Covered Events Volume 32 Issue 1 | Recent Cases of Interest

Seventh Circuit

Privacy Exclusions/"Arising Out Of" (IL)

Allegations that a debt collection agency harassed a debtor and made 53 abusive phone calls that ultimately caused her to miscarry have been held subject to a Recording and Distribution of Material or Information in Violation of Law" exclusion in Zurich's CGL policies, as well as a Violation of Communications or Information Law exclusion. Despite the insured’s argument that these exclusions were limited to the statutory claims against it and that Zurich’s duty to defend was still triggered by the plaintiff’s common law privacy claims, the Seventh Circuit ruled in Zurich American Ins. Co. v. Ocwen Financial Corp. (PDF), No. 19-3052 (7th Cir. Mar. 12, 2021) that these exclusions applied not only to statutory claims but to all common law claims based upon conduct that violated the statutes. The court declared that if the plaintiff would not have been injured but for the conduct that violated an enumerated law, then the exclusion applies to all claims flowing from that underlying conduct regardless of the legal theory.

Michael Aylward
Morrison Mahoney
Boston, MA

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Eleventh Circuit

"Property Damage"/Insured's Product Exclusion (GA)

The Eleventh Circuit has ruled in Morgan Concrete v. Westfield Ins. Co. (PDF), 20-14081 (11th Cir. Fed. 26, 2021) (unpublished) that a Georgia District Court did not err in holding that a liability insurer did not owe coverage or a defense to allegations by a customer that the insured had supplied it with ready-mix concrete of insufficient strength. Whereas the insured argued that any deficiencies with respect to its product were the result of the customer "baking" the product in a manner that reduced its tensile strength, the Eleventh Circuit found that the only property damage identified in the underlying lawsuit was to the insured's own property and was therefore excluded from coverage. As the court concluded: "Because the dispute between the concrete companies involved only damage to the inferior concrete and economic losses for repairs necessitated by the defective product, the insurance policy did not require Westfield to provide a defense."

Michael Aylward
Morrison Mahoney
Boston, MA

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Arizona

COVID-19/Business Interruption

Judge Brnovich has granted a property insurer's motion to dismiss, ruling in B Street Grill and Bar LLC v. Cincinnati Insurance Company (PDF), No. 20-1326 (D. Ariz. Mar. 5, 2021) that three restaurants in Mesa, Arizona could not obtain property insurance for COVID-19-related business interruption losses in light of their failure to plead "accidental physical loss or accidental physical damage" to the properties. Notwithstanding limited Arizona case law on this point, the district court concluded that this language required actual physical damage to the insureds' property. The court distinguished an earlier Federal Arizona District Court ruling in Ingram Micro as involving micro circuitry in the context of computers. The court also noted that the computers in Ingram Micro had to be repaired, whereas there was no similar contention in this case. The court emphasized that even if virus particles were present in the insured's premises, they could be removed by simple cleaning and had not caused any physical damage. Likewise, the court declined to find that the policies were intended to cover virus losses given that they lacked an express exclusion for virus damage. For similar reasons, the court refused to find that there was any Civil Authority or ingress/egress coverage.

Michael Aylward
Morrison Mahoney
Boston, MA

Consent to Settle

On a certified question from the Ninth Circuit, the Arizona Supreme Court has ruled in Apollo Education Group Inc. v. National Union Fire Insurance Company of Pittsburgh, PA (PDF), No. CV-19-229 (Ariz. Feb. 17, 2021) that the standard for evaluating whether a D&O insurer was unreasonable in withholding consent to the policy holder's settlement should be determined from the prospective of the insurer and not the policyholder. The supreme court declared that "the insurer must independently assess and value the claim, giving fair consideration to the settlement offer, but need not prove a settlement simply because the insured believes it is reasonable." The court distinguished its 1987 opinion in USAA v. Morris, in which it had declared that "the test is to whether the settlement was reasonable and prudent is what a reasonably prudent person in the insured's position would have settled for on the merits on the claimant's case," as Morris was decided on the basis of the fact that the insurer had a duty to defend whereas D&O policies do not contain duty to defend language.

Michael Aylward
Morrison Mahoney
Boston, MA

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California

COVID-19/Pollution Condition or Biological Agent Conditions

Judge Carney has ruled in Sunstone Hotel Investors Inc. v. Endurance American Specialty Insurance Company (PDF), No. 20-2185 (C.D. Cal. Feb 26, 2021), that a Site Environmental Impairment Liability insurance policy may provide coverage for costs associated with the remediation of conditions at the Marriott Boston Long Wharf Hotel that resulted in a "super spreader" event in March 2020 at the outset of the COVID-19 pandemic. Endurance American had moved to dismiss, arguing that the insured's costs to date did not exceed the $100,000 self-insured retention necessary to trigger the policy's coverage for biological agent conditions (Coverage C). However, the district court agreed with the insured that the applicable section of the policy was not Coverage C but rather Coverage D which insured business interruption losses and extra expenses that "directly result from Pollution Condition or biological agent conditions." The court declared the Coverage D was not subject to the $100,000.00 self-insured retention contained in Coverage C nor had the insured sought coverage under Coverage C. Further, the court found that the availability of coverage was consistent with the insured's reasonable expectations as "Coverage D contained strong language indicating that [business interruption] losses that directly result from viruses on Scheduled Locations will be covered. It seems to the court that it would be a very rare situation for losses caused by a virus like the coronavirus resulted in Cleanup Costs over $100,000. If Defendant wish to make coverage for BI losses contingent on significant Cleanup Costs, it should have done so clearly and unambiguously. It did not."

Michael Aylward
Morrison Mahoney
Boston, MA

Construction Defect Claims/Trigger of Coverage

The California Court of Appeal has ruled that a trial court should not have granted summary judgment to a building contractor's liability insurer where issues of fact existed as to whether damage from a retaining wall began while a policy was in effect. Although the trial court had ruled that the damage occurred after the policy expired, the Fourth District ruled in Guastello v. AIG Specialty Ins. Co. (PDF), G057714 (Cal. App. Feb. 19, 2021) that the trial court had ignored an affidavit that the plaintiff had submitted from a licensed civil engineer contending that the damage and deterioration of the wall as well as damaged to the property of others had been continuous and progressive from the end of November 2004, within the period of time that the AIG policy remained in effect. Despite AIG’s claim that the engineer’s opinions were unreliable, the court of appeal declined to dismiss this evidence and declared that is veracity could be determined at trial through cross-examination.

Michael Aylward
Morrison Mahoney
Boston, MA

Bad Faith

Pinto v. Farmers Ins. Exch., No. B295742, 2021 WL 857776 (Cal. Ct. App. Mar. 8, 2021)

The California Court of Appeals overturned a $9.9 million bad faith verdict against Farmers Insurance Exchange (Farmers) arising out of Farmers' alleged failure to settle a car crash claim. The appellate court ruled bad faith claims must demonstrate a finding that an insurer acted unreasonably.

The case arose out of a 2013 automobile accident in which the plaintiff suffered injuries causing quadriplegia, and the owner of the vehicle suffered brain damage. The driver and three passengers were coming from a party where drugs and alcohol were present. Alaxandrea Martin (Martin), a passenger at the time of the accident, owned the truck, which was insured under an auto policy issued by Farmers. There was some confusion about who was driving the vehicle, but it was ultimately determined that Dana Orcutt (Orcutt) may have been driving the vehicle at the time with Martin's permission.

Orcutt assigned her rights under the Farmers policy to the plaintiff who then presented Farmers with a settlement offer. However, the proposed settlement required Farmers to furnish a declaration on Orcutt’s insurance coverage and Orcutt refused to cooperate in providing insurance information and signing a declaration. Faced with a time limited settlement demand, which included as a condition a signed declaration from Orcutt with her insurance information, Farmers ultimately sent the plaintiff a $50,000 check for the claim without the requested declaration from Orcutt.

It his suit, the plaintiff claimed that Farmers acted in bad faith in handling the plaintiff's claim and failing to settle. A jury returned a verdict in the plaintiff’s favor, and the court entered a $9.9 million judgment against Farmers.

The appellate court unanimously overturned the verdict, reasoning that “[t]he special verdict here was facially insufficient to support a bad faith judgment because it included no finding that Farmers acted unreasonably in failing to accept Pinto's [the plaintiff's] settlement offer.” Without such a determination of unreasonableness, the jury’s verdict was “deficient,” and the judgement was “defective.” Even though the plaintiff submitted evidence of unreasonableness by Farmers, because the jury was not instructed to determine the issue, the evidence was “irrelevant.” The plaintiff further argued that he had suggested a question on the verdict form that spoke to Farmers’ reasonableness, to which Farmers objected. The appellate court rejected this estoppel argument, asserting that the plaintiff was responsible for the shortcomings of the verdict form. The appellate court reversed the judgment in favor of the plaintiff and remanded the case to the trial court with an instruction to enter a judgment in favor of Farmers.

Charles W. Browning
Elaine M. Pohl
Patrick E. Winters
Plunkett Cooney
Bloomfield Hills, MI

COVID-19/Business Interruption

Kingray Inc. v. Farmers Group Inc., No. EDCV 20-963 JGB (SPx), 2021 WL 837622 (C.D. Cal. Mar. 4, 2021)

Plaintiffs Kingray Inc. (Kingray), a sports bar and grill in California, and Nora’s Style Salon, Inc. (Nora's), a beauty salon in New York, filed a class action complaint against their insurers Farmers Group, Inc., Farmers Insurance Company, Inc., and Truck Insurance Exchange. Kingray and Nora’s alleged that COVID-19 related business losses, incurred by them and others similarly situated, were covered under their all-risk commercial property policies. In response, the insurers filed a motion to dismiss.

In deciding the insurers’ motion to dismiss, the district court recognized that New York law applied to the interpretation of the all-risk policy issued to Kingray, whereas California law applied to the policy issued to Nora’s. The court then ruled that the virus exclusion in Kingray's policy "plainly defeated" its "theory that the coronavirus itself triggers Kingray’s insurance coverage." Accordingly, the court dismissed Kingray’s claims against its insurer.

The all-risk policy issued to Nora’s did not, however, contain a virus exclusion, which necessitated the court’s interpretation of the "central clause 'direct physical loss of damage to property.'" Initially, the court recognized that the words "direct" and "physical" modified both "loss" and "damage." "The most natural reading of the phrase is that Nora’s is insured for direct physical loss of its property and also insured for direct physical damage to its property."

Given that neither COVID-19 nor New York's "stay at home" orders caused partial or complete physical destruction of the insured property, there was not a "direct physical loss." However, the court recognized that actual physical loss may not be required for a "direct physical loss." Instead, physical dispossession of the property may be sufficient. The court explained that it was "plausible that 'direct physical loss of' property includes physical dispossession because of dangerous conditions (a virus in the air) or a civil authority requiring Nora's to close." Accordingly, the court denied the insurers’ motion to dismiss Nora’s claims for coverage.

Charles W. Browning
Elaine M. Pohl
Patrick E. Winters
Plunkett Cooney
Bloomfield Hills, MI

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Colorado

Bad Faith/Assignments/Stipulated Judgments

The Colorado Court of Appeals has sustained a lower court's declaration that an insured breached the terms of its auto policy by stipulating to a judgment and assigning its right to an accident victim. In State Farm Mutual Automobile Ins. Co. v. Goddard (PDF), 2021 WL 501122 (Colo. App. Feb. 11 2021), the court of appeal rejected the insured's argument that the insured could not have violated the terms of its policy in light of the fact that policy assignments were authorized by the Colorado Supreme Court’s decision in Nunn v. Mid-Century Ins. Co., 244 P. 3d 116 (Colo. 2010). In Nunn, the supreme court ruled that a policyholder did not breach the terms of its policy by entering into a stipulation with an accident victim not to execute on the excess judgment and to assign its rights, including bad-faith claims, to the accident victim. Instead, it concluded that an insured who has "suffered a judgment in excess of policy limits, even if the judgment is confessed and the insured is protected by a covenant not to execute, has suffered actual damages and will be permitted to maintain an action against insurer for bad-faith breach of the duty to settle." In this case, however, the court of appeals declared that "before an insured is justified in stipulating or judgment and assigning its claims against the insurer to a third-party claimant, it must first appear that the insurer has unreasonably refused to defend the insured or to settle the claim within policy limits." While rejecting State Farm's argument that there must be a finding of bad faith on the part of the insurer before an insured is justified in entering such an agreement, the court of appeals found that the facts in this case did not preclude a judge from ruling that the insured violated the terms of his policy by entering into a stipulated judgment with the accident victim where there was conflicting evidence at trial with respect to whether State Farm appeared to have acted unreasonably in denying a policy limit settlement.

Michael Aylward
Morrison Mahoney
Boston, MA

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Delaware

First Party/"Earth Movement" Exclusion

The Delaware Supreme Court has ruled that the collapse of a pedestrian bridge and retaining wall at the insured's home following a severe weather event that resulted in a combination of water backups from drainage systems, scouring of supporting earth embankments, heavy rain and tree debris were subject to an "earth movement" exclusion in a homeowner's policy. In Monzo v. Nationwide Property & Casualty Ins. Co., 199,2020 (Del. Nar. 11, 2021), the court ruled that "earth movement" encompassed the "scouring" of earth embankments that had resulted in this loss. The court rejected the insured's argument that the exclusion does not apply to earth movement when combined with water, noting that the exclusion applied to losses "resulting directly or indirectly from earth movement due to natural or unnatural causes…" The court also noted that the exclusion included types of earth movement such as "mudslides" that contain water. On the other hand, the supreme court held that the trial court had erred in granting summary judgment to Nationwide with respect to the collapsed retaining wall as, unlike the pedestrian bridge, the undisputed facts did not establish that "scouring" had contributed to the wall's collapse.

Michael Aylward
Morrison Mahoney
Boston, MA

Fraud and Choice of Law

RSUI Indem. Co. v. Murdock, --- A.3d ---, 2021 WL 803867 (Del. Mar. 3, 2021)

The Supreme Court of Delaware held that coverage under a Directors' and Officers' policy (D&O policy) for claims of intentional wrongdoing and fraud by an insured CEO did not violate Delaware public policy. The excess insurer, RSUI Indemnity Company (RSUI), appealed a series of decisions from the Superior Court of Delaware ruling in favor of the insureds, Dole Food Company, Inc. (Dole) and Dole’s director and CEO, David H. Murdock (Murdock). RSUI sought a declaration from the superior court that coverage under its D&O policy was unavailable to fund Dole and Murdock’s settlement of underlying state and federal lawsuits that current and former Dole shareholders filed based on Murdock's fraudulent conduct related to a merger transaction that took Dole private and resulted in Murdock acquiring all of Dole’s stock.

RSUI argued that Delaware law—and not California law—governed the interpretation of the D&O policy, that fraudulent conduct by Murdock was uninsurable under either state’s laws, and that the "Fraud/Profit Exclusion" defeated coverage for the settlements in the state and federal actions. The appellate court first held that Delaware had a more significant interest in its law being applied because that is where Dole is incorporated, even though California is the location of Dole’s headquarters and the residence of Dole’s directors and officers. Delaware had a stronger "interest in protecting the ability of its considerable corporate citizenry to secure D&O insurance and thereby attract talented directors and officers[.]"

Turning to the substantive issues, the appellate court held that allegations of fraud "fit comfortably within the [] terms defining the scope of coverage," and that Delaware does not have a public policy "against the insurability of losses occasioned by fraud so strong as to vitiate the parties' freedom of contract[.]" In other words, Delaware public policy "weighs in favor of the insurability of losses incurred as the result of a breach of the duty of loyalty, including one marred by fraud." Lastly, the appellate court held that the Fraud/Profit Exclusion did not bar coverage because the provision only excluded "fraudulent act[s] ... established by a final and non-appealable adjudication adverse to [the] Insured in the underlying action," and RSUI was obligated to pay the settlement in the federal action, which occurred without a final and non-appealable adjudication.

Charles W. Browning
Elaine M. Pohl
Patrick E. Winters
Plunkett Cooney
Bloomfield Hills, MI

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Illinois

COVID-19/Business Interruption

The federal judge overseeing one of the two insurer-specific MDL cases ruled against Society Insurance last week in three bellwether cases. In In Re: Society Insurance Company COVID-19 Business Interruption Protection Insurance Litigation (PDF), MDL No. 2964 (N.D. Ill. Feb 22, 2021), Judge Chang rejected Society's argument that the insureds had not pleaded a viable claim for "direct physical loss or damage" to their property. The court ruled that the policy "does not say that the business suspension must be directly caused by a covered cause of loss; the text simply states that the business suspension must be "caused" by a covered cause of loss." Given that proximate cause is therefore the governing standard, Judge Chang ruled that a reasonable jury could find "that the novel coronavirus and the resulting pandemic proximately caused the business interruptions." Further, the court ruled that these limitations upon the insured's ability to use their businesses constituted a "physical loss" to the premises. The court did rule that there was no basis for "civil authority" coverage since these orders have not completely prohibited access to the premises. The court also ruled that there was no coverage under that section of these policies that provides coverage for operations suspended due to "contamination." Finally, the court rejected the argument of the Rising Dough plaintiffs that they were entitled to "sue and labor" coverage since this provision of the policy does not independently provide coverage but instead sets forth what the insured must do if there is coverage. The court declined to dismiss the insureds’ Section 155 claims declaring that those Illinois cases which have ruled that a bona fide a dispute as to the availability of coverage protects against bad faith only did so after an ultimate coverage determination and that "there was no reason to opine on whether an ultimate finding that there is no coverage always means that there could be no viable Section 155 claim." Since no discovery had taken place with respect to the claims at issue, the court ruled that any such ruling is premature at this stage of the litigation.

Michael Aylward
Morrison Mahoney
Boston, MA

COVID-19/Business Interruption

In Derek Scott Williams PLLC v. The Cincinnati Insurance Company (PDF), No. 20-2806 (N.D. Ill. Feb. 28, 2021), Judge Kennelly (the judge that had been proposed to the JPMDL to oversee all federal COVID DJs) ruled that a Texas dentist could proceed with its suit for losses due to the pandemic. While granting Cincinnati's motion to dismiss with respect to plaintiff's claim under the policy's Civil Authority coverage, Judge Kennelly declared that the insured had pleaded sufficient facts to preclude the dismissal of its claim for lost business income. Where Cincinnati had argued that the business income coverage required evidence of physical damage to the property, the district court adopted Judge Chang’s analysis that the claims in question could be construed as involving physical loss even if the property had not been physically damaged. Applying Texas law, the court ruled that "the court is persuaded that a reasonable fact finder could find that the term "physical loss is broad enough to cover, as Williams argues, a deprivation of the use of its business premises." The court also declined to adopt Cincinnati's argument that any such conclusion was contrary to the "period of restoration" language of this policy. The court found that "repair" did not necessarily involve physical damage "one need only consider common references to repairing a relationship or repairing one's health." "In a situation like the one at issue here, the "loss" would be "repaired" if and when orders by governmental authorities permitted full use of the property." The court disagreed with Cincinnati that the terms "loss" and "damage" mean the same thing and held that its arguments merely reflected "poor English" or ambiguous policy wordings. Nevertheless, the court did agree with Cincinnati that there was no Civil Authority coverage as there was no allegation that access to the area immediately surrounding the damaged property was prohibited by civil authority." The court found that the Texas shutdown order only prevented the debtors from conducting elective and non-emergency procedures and had not completely shut down its business.

Michael Aylward
Morrison Mahoney
Boston, MA

COVID-19/Liability

McDonald's Corp. v. Austin Mut. Ins. Co. No. 1:20-cv-05057 (N.D. Ill. Feb. 22, 2021)

The U.S. District Court for the Northern District of Illinois denied Austin Mutual Insurance Company's (Austin Mutual) motion to dismiss a lawsuit brought by its insured, McDonald’s Corporation and McDonald’s USA LLC, and the fast food restaurant’s franchise owners, Lexi Management LLC and DAK4, LLC, (the plaintiffs). The plaintiffs sought coverage under the Commercial General Liability (CGL) policies that Austin Mutual issued to them for a lawsuit in which the plaintiffs were accused of public nuisance and negligence due to their decision to "remain open during the COVID-19 pandemic without enhanced health and safety standards." (the Massey suit).

Austin Mutual argued that the plaintiffs were not entitled to coverage for the Massey suit because it did not seek "(1) 'damages' (2) 'because of'; (3) 'bodily injury'" where "the nature of [the] Plaintiffs' expenditure is not to remedy bodily injury to third-persons." The plaintiffs countered that "but for" COVID-19 and SARS-CoV-2, which they argued are bodily injuries, they would not have sustained the damages associated with the mandatory injunction in the Massey suit. The plaintiffs further argued that any money spent to conform to the mandatory injunction constituted damages "'because of' exposure to [COVID-19 and SARS-CoV-2]."

In analyzing both arguments, the court held that the mandatory injunction in the Massey suit constituted damages because it would require the plaintiffs "to expend money to remediate the continuous and ongoing exposure to [COVID-19 and SARS-CoV-2]." Moving onto whether the damages were "'because of' 'bodily injury,'" the court held that the plaintiffs proved that "but for" the individuals in the Massey suit contracting and exhibiting symptoms of COVID-19, the plaintiffs' would not have incurred damages, including money losses, related to the mandatory injunction.

The court rejected Austin Mutual's argument that the CGL policies are only meant to cover damages paid to a third-party, stating that the argument is "untethered to any language in the policy." Finally, in deciding whether there was bodily injury, the district court stated that "[n]o one disputes—or even could dispute—that [COVID-19 and its corresponding symptoms] is a 'bodily injury.'" As a final note, the district court stated that had Austin Mutual wanted to exclude damages related to COVID-19, it could have included a virus exclusion in its CGL policies. Thus, because the plaintiffs’ complaint alleged facts that potentially give rise to coverage, Austin Mutual's motion to dismiss was denied.

Charles W. Browning
Elaine M. Pohl
Patrick E. Winters
Plunkett Cooney
Bloomfield Hills, MI

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Indiana

COVID-19/Business Interruption

Judge Young ruled in MHG Hotels LLC v. Emcasco Insurance Company Inc. (PDF), No. 20-1620 (S.D. Ind. Mar. 8, 2021) that a motel chain had failed to plead facts sufficient to support business interruption coverage under policies issued by Union Insurance Company of Providence and Emcasco. In granting the insurers' motion to dismiss, the district court ruled that there was no allegation that the insureds' properties had suffered "direct physical loss of or damage" to covered property. Citing the Merriam-Webster definition, the court declared that physical damage involved something that had a "material existence: perceptible especially through the senses and subject to the laws of nature." The court ruled that this interpretation of direct physical loss as requiring tangible injury was consistent with the "period of restoration" language in the policy. The court found, therefore, that since the insureds had continued to operate their hotels and had not been required to repair, rebuild, or replace any property, they had not pleaded a direct physical loss. The court also declined to find any "civil authority" coverage inasmuch as the plaintiffs had not pleaded any contention that executive orders or the virus had caused a direct physical loss to property other than the insureds' premises. Finally, the court ruled that any coverage that might otherwise have applied was clearly within the scope of the policies' virus exclusion. The court also declined to allow the case to go forward based on allegations that the insureds' insurance agent had deceived them by assuring them when the coverage was renewed in 2019 that it would cover all business interruption losses. Having ruled that these claims were not covered, the court also dismissed the insureds' bad-faith claims. Judge Young declared that a mere conclusory allegation that the insurers had acted with "malice, fraud, gross negligence and oppressiveness" merely set forth conclusory facts and was insufficient to survive a motion to dismiss.

Michael Aylward
Morrison Mahoney
Boston, MA

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Kentucky

International Acts Exclusion

The Kentucky Supreme Court has ruled that a homeowner’s exclusion for loss resulting from "any action by or at the direction of an insured person committed with the intent to cause a loss, or that could be reasonably expected to cause a loss" should be interpreted objectively and not, as the trial court had, from the subjective view point of the insured's son who had set fire to the family home in an effort to commit suicide. However, the supreme court ruled in Foreman v. Auto Club Property-Casualty Ins. Co., 2018-SC-0618 (Ky. Feb. 18, 2021) that the case should be remanded so that the insureds might present evidence to establish that their son lacked adequate mental capacity at the time of the act to form an intent to injure. The court declared that "intentional act exclusions are included in contracts to prevent the insured from manipulating the risk and thereby receiving a financial benefit from the consequences of the loss that was intended or expected by the insured. In contrast, though, an individual who lacks mental capacity to conform his conduct will not be influenced by the existence or non-existence of coverage." In this case, the court ruled that the insured's intention may be proven "either by direct evidence of actual intent or it may be inferred by the nature of the act and the accompanying reasonable foreseeability of harm." The crucial question, according to the court, was not whether the insured knew right from wrong, but that "he did not understand the nature and quality of his actions so that he was rendered unable to understand the physical nature of their consequences."

Michael Aylward
Morrison Mahoney
Boston, MA

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Massachusetts

COVID-19/Business Interruption

Judge Saylor has ruled in Kamakura, LLC v. Greater New York Mutual Insurance Company (PDF), No. 20-11350 (D. Mass. March 9, 2021) that a Boston restauranteur had not pleaded a viable claim for business interruption coverage for pandemic-related losses. The district court expressed sympathy for the plaintiff's plight and observed that whereas a pandemic was the sort of widespread disaster for which a small business not only could not prepare but for which insurance coverage ought to be routinely available, the court could not find coverage in this case in light of the plain language of the subject policies as written. In keeping with the recent Massachusetts rulings in Legal Sea Foods and SAS, Judge Saylor declared that a mere threat to the insured premises without any actual physical damage was not a basis for coverage. The court rejected the insured's argument that the presumed or imminent threat of contamination which renders premises unusable for its intended purpose was insufficient to trigger coverage. The court distinguished the Massachusetts cases cited by the insured but declared that even if they held for the proposition stated, they did not apply here where the business loss was due to governmental orders and not the presence of the coronavirus itself. Judge Saylor observed in the footnote, however, that he was skeptical that either Matzner or Arbeiter fairly reflected Massachusetts law since they failed to cite the appeals court's decision in HRG Development. The court declined to find that the absence of a virus exclusion was evidence of an intent to provide coverage and declared, in any event, that extrinsic facts could not be considered by the court in the absence of ambiguous policy language. Apart from a question of whether the presence of the virus could cause direct physical loss, the court found that it was only speculation that virus particles were actually present within the insured's restaurants. Further, the court observed that the shutdown orders were not on account of the presence of virus particles and applied across the board without regard to whether business had been previously or were presently contaminated with the coronavirus. The court also declined to find civil authority coverage noting the absence of any allegation that other property had suffered physical damage. Having found an absence of coverage, the court likewise dismissed the insured's assertions of bad faith under G.L. c 93A. The court ruled that even if the coverage denial was mistaken, there was a good faith basis for it and declined to find that GNY had not conducted a sufficient investigation since the complaint did not allege what GNY should have considered that it did not. The court ruled that bad faith could not be based upon the failure of GNY to inspect the insured's premises or documents concerning its business activities since this denial was based upon policy interpretation rather than any factual finding as to the condition of the premises.

Michael Aylward
Morrison Mahoney
Boston, MA

COVID-19/Business Interruption

The earliest declaratory judgment action filed in Massachusetts has become the latest insurer victory. Despite the district court's willingness to allow the iconic restaurant chain to file an amended complaint alleging that virus particles were present in its restaurants, Judge Gorton ruled in Legal Sea Foods, LLC v. Strathmore Ins. Co. (PDF), No. 20-10850 (D. Mass. Mar. 5, 2021) that a virus is incapable of damaging physical structures or impacting the structural integrity of property so as to cause "direct physical loss or damage" to property. The court questioned the precedential value of the cases cited by Legal Sea Foods and refused to find that the absence of a virus exclusion in a policy issued days before the pandemic began was evidence of Strathmore’s intention to cover virus losses. The court also refused to find any Civil Authority coverage in this case in light of the fact that the relevant government orders did not forbid or prevent access to the insured's premises but rather limited the type of services that could be provided there.

Michael Aylward
Morrison Mahoney
Boston, MA

COVID-19/Business Interruption

A federal district court in Massachusetts has joined Judge Sanders recent ruling in the Business Litigation Session in declaring that a property insurer did not owe coverage for pandemic-related business interruption losses. Unlike the state court’s ruling in Verveine (PDF), which had emphasized that there was no allegation that virus particles were present on the insured's business premises, Judge Stearns ruled in SAS Int'l v. General Star Ind. Co. (PDF), No. 20-11864 (D. Mass. Feb. 19, 2021) that the transient presence of virus particles on the insured’s property did not cause "direct physical loss." The district court distinguished Massachusetts cases that have founded coverage for the presence of noxious fumes inside a building, observing that "Unlike an unpleasant odor, however, COVID-19 is imperceptible; it does not endure beyond a brief passage of time or a proper cleaning, let alone render the property permanently uninhabitable."

Michael Aylward
Morrison Mahoney
Boston, MA

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Minnesota

COVID-19/Business Interruption

In Bachman's Inc. v. Florists Mut. Ins. Co. (PDF), No. 20-2399 (D. Minn. Mar. 16, 2021, the court held that although structural damage to property is not necessary for there to be "direct physical loss," coverage does not arise in this case where insured flower shop has not alleged that the virus particles are present on its property causing contamination.

Michael Aylward
Morrison Mahoney
Boston, MA

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Montana

Claims Made/Known Loss/Prior Knowledge Exclusion

The Montana Supreme Court has ruled in ALPS Property & Casualty Insurance Company v. Keller, Reynolds, Drake, Johnson and Gillespie, P.C., 2021 MT 46 (Mt. Feb. 23, 2021) that a trial court did not error in holding that a professional liability insurer was not obligated to provide a defense to a lawsuit in light of uncontroverted evidence that a member of the firm knew the basis of the legal malpractice claim prior to the issuance of the policy. The court rejected the arguments of various partners who had been named as defendants based upon their claimed negligence in failing to monitor and supervise the attorney who committed malpractice notwithstanding their contention that they had not been aware of the facts and circumstances concerning the attorney's negligence, nor had they had any direct involvement in representing the client bringing the malpractice claim. The court declared that "it is well accepted that insurance does not cover known losses." and that the policy at issue contained various provisions embodying this principle. The court emphasized that the insurance agreement stipulated that coverage was only provided for claims received and reported during the policy period if "no insured knew or reasonably should have known or foreseen that the ad, error omission or Personal Injury might be the basis of the claim." Despite the argument of various partners that they were ignorant of the facts that were uncontrovertibly known to the attorney who committed the malpractice, the court declared that "the unambiguous language of the Policy does not allow a claim to be divided into parts based upon the knowledge of each Firm member." Rather, the court found that the prior knowledge provisions preclude coverage for the claim, not coverage for a specific attorney. The court also rejected the insured's argument that the "common law innocent insured doctrine provides a separate basis for coverage beyond the expressed terms of the Policy." The court also found that this interpretation was not inconsistent with the "reasonable expectations" doctrine in view of the fact that an insured could not have a reasonable expectation of coverage where an unambiguous exclusion applies.

Michael Aylward
Morrison Mahoney
Boston, MA

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Nebraska

Misrepresentation/Damage to Property Exclusion

The Nebraska Supreme Court has ruled in State Farm Fire and Casualty Company v. TFG Enterprises, 308 Neb. 460 (Neb. Feb. 19, 2021) that a homeowner’s insurer did not owe a defense to allegations that its insured had failed to disclose the presence of mold and other problems with the insured premises when he sold it to the plaintiff. While expressing skepticism that such claims involved an "occurrence," the court held that it need not resolve this issue in light of the fact that the policy clearly excluded claims for property damage to property that was owned in the care of or later sold by the insured. The court declared that its findings consistent with numerous out of state cases in which courts have found that insurance policies containing exclusions for property damage to property that is sold by the insured provide no liability coverage for lawsuits alleging misrepresentations in the sale of the property.

Michael Aylward
Morrison Mahoney
Boston, MA

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Nevada

Duty to Defend/Recoupment/Restitution

A narrowly divided Nevada Supreme Court has ruled that a general liability insurer is entitled to recoup defense costs that it paid under protest in a case that it had no duty to defend. On a certified question from the Ninth Circuit, the majority declared in Nautilus Insurance Company v. Access Medical, LLC, No. 79130 (Nev. Mar. 11, 2021) that "when a court determines that an insurer never owed a duty to defend, the insurer expressly reserved its right to seek reimbursement in writing after defense was tendered, and the policyholder accepted the defense from the insurer, then the insurer is entitled to that reimbursement. Under generally applicable principals of unjust enrichment and restitution, the insurer has conferred a benefit on the policyholder; the policyholder appreciated the benefit; because it is reasonable for the insurer to accept the policyholder's demand, it is equitable to require the policyholder to pay." The majority concluded that this holding was consistent with Restatement of Restitution and found that, whereas the ALI's new Restatement for liability insurance had reached a different conclusion, it had done so for reasons that the court disagreed with. Three justices dissented, arguing that a court should not rely on equitable principles to imply contractual terms where an express agreement existed between the parties that lacked such terms, nor was it appropriate to permit Nautilus to create a remedy through a unilateral reservation of rights that are not set forth in the agreed terms of the policy itself.

Michael Aylward
Morrison Mahoney
Boston, MA

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New Hampshire

Subrogation

The New Hampshire Supreme Court has ruled that the property insurer of a college may not subrogate against college students for accidentally setting fire to their dormitory. In Ro v. Factory Mutual Ins. Co., 2009-620 (N.H. Mar. 10, 2021), the court extended the anti-subrogation rule to students notwithstanding the absence of any formal "possessory interest" in the college dormitory that they damaged. Factory Mutual had argued that students had no more possessory interest in their residences than guests in a hotel and were therefore not "co-insureds" under the policy. The supreme court disagreed, concluding that Factual Mutual's arguments rested too heavily on property law whereas subrogation is an equitable remedy that does "not depend upon feudal principals" and that courts have likened the relationship between a college and residential student to that of a landlord and tenant in other cases.

Michael Aylward
Morrison Mahoney
Boston, MA

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New Jersey

Subrogation

In Causeway Automotive LLC v. Zurich American Insurance Company (PDF), No. 28-8393 (D.N.J. Feb. 10, 2021), Judge Wolfson declared the business interruption losses suffered by various auto dealerships were subject to a virus exclusion as involving "loss or damage caused by a resulting from any virus…or other microorganism that induces or is capable of inducing physical distress, illness or disease." The court rejected the insurance argument that the exclusion was ambiguous or should or could be interpreted as only applying where the injuries were due to virus particles on the insurance property. Nor did he find that the virus exclusion did not apply because the losses resulted from Governor Murphy's executive orders and not the virus itself. Notably, the Zurich exclusion did not contain anti-concurrent causation language.

Michael Aylward
Morrison Mahoney
Boston, MA

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New York

COVID-19/Business Interruption

In Food For Thought Caterers Corporation v. Sentinel Insurance Company (PDF), No. 20-34018(S.D.N.Y. Mar. 6, 2021) the court held that Appellate Division’s 2002 ruling in Roundabout Theatre requires more than mere loss of use of premises.

Michael Aylward
Morrison Mahoney
Boston, MA

Duty to Defend/Recoupment

The Second Department has ruled that a liability insurer had no right to recoup defense costs that it had paid to defend its insured during the period of time between when a trial court vacated a default judgment against its insured and the Appellate Division reinstated the default. In American West Home Ins. Co. v. Gjonaj Realty & Management Co., 2020 WL 7767944 (App. Div. Dec. 30, 2020), the Appellate Division first found that American West was not estopped to assert these claim since it had initially denied on the basis of the lack of timely notice and had thereafter defended under a reservation of rights, including a right to recoup. Nevertheless, the court found that American West had no right of recoupment. Whereas a duty to defend is based upon the potential for coverage and exists independently of the duty to indemnify, the Second Department ruled that the court’s ultimate determination that American West had no duty to pay the default judgment did not relieve of its duty to pay defense costs in the interim. The court acknowledged that federal cases had found a right to recoupment but that the insureds had not opposed recoupment in some of these cases and other federal district courts had more recently refused to allow recoupment. As a result, the court found that insurers have no right to unilaterally impose a right of recoupment through a reservation of rights letter that is not based upon actual terms in its policy.

Michael Aylward
Morrison Mahoney
Boston, MA

CTE Litigation/Discovery

The Appellate Division has ruled in Alterra America Ins. Co. v. National Football League (PDF), 2021 NY Slip Op 00900 (App. Div. Feb. 11, 2021), that a trial judge did not err in denying efforts by the NFL's liability insurers to compel discovery of underlying defense settlement materials and electronically stored information concerning CTE/concussion claims against the league. The First Department ruled that the trial court had properly exercised its broad discretion in denying discovery and that the cooperation clauses in the defendant's policies did not operate as waivers of otherwise applicable attorney–client and work-product privileges belonging to the NFL. Further, the court ruled that there was not a waiver of the attorney-client privilege merely because the parties had a common interest in the outcome of the underlying actions. The court declared that "by seeking coverage, the NFL did not put its privilege in protected information at issue."

Michael Aylward
Morrison Mahoney
Boston, MA

Additional Insured/Duty to Defend

Ohio Security Ins. Co. v. Travelers Indemnity Co. (PDF), United States District Court, Southern District of New York

This action arose out of a job site trip and fall. The claimant fell while working as an HVAC installer for Airforce 1 Mechanical (Airforce), an insured of Travelers Indemnity Company of Connecticut (Travelers), on a Kings County construction project. Claimant sued the property owners and construction manager (MJM Associates) in state court. MJM implead the HVAC contractor (TRV Mechanical) seeking indemnity from TVR's insurer Ohio Security Insurance Company (Ohio). Claimant then amended his complaint adding TVR as a first party defendant. Claimant alleged that negligence on the part of the state court defendants was the sole cause of his injuries. Claimant's bill of particulars, like the complaint, did not allege any acts or omissions by Airforce. It mentioned Airforce only once, in connection with Mena's claim for lost wages as a result of the injury. Both Ohio and Travelers investigated the accident. Ohio's investigation found that claimant’s injury occurred on the roof of the premises at the construction site and that "claimant was allegedly injured when he, while walking across this roof, tripped over a piece of plywood and/or temporary floor covering." Travelers determined that claimant was "carrying a metal air conditioning duct when he tripped on a piece of plywood."

The two policies at issue in this action were an Ohio commercial general liability policy issued to TVR and a Travelers plumbing and mechanical policy issued to Airforce. Airforce is the only named insured under the Travelers policy. The Travelers policy provides that it protects those listed as additional insureds for liability for personal injury and property damage only as follows:

If, and only to the extent that, the injury or damage is caused by acts or omissions of you or your subcontractor in the performance of "your work" to which the "written contract requiring insurance" applies. The person or organization does not qualify as an additional insured with respect to the independent acts or omissions of such person or organization.

Thus, for someone to qualify as an additional insured with respect to a particular claim, they must be listed as an additional insured and the injury must be the result of acts or omissions of the named insured. The parties agree that the subcontract between TRV and Airforce is a written contract requiring insurance and designates Ohio's insureds as additional insureds under the Travelers policy. The question is whether or not the Travelers policy applies to claimant’s claims.

The court began its assessment of this claim by outlining two New York Court of Appeals cases dealing with additional insureds. First the court reminded us that when an insurance policy extends coverage to additional insureds only for injuries "'caused, in whole or in part,' by the 'acts or omissions' of the named insured, the coverage applies to injury proximately caused by the named insured." Burlington Ins. Co. v. NYC Transit Auth., 79 N.E.3d 477, 478 (N.Y. 2017). Thus, an obligation to indemnify does not attach if a named insured’s innocent conduct is merely a but-for cause of the injury. The court then discussed an insured’s duty to defend, reminding us that "[A]n insurer has a duty to defend if the allegations state a cause of action that gives rise to the reasonable possibility of recovery under the policy." Belt Painting Corp. v. TIG Ins. Co., 795 N.E.2d 15, 17 (N.Y. 2003) (citing Fitzpatrick v. Am. Honda Motor Co., 575 N.E.2d 90, 92 (N.Y. 1991)). To determine if the duty to defend applies the court looks to the complaint and determines whether or not the pleadings suggest a reasonable possibility of coverage.

Looking to the underlying pleadings, the court found no allegations that claimant's injuries were the result of any negligence by Airforce, meaning the Travelers policy would not be implicated. Ohio contended that because claimant asserted claims for violations of the New York Labor Law, his claims must stem from Airforce's acts or omissions. The court rejected Ohio’s argument because the cited portions of New York Labor Law impose nondelegable duties on property owners to maintain safe premises, and do not impose any duty on an employer or contractor. Ohio then attempted to look beyond the complaint and at the contract between TVR and Airforce. The relevant contracts however do not support the view that Airforce was responsible for hazards at the worksite that it did not create. As there was no clear nexus between negligent conduct on the part of Airforce and claimant’s alleged injuries the court holds that the Travelers policy should not provide a defense to Ohio’s insured, TVR.

Charles J. Englert III
Hurwitz & Fine
Buffalo, New York

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Ohio

COVID-19/Business Interruption

Brunswick Panini's LLC v. Zurich Am. Ins. Co., No. 1:20-CV-1895, 2021 WL 663675 (N.D. Ohio Feb. 19, 2021)

The U.S. District Court for the Northern District of Ohio granted an insurer's motion to dismiss a lawsuit filed by a restaurant alleging that the insurer had wrongfully denied the restaurant's business interruption claim. The court’s decision contrasts with a decision last month by District Judge Dan Aaron Polster, also of the U.S. District Court for the Northern District of Ohio, that found that an insured restaurant chain was entitled to coverage for its business income losses stemming from the closure of its restaurants due to the COVID-19 pandemic.

Zurich American Insurance Company (Zurich) issued a first-party property insurance policy to Brunswick Panini's LLC and Kent Entertainment Group (collectively, Brunswick) for a group of restaurant/bar facilities operated by Brunswick in Ohio. On March 15, 2020, the state of Ohio restricted restaurants to carry-out and delivery orders only, and Brunswick halted all operations in accordance with that order. Brunswick submitted a claim to Zurich for, among other things, loss of business income stemming from the state's order. Zurich denied coverage and Brunswick commenced a lawsuit, alleging breach of contract and breach of the implied covenant of good faith and fair dealing.

Zurich moved to dismiss Brunswick’s complaint and District Judge Christopher A. Boyko Sr. granted the motion. The court found that Zurich’s policy required direct physical loss of or damage to "real property" and "personal property" at the insured's premises as a precondition to coverage for loss of business income. Under the "Twombly-Iqbal analysis," the court found that Brunswick failed to allege direct physical loss to its property because it "conclusorily allege[d] ... 'COVID-19's actual or suspected physical presence at or in the vicinity of Plaintiffs' Property,'" and that "[b]ased on the prevalence of the virus in northeast Ohio, it is probable that Plaintiffs sustained direct physical loss of or damage." (emphasis in decision). As a result, the court concluded that the "allegations regarding the physical presence and/or impact of the coronavirus are insufficient."

The court found that Zurich’s policy language was unambiguous, even though the pertinent terms were not defined in the policy, concluding that "neither the COVID-19 virus nor the state government orders caused 'direct physical loss of or damage to' [Brunswick's] Insured Property." The court further held that, even if the insuring agreement were to apply, the policy's microorganism exclusion, which defines microorganism to include "any type or form of organism of microscopic or ultramicroscopic size including ... virus," precluded coverage for Brunswick's claims under Zurich's policy.

Charles W. Browning
Elaine M. Pohl
Patrick E. Winters
Plunkett Cooney
Bloomfield Hills, MI

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Texas

Cyber/Phishing

A federal district court in Dallas has ruled in RealPage, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA (PDF), No. 19-1350 (N.D. Tex. Feb. 24, 2021) that neither National Union or Beazley owed coverage for a phishing scheme that resulted in the insured transferring funds from five accounts to unauthorized third parties and granting summary judgement to RealPage's commercial prime insurers, Judge Boyle declared that there was no coverage under the primary or excess policy due to the fact that RealPage was not withholding these funds at the time of the loss since they were within the possession of a third party payment processor, Stripe, Inc. The court ruled that RealPage's ability to direct the funds to third parties did not amount to "holding" them. In light of the fact that RealPage had not actually held the funds, the district court concluded that "its loss resulted from its decision to reimburse its clients" and that it had therefore not suffered any direct loss to property insured within the scope of its computer frauds or funds transfer fraud coverage.

Michael Aylward
Morrison Mahoney
Boston, MA

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