Insurance Case Law Developments and Commentary- January 2024
January 30, 2024
NEW RULINGS OF NOTE
1. New Jersey Supreme Court Says No to Covid BI Coverage
At the outset of the COVID coverage litigation pandemic in 2020, Garden State policyholders believed, perhaps with some justification given Wakefern and other first party precedents, that New Jersey courts would be receptive. In the ensuing three years, that has not proved to be the case and any lingering hopes for coverage may finally have been snuffed out by the state Supreme Court’s ruling in AC Ocean Walk, LLC v. American Guarantee and Liability Ins. Co. A-28-22 (N.J. January 24, 2024).
At issue in AC Ocean was the availability of property insurance coverage for certain business interruption losses that an Atlantic City resort claimed to have sustained during the pandemic. At trial, the Superior Court had found that the casino had pleaded sufficient facts to avoid a quick dismissal of its claims. Furthermore, in light of the State Supreme Court’s analysis of pollution exclusions in its 2005 Nav-Its opinion, the trial court ruled that the contamination exclusion was inapplicable. These findings were reversed in 2023 by the Appellate Division of the New Jersey Superior Court setting the stage for this final ruling by the state Supreme Court opinion, declaring that the losses were not covered. A unanimous court held that “In order to show a ‘direct physical loss’ of its property or ‘direct physical…damage’ to its property…, Ocean Walk was required to demonstrate that its property was destroyed or altered in a manner that rendered it unusable or uninhabitable.”
While acknowledging that its ruling with respect to “direct physical loss” rendered the applicability of policy exclusions academic, the court nonetheless felt it useful to also affirm the Appellate Division’s ruling that the contamination exclusion applied. The court rejected the insured’s argument that this exclusion should only apply to “environmental pollution risks” noting that, unlike the liability exclusion at issue in Nav-Its, “the contamination exclusion of the policy in said issue bars coverage not only for certain claims premised on loss or damage caused by a ‘pollutant’ but also for certain claims premised on loss or damage resulting from other causes” including those resulting from the presence of a virus or other pathogens. It also noted that its analysis that its holding in Nav-Its had been influenced by misleading statements by insurance companies to insurance regulators, whereas there was no evidence of similar representations with respect to this contamination exclusion.
2. Service of Suit Clauses Held to Waive Forum Non Conveniens in Washington
A recent opinion of the Washington State Supreme Court has called into question whether the jurisdictional defense of forum non conveniens has any value in the face of service of suit clauses wherein the insurer assents to the insured’s choice of forum.
In Pacific Lutheran University v. Certain Underwriters at Lloyds London, No. 100752-3 (Wash. Jan. 18, 2024), 130 colleges across the country sued 16 carriers seeking COVID BI coverage under a joint property insurance program. After 60 of the colleges filed suit in the Pierce County Superior Court in Washington, the insurers filed a competing action in Illinois and moved to dismiss the insureds’ DJ on the grounds that Washington was not an appropriate forum within which to litigate these claims. This motion was denied by a judge in the Pierce County Superior Court who also enjoined the insurers from proceeding in Illinois.
In affirming the trial court’s decision, the Washington Supreme Court declared that in addition to the private and public interest factors on which forum non conveniens arguments normally turn, it is relevant in insurance cases to consider policy wordings such as “service of suit” and “suit against the company” clauses. The insurers argued that these clauses were merely “permissive consent to jurisdiction” clauses and did not prevent them from raising forum non conveniens argument to try to change the insured’s chosen forum. In rejecting this argument, the Supreme Court agreed with the colleges that the insurers had waived the right to raise forum non conveniens argument when they agreed to include these clauses in their policies.
The Supreme Court also sustained the trial court’s entry of an injunction against the insurers, holding that it was consistent with Washington’s “priority in action” rule which provides that the first court to obtain jurisdiction of a case possesses exclusive jurisdiction to the exclusion of other courts.
Washington Supreme Court’s ruling is all the more alarming as it comes on the heels of last June’s decision by the U.S. Supreme Court in Mallory v. Norfolk Southern Railway Company, upholding a pensioner’s “consent by registration” statute that required businesses to consent to the jurisdiction of out of state courts in states in which the states where they do business.
COMMENTARY: Has the First Circuit Reopened the Door for COVID Claims?
The First Circuit’s recent ruling in Lawrence General Hospital v. Continental Cas. Co., No. 23-1286 (1st Cir. Jan. 11, 2024) has generated intense excitement among policyholder lawyers and revived hopes that were seemingly dashed by the Massachusetts Supreme Judicial Court’s ruling in Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266 (Mass. 2022).. In fact, while the LGH court’s treatment of “communicable disease” coverage may prove nettlesome to those insurers who included this coverage as a rider to their property policies, the decision as a whole is a bold reaffirmation of the Verveine court’s conclusion that the COVID 19 virus does not cause “direct physical loss” to property.
In early 2023, a U.S. District Court in Boston had granted Continental Casualty’s motion to dismiss a local hospital’s COVID BI claim. Judge Gorton ruled that, in keeping with Verveine, the presence of virus particles had not caused directly physical loss to the insured’s facilities. Further, the court rejected the hospital’s separate claim that it was entitled to coverage under the policy’s Health Care Endorsement, which included $1 million in coverage for remediation costs and related business income losses arising out of “an evacuation or decontamination order at a [covered] location by the National Centers for Disease Control, authorized public health official or governmental authority because of the discovery or suspicion of a communicable disease or the threat of the spread of a communicable disease…”
As to this latter coverage, Judge Gorton ruled that the CDC and MA Department of Health directives to hospitals to adopt certain sanitation and safety practices during the pandemic were not remediation or evacuation orders. As a result, the District Court did not address CCC’s alternative argument that this coverage only applies when an order is directed at a particular covered facility because of the discovery, suspicion or threat of a communicable disease at that location and is therefore not triggered by governmental orders based upon regional circumstances.
In the weeks following the SJC’s landmark decision in Verveine, the First Circuit had issued affirmances in Legal Sea Foods v. Strathmore Ins. Co., 36 F.4th 29 (1st Cir. 2022) and SAS Int’l v. General Star Ind. Co., 36 F.4th 23, (1st Cir. 2022) which had emphasized the SJC’s statement in Verveine that “[e]vanescent presence of a harmful airborne substance that will quickly dissipate on its own, or surface-level contamination that can be removed by simple cleaning, does not physically alter or affect property.” LGH seized on this language in drafting its Amended Complaint in 2023 and argued on appeal that it claims should not have dismissed because it had been required to undertake “substantial remediation efforts” that went beyond “simple cleaning” and because the presence of virus particles that could take up to a month to dissipate on its own was not “evanescent.” The First Circuit disagreed.
On appeal, the First Circuit sustained Judge Gorton’s holding that LGH could not access the policy’s $563 million in coverage for “direct physical loss” to covered property.t Perhaps anticipating years of litigation with respect to how many weeks or months contamination must persist before it ceased to be “evanescent” and what amount of cleaning work went beyond “simple,” the First Circuit focused instead on what it saw as the “central holding” of Verveine, namely whether property could repair itself. As a result, it declared that even “distinct, demonstrable, physical alteration” of property that will resolve of its own accord, without the aid of remediation efforts, is not ‘direct physical loss of or damage to property’ under Massachusetts law.” This is a straightforward test and one that courts may apply without the lengthy litigation that might attend temporal issues or the meaning of “simple cleaning.”
While Continental Casualty was thus able to secure a significant victory on appeal and avoided exposure of its $563 million coverage limits, it did suffer a significant reverse on the issue of whether the hospital might nonetheless access the policy’s $1 million endorsement for Disease Contamination Coverage endorsement. In reversing tis aspect of Judge Gorton’s order, the First Circuit found that the CDC and MADOH directives, which made reference to remediation procedures, were clearly within the scope of this endorsement and that CCC’s argument that the orders had not obliged the hospital to cease operation was unreasonable since “no evacuation or decontamination directive would ever be mandatory, because a facility would always have the option of ceasing to provide all or a subset of medical services instead of complying.”
While this means that the case will go back to the District Court for further findings concerning the Disease Contamination Coverage endorsement, it is far from clear that the insurer will ultimately have to provide coverage under this endorsement. On remand, the District Court will have to rule on CCC’s other argument, namely that the CDC and MA DOH directives were not issued due to any outbreak of disease at the insured’s facilities, a defense that has been upheld by federal courts across the country. See Santo’s Italian Café v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021); Dakota Girls LLC v. Philadelphia Ind. Ins. Co., No. 21-3245 (6th Cir. Nov. 5, 2021)(rejecting insured’s argument that endorsement does not require an outbreak of a communicable disease on the insured’s property); Paradigm Care & Enrichment Center LLC v. West Bend Mut. Ins. Co., No. 21-1695 (7th Cir. May 3, 2022)(communicable disease coverage did not apply because the State of Illinois shut-down orders were not specifically directed to any outbreak of COVID on the insured’s premises); First and Stewart Hotel Owner LLC v. Fireman’s Fund Ins. Co., No. 21-35637 (9th Cir. May 19, 2023); Northwell Health, Inc. v. Lexington Insurance Company, 21-1104 (S.D. N.Y. July 26, 2021); Coral LLC v. West Bend Mut. Ins. Co., No. 20-496 (W.D.N.C. April 13, 2021) ( “communicable disease provision makes clear that covered losses must result from a suspension of operations that took place ‘due to an outbreak of [e.g., COVID-19] at the insured premises’); Mohawk Gaming Enterprises v. Affiliated FM Ins. Co., No. 20-701 (W.D.N.Y. April 15, 2021)(no “communicable disease” coverage where no allegation of virus outbreak at the insured’s casino); Paradigm Care & Enrichment Center LLC v. West Bend Mut. Ins. Co., No. 20-720 (E.D. Wis. Mar. 26, 2021). Even if evidence exists of COVID outbreaks on the LGH premises, issues may arise on remand with respect to the extent which LGH can prove that certain expenses or business losses were incurred in response to these outbreaks.
Another significant issue on remand will be whether LGH can succeed in convincing the court that it may obtain many multiples of the policy’s $1 million limit for this Disease Contamination coverage by arguing that each individual case or outbreak of COVID should be treated as a separate “occurrence.” As contrasted with liability insurance policies, there is relatively little first party law on the question of whether or when first party policies should be consolidated as a single “occurrence” and whether the “cause” approach embraced by courts in liability coverage cases has any application to property insurance.
In Newmont Mines, Ltd. v. Hanover Ins. Co., 784 F.2d 127 (2d Cir. 1986), the U.S. Court of Appeals for the Second Circuit affirmed a New York jury’s finding that a property loss resulting from the collapse of separate sections of a roof on the insured’s “concentrator” building triggered two policy limits, despite the insurers’ contention that both losses resulted from the same “cause” (the accumulation of snow and ice on the roof). The court held that the jury had been properly instructed to find separate insured losses unless the losses were part of a single, continuous event. In particular, the Second Circuit emphasized the evidence at trial of the lack of any clear common “cause” such as the fact that the two collapse events had occurred at least 3 days (and perhaps as much as 17 days apart); that the damaged portions of the roof had been designed as independent structures; that the second collapse had not been caused by the first and that the collapse events had actually been of different sorts. See alsoU.E. Texas 1-Barrington Limited v. General Star Indemnity Company, No. 02-50028 (5th Cir. May 16, 2002) (rejecting argument that the installation of the overall piping system for the insured’s building complex that the single event which gave rise to the damage to the separate buildings).
Apart from the issue of whether a Massachusetts court would apply a liability policy’s “cause” approach to property policies, it will be difficult for LGH to produce evidence with respect to when COVID outbreaks took place at the hospital and how these outbreaks correlate with the claimed costs.
In short, while Continental Casualty would surely have preferred a complete victory, it is far from clear that the case will ultimately result in an order requiring it to pay for claims pursuant to this endorsement.