PANDEMIC ROUNDUP
The number of new COVID-19 DJs being filed has jumped in recent weeks after months of falling numbers as policyholders rush to avoid the potential effect of one year suit limitation periods for their claims.
Reuters reports that some property insurers are revising their policy forms to add definitions for terms such as “microorganism” and “communicable disease” and the Lloyds Market Association has prepared a new exclusion for losses “directly or indirectly arising out of, attributable to, or occurring concurrently or in any sequence with a Communicable Disease.”
The earliest declaratory judgment action filed in Massachusetts has become the latest insurer victory. Despite the District Court’s willingness to allowed 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., No. 20-10850 (D. Mass. Mar. 5, 2021) that a virus is capable 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.
Judge Brnovich has granted a property insurer’s motion to dismiss, ruling in B Street Grill and Bar LLC v. Cincinnati Insurance Company, 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.
A federal judge in California has given a split decision to Farmers, declaring in Kingray Inc. v. Farmers Group Inc., No. 20-963 (C.D. Cal. Mar. 4, 2021) that a virus exclusion in the policy that it issued to Kingray, Inc. precluded coverage for pandemic losses but that it owed coverage to Nora’s Style Salon under a policy that lacked a virus exclusion. While agreeing that there was no “physical damage to property in this case, the court distinguished between “damage” and “loss,” declaring that the periodic dispossession of the insurance premises as the result of shutdown orders was a form of “dispossession” and thus “loss.”
In Causeway Automotive LLC v. Zurich American Insurance Company, 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.
Judge Young ruled in MHG Hotels LLC v. Emcasco Insurance Company Inc., 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.
OTHER RULINGS OF CONSEQUENCE
ELEVENTH CIRCUIT “Property Damage”/Insured’s Product Exclusion (GA)
The Eleventh Circuit has ruled in Morgan Concrete v. Westfield Ins. Co. 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 form 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.”
CALIFORNIA Bad Faith/Failure to Settle/Verdict Forms
The California Court of Appeal has set aside a $10 million bad-faith verdict against Farmers for not having accepted a time-limited demand against its insured. In Alexander Pinto v. Farmers Insurance Exchange, B295742 (Cal. App. Mar. 8, 2021), the Second District held that judgment should not have entered for the plaintiff following the trial of an accident victim’s claim that the insurer unreasonably failed to accept her offer to resolve the claims for the driver’s policy limits where the jury’s verdict failed to set forth any special finding that the insurer acted unreasonably in any respect. The Second District ruled that the jury’s findings that Pinto’s settlement demand had been reasonable and that Farmers had failed to accept it did not satisfy the further requirement that Farmers must have acted unreasonably in failing to accept the offer and that an insurer’s failure to accept a reasonable offer was not unreasonable per se. The court declined to hold Farmers responsible for the special verdict for the deficiencies in the special verdict form and directed that the case be remanded to the superior court to set aside the verdict for Pinto and enter a new judgment in favor of Farmers.
FLORIDA Bad Faith/”Civil Remedy Notice”
The Florida District Court of Appeal has ruled in Junior Julien v. United Property & Casualty Insurance Company, No. 4D19-2763 (Fla. DCA 4, Mar. 3, 2021) that a homeowner’s civil remedy notice to the Florida Department of Financial Services, which is a pre‑condition to a Section 624.155 bad-faith claim, was deficient in that it failed to specify the policy language upon which the claim was based. The court observed that Julien’s notice had cited 14 statutory provisions followed by 21 sections of the Florida Administrative Code and had designated as “specific policy language” every section in the policy.
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.
NEW YORK Arbitration
The First Department has ruled in the Matter of County-Wide Insurance Company v. TC Acupuncture, P.C., 2021 NY Slip Op 01120 (App. Div. Feb 18, 2021) that a trial judge erred in vacating an arbitration award in light of his failure to consider New York precedent confirming that CPLR 7511(b) limits the discretion of the court to vacate arbitration Awards to circumstances that are not present in this case. Although the trial court had vacated the award on the grounds that the arbitrator had applied the wrong burden of proof, the court declared that this did not provide a basis for vacating.
OTHER DEVELOPMENTS OF NOTE
Inside the Insurance Industry
Berkshire Hathaway Specialty Insurance has hired Anthony Tatulli, who formerly helmed AG’s North American financial lines, to head up its executive professional lines for North America.
Marsh LLC announced this week that Amy Barnes has assumed the position of its head of sustainability and climate change strategy. Barnes, who has worked for Marsh for nearly two decades, has been instrumental recently in shaping the mega-broker’s Specialty Energy and Power team.
Cyber Update
Lloyd’s and Guy Carpenter have issued a new analysis of “the emerging cyber to industrial control systems” that considers the risk and ramifications of a coordinated cyber-attack on businesses in the manufacturing, shipping, energy and transportation sectors and concludes that:
- The risk of a cyber-physical ICS incident is increasing, especially for individual entities.
- Only a nation-state or nation-state affiliated actor is likely to possess the resources and level of technical sophistication necessary for a malicious ICS-oriented attack.
- Three plausible scenarios consider: (1) a targeted supply-chain malware attack, in which malicious actors breach a device manufacturer and compromise that manufacturer’s products before distribution; (2) a targeted Internet of Things (IoT) vulnerability attack, in which attackers exploit a vulnerability in widely used IoT devices found in industrial settings; and (3) the infiltration of industrial IT networks to cross the OT “air-gap”.
- An OT event could conceivably trigger a loss that leads to property damage and loss of life in one entity, and lead to extensive forensics, remediation, and product recall as necessary to limit further damage. However, an event leading to widespread property damage, business interruption, and human costs across multiple sites is currently less likely to occur.
- A targeted attack against an industrial site in an industry with outsized strategic, economic or societal importance (or any combination of those factors) would be hugely significant. The key industries considered include manufacturing, energy, transportation and shipping.
- Continued trends of increased cloud adoption in industrial operations, the convergence of IT and OT, and the proliferation of IoT and “smart manufacturing” can exacerbate security concerns and increase exposure profiles.
