40.

Further, the court rejected the interpretation of the exclusion to prevent coverage of “any form of physically harmful conduct,” using the example of “a homeowner injured a guest by accidentally spilling coffee on the guest's arm” and such an application would “undermine the basic purpose of a homeowner purchasing such a policy.” Id. at 440.

The court further suggested that some courts had limited its application to situations involving more than simple assault and suggesting that it requires “the act of a person in control, dominance, or authority who misuses his [or her] position to harm or mistreat a person over whom he [or she] exercises such control.” The court concluded that, “a reasonable insured could, and likely would, understand the ‘abusive’ quality of physical abuse to apply to a limited subset of physically harmful treatment, often characterized by an imbalance of power.” Id. at 444–45.

After reviewing Massachusetts statutes using the word “abuse,” the court concluded that:

a reasonable insured would interpret “physical abuse” to apply only to a limited subset of physically harmful treatment, where the treatment is characterized by an “abusive” quality such as a misuse of power or, perhaps, conduct so extreme as to indicate an abuser's disposition towards inflicting pain and suffering.

Then, the court went on to hold that the facts at issue here did not meet that standard, resulting in a determination of coverage. Id. at 446.

Only a few states have addressed this exclusion. Connecticut courts addressed it in Merrimack Mutual Fire Insurance Co. v. Ramsey, 982 A.2d 195, 117 Conn. App. 769 (2009), where the Appellate Court of Connecticut applied the same exclusion and determined that it applied to prevent coverage of a stabbing by an insured under a homeowners policy. The insured allegedly suffered from mental and psychiatric disorders. The concluded as follows:

The exclusion expressly exempts coverage for bodily injury arising out of physical abuse. Nowhere does it provide that a consideration of the abuser’s intent is required. In fact, the policy contains a separate exclusion that applies specifically to intentional acts. . . . When both exclusions are read together, it is clear that [the physical abuse] exclusion . . . does not require a consideration of the insured’s intent.

Id. 982 A.2d at 198; 117 Conn. App. at 773. See also Safeco Ins. Co. of Am. v. Vecsey, Civil No. 3:08cv833 (JBA), 2010 WL 3925126 (D. Conn. Sept. 30 2010) (no coverage for injury to wife hit in the eye by a carrot thrown by her husband due to physical abuse exclusion, based on determination that a single act could be abuse, abuse was not ambiguous, and exclusion did not require intent to harm).

Likewise, the Court of Appeals for the Ninth Circuit determined that Arizona law regarding application of the physical abuse exclusion to claims against the insureds for failing to report abuse of their grandchild by their daughter’s boyfriend resulting in death of the child. The Ninth Circuit affirmed holding that “the abuse exclusion barred coverage . . . because Moreno’s claims against the Verdugos were for bodily injury arising from physical abuse. Moreno’s claims “necessarily include[]” Medina’s abuse, and “cannot exist apart from” that excluded physical abuse. Am. Family Mut. Ins. Co. v. Verdugo, 691 Fed. Appx. 387, 389 (9th Cir. 2017).Illinois’ Appellate Court also determined that the insured’s actions were “active participation in an act of physical abuse of a minor” and thus within the exclusion of “physical abuse to a minor” in American Family Mutual Insurance Co. v. Chiczewski, 298 Ill. App. 3d 1092 (1998). The insured’s alleged actions were described as “enter[ing] defendants’ home at approximately 4 a.m. . . . after consuming alcohol or ingesting illegal drugs . . . and ‘carelessly and negligently flailed his arms, legs and other object [sic],’ causing K.C. to suffer great bodily harm.” Using a dictionary definition of abuse—“physically harmful treatment”—the court concluded that the exclusion applied and eliminated coverage. Id. at 1095.

Considering the Krusell decision and the forgoing additional cases construing the “physical abuse” exclusion, relevant case law reflects a variety of situations arguably constituting “physical abuse.” However, there is limited case law on this issue, and much of that case law is unpublished. Further, at least to date, courts have ruled inconsistently on whether “abuse” or “physical abuse” is ambiguous, particularly outside the context of domestic violence of abuse of children. Interestingly, courts seem to have less of a problem with the phrase “sexual abuse.”

The current state of the law may allow for the argument that the particular circumstances at issue are abuse and that in the facts presented “abuse” is not ambiguous. Further, even to the extent that courts recognize that there is not an intent component to this exclusion, that will likely be an issue in these cases, and counsel should be prepared for it. Further, if the Krusell case is followed by other courts, a deep dive into the state’s law and use of the word “abuse” should be done in preparation for seeking to apply this exclusion.

Based on current case law, this exclusion is more likely to be applied in the context of domestic violence against a spouse or the physical abuse of a child, particularly with a series of incidents, rather than a single event. Further, a difference in power or control between the insured and the victim increase the likelihood of the exclusion’s application.

In the context of liability claims under homeowners policies, insurers, insureds, and their counsel should be aware of the potential of physical abuse exclusions being applied. This exclusion should be considered as well as whether there is an “occurrence” and whether intentional injury or criminal act exclusions apply.

Laura Meyer Gregory, CPCU, is a partner at Sloane and Walsh LLP in Boston, Massachusetts, specializing in insurance coverage and bad faith matters in the context of a variety of coverages and policies, litigating in courts throughout New England. She has written and presented on topics relating to insurance coverage and bad faith in the context of both personal and commercial insurance and first and third party claims. She is a member of DRI’s Insurance Law Committee and several of its SLGs and is active in its Personal Lines SLG. She is also active in the Massachusetts Defense Lawyers Association, serving on the Board of Directors from 2014 to 2020. She is also an elected official in Andover, Massachusetts, serving as a Selectwoman from 2017 to the present and chair for 2019–2020. www.linkedin.com/in/laura-gregory.