The US Judicial Panel on Multidistrict Litigation on August 12 denied certain plaintiffs’ motions to centralize lawsuits brought by businesses seeking insurance coverage for coronavirus (COVID-19) losses. In rejecting complete centralization, the panel ruled that there are “very few common questions of fact, which are outweighed by the substantial convenience and efficiency challenges posed by managing a litigation involving the entire insurance industry.” Here is what the ruling means for policyholders.

Hundreds of policyholders have filed suits across the United States seeking insurance coverage for losses related to the COVID-19 pandemic. A number of these plaintiffs also filed motions seeking the establishment of coordinated multidistrict litigation (MDL) in federal court to centralize the resolution of such coverage disputes. As discussed in our prior LawFlash on this issue, the efforts to establish an MDL for COVID-19-related business interruption coverage is neither apt nor desirable.

Rather, the most optimal recovery approach for many policyholders will be to initiate their own coverage litigation in an appropriate forum based on the applicable state law, the specific policy language, and other relevant factors. The recent decision of the US Judicial Panel on Multidistrict Litigation (JPML), declining to centralize all COVID-19 coverage actions into a single MDL, confirms the importance of a particularized analysis in coverage disputes.

IN RE: COVID-19 BUSINESS INTERRUPTION PROTECTION INSURANCE LITIGATION[1]

The JPML, a special body within the US federal court system that manages multidistrict litigation, determines whether civil actions pending in different federal district courts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings.

On August 12, the JPML issued an order denying certain plaintiffs’ motions to centralize lawsuits brought by businesses seeking insurance coverage for their COVID-19 losses. In rejecting the request for complete centralization, the seven-member JPML ruled that there are “very few common questions of fact, which are outweighed by the substantial convenience and efficiency challenges posed by managing a litigation involving the entire insurance industry.” However, the panel left open the possibility that centralization could still be appropriate for insurer-specific multidistrict litigation and requested further briefing on the issue by August 26.

The JPML considered two motions under 28 USC § 1407 to centralize pretrial proceedings in the litigation. In the first motion, plaintiffs in two Eastern District of Pennsylvania actions sought the centralization of 11 actions in that district. In the second motion, plaintiffs in seven actions pending in various districts sought the centralization of 15 actions in the Northern District of Illinois. Plaintiffs in these cases allege that the insurance policies provide coverage for business interruption losses caused by the COVID-19 pandemic and the related government orders suspending or severely curtailing operations of nonessential businesses.

The JPML concluded following a July 30 hearing that “the industry-wide centralization requested by movants will not serve the convenience of the parties and witnesses or further the just and efficient conduct of this litigation.” The JPML stated that the three alleged core common questions identified by the movants — “(1) do the various government closure orders trigger coverage under the policies; (2) what constitutes “physical loss or damage” to the property; and (3) do any exclusions (particularly those related to viruses) apply” — did not compel centralization because they “share only a superficial commonality.”

The JPML identified several additional variables that “will overwhelm any common factual questions,” including (1) the absence of a common defendant diminishing any chance for “common discovery” and (2) the challenge of grappling with “different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states.” Moreover, while the insurers may use standardized forms, “any form used by a given insurer will have been modified in a unique way.” For example, the JPML explained, “[w]hile the policy language for business income and civil authority coverages may be very similar among the policies, seemingly minor differences in policy language could have significant impact on the scope of coverage.”

The JPML also denied the regional and state-based MDLs proposals finding that, while smaller, “they still would involve multiple defendants with different policies, coverages, exclusions, and endorsements.”

By contrast, the JPML found the arguments for insurer-specific MDLs more persuasive and stated that, “[a]n insurer-specific MDL therefore could achieve the convenience and efficiency benefits envisioned by Section 1407.” An insurer-specific MDL is more likely to “involve insurance policies utilizing the same language, endorsements, and exclusions” creating the “significant possibility that the actions will share common discovery.” The JPML decided not to attempt to create an insurer-specific MDL on the present record. Instead, the JPML directed the Clerk of the Panel to issue orders with respect to actions naming four insurers or groups of related insurers (Certain Underwriters at Lloyd’s, London; Cincinnati Insurance Company; the Hartford insurers; and Society Insurance) and directing the parties to show cause why those actions should not be centralized. The panel will consider those matters at its next hearing session on September 24, 2020.

STUDIO 417, INC. V. THE CINCINNATI INSURANCE CO.[2]

A recent Missouri federal district court decision interpreting the “physical loss or damage” requirement in a first-party property policy is a critical example of why policyholders may find that the best approach is to initiate their own coverage litigation in an appropriate forum. In that case, a group of hair salons and restaurants brought suit claiming that their carrier wrongfully denied coverage for their COVID-19 losses resulting from various shutdowns. The insurer filed a motion to dismiss, asserting that the plaintiffs failed to allege that COVID-19 caused “direct physical loss” to property, as required to trigger coverage under the first-party insurance policy.

In denying the insurer’s motion, Judge Stephen Bough of the US District Court for the Western District of Missouri rejected the carrier’s narrow interpretation of “physical loss,” holding that the policies’ core requirement of direct physical loss or damage to property does not require an “actual, tangible, permanent, physical alteration.” Contrary to other recent trial court decisions in state courts in Michigan and the District of Columbia, for example, the Missouri federal court held that the carrier’s position conflated the terms “loss” and “damage,” despite the two terms having distinct meanings. Applying the dictionary definition of “loss,” the court held that the amended complaint sufficiently alleged a direct physical loss because they claimed the presence of COVID-19 on their premises hurt their operations.

As Judge Bough explained, “COVID-19 allegedly attached to and deprived plaintiffs of their property, making it ‘unsafe and unusable, resulting in direct physical loss to the premises and property.’” Based on these allegations, the amended complaint plausibly alleges a ‘direct physical loss’ based on ‘the plain and ordinary meaning of the phrase.’” Significantly, the Missouri federal district court also held that the businesses sufficiently alleged that civil authority coverage applies because the stay-at-home orders stemmed from the likely presence of COVID-19 at nearby properties.

Accordingly, as discussed in our prior LawFlash, policyholders with impacted insured locations in multiple states should consider presenting and pursuing their claims for recovery of COVID-19 related business interruption losses on an insured-by-insured location basis as different states’ laws, some more favorable than others, may be called upon to apply to such losses.

LOOKING FORWARD

The JPML’s August 12 order and the recent pro-policyholder Studio 417, Inc. decision under Missouri law and other recent pro-insurer decisions by trial courts in other states reflect the reality that policyholders, particularly those with insured properties in multiple states, should carefully consider the unique policy language and factual circumstances that may strengthen or weaken their coverage claims and should confer with experienced coverage counsel who can advise on various issues regarding maximizing the prospects of recovery, including the best timing and most appropriate forum for filing coverage litigation, if necessary.

Additionally, policyholders should be mindful of any statute of limitation dates for initiating coverage actions including such limitations specified in their insurance policies, which often require initiating an action within 12 months. Coverage counsel can provide advice and representation including with respect to the negotiation of and entry of tolling agreements to attempt to address such statute of limitations issues.

[1] In re: COVID-19 Business Interruption Protection Insurance Litigation, US Judicial Panel on Multidistrict Litigation, MDL No. 2942, Document 772, Filed 08/12/20

[2] Studio 417, Inc. v. The Cincinnati Insurance Company, 6:20-cv-03127-SRB (W.D. Mo.)

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