A special podcast from JAMS featuring Cassandra Franklin and Peter Woodin on navigating insurance disputes
Business interruption is on the minds of many, especially now as the COVID-19 pandemic has created unprecedented legal and business challenges.
In this new podcast from JAMS, two well-respected neutrals with extensive experience resolving insurance disputes discuss the current environment and what to expect in the coming months and years as more disputes come to the surface.
Moderator: [00:00:00] Welcome to a special podcast from JAMS. Today, we are going to be exploring an issue on the minds of so many in the business community: resolving business interruption disputes caused by the coronavirus. Our guests are two JAMS neutrals with decades of relevant experience, who are going to help us understand what to expect in the coming months and years as these disputes come to the surface.
Peter Woodin, who is joining us from New York, has been a mediator and arbitrator since 1993. He has served as settlement administrator, court appointed mediator, special master in class actions and other complex federal and state litigations. His mediation experience spans a wide range of claims, including those involving insurance coverage.
We also have Cassandra Franklin joining us from Los Angeles. Cassandra brings extensive experience on both the carrier and policyholder sides of complex insurance coverage matters. Prior to joining JAMS, Cassandra served for almost six years as managing attorney claims coverage counsel at Allianz Global Corporate and Specialty Environments Fund Insurance Company. Before joining Allianz, she spent almost 14 years representing policyholders in diverse lines of business.
So, thank you both for joining us. Let's just dive right in. Peter, I'll start with you. Even though it feels like a lifetime, it’s still early into the pandemic. What types of claims or questions around claims are you seeing come in at this stage?
Peter Woodin: [00:01:34] Well, as you said, it’s very early in the process and we are going to be seeing all sorts of claims ultimately, but at the present time, the major focus has been on business interruption claims, and those claims arise out of the fact that businesses have been ordered to shut down, or had to shut down for a health or safety concerns, or patrons have stayed away. And the issue of course is the losses, which have been catastrophic and immediate. It is not surprising that in those situations, businesses from major corporations, to small mom and pop stores, have turned to their insurance policies to see whether or not there is any kind of compensation that can be had under the policies from their insurers.
The principle claims that are making the news these days are claims involving business interruption. Namely the claim that arises from a loss of revenue for having to have shut down or close one's doors. We see claims of that nature also, and in the context of civil authority insurance, in which there is coverage under certain circumstances, when a civil authority ordered the closure of businesses.
There are contingent business interruption claims, which is where a manufacturing company, restaurant or other business cannot obtain the supplies necessary from its suppliers. And so therefore it's just simply unable to function. Cassandra, what else have we been seeing?
Cassandra Franklin: [00:03:00] There really has been, as you put it the other day, a tsunami of business interruption claims, but also of event cancellation claims.
As has been also widely reported in the news, events, large and small, have been canceled worldwide. So, for example, the Summer Olympics were canceled and rescheduled, but canceled for the first time since World War II. And Broadway is essentially shuttered. Originally, that was to last until May 12th. It's now been continued until September 6th.
So, these situations have given rise to a host of claims under event cancellation policies. The real issue here is that with all of these coverages, in particular some of those you mentioned, as well as the event cancellation policies, they're fraught with a great deal of uncertainty regarding coverage.
And for example, I just want to start with some of the coverage grants under business interruption, and in that area, the business interruption coverage is appended to commercial property policies in general, for these large business shutdowns. And those policies require direct physical loss - that's in quotations - in order to trigger coverage. There's a big question as to whether the virus will be considered direct physical loss. There are cases, not in virus situations, but in similar situations, where there's some sort of fumes or even E. coli bacteria invading a property that renders it uninhabitable or unusable. And in those circumstances across the 50 states, courts have really come down on both sides of the issue. Sometimes finding coverage, sometimes not.
Peter, what would be some of the major exclusions, if you could address those?
Peter Woodin: [00:05:07] Sure. The tension here is quite interesting because of the view--of many I think--that direct physical loss requires something more than the presence of a contaminant, such as a virus.". That it requires actual damage to the property itself and that the presence of something that otherwise doesn't harm the property does not really meet the coverage requirement. In terms of exclusions, it's not unusual that there are various types of exclusions to the scope of the coverage granted under the property insurance policies. The exclusions will typically be for pollutants or contaminants. Sometimes there is no further definition of what is intended. And, of course, the argument arises as to whether or not a virus - the presence of a virus - is a contaminant or pollutant, since insurers have taken the position, in some cases, historically that pollutants and contaminants arise from manufacturing or other activities and are contaminants created by operations of business, rather than a natural presence of a virus.
There are also exclusions that specifically name viruses and bacteria as losses arising from the presence of those items as vitiating or preventing or barring coverage. Conversely, there are policies that make explicit the fact that coverage is intended to be provided for viruses and bacteria. For instance, the Wimbledon tennis tournament, it's reported, has a policy that provided specifically for the compensation, for the loss of business in the event that Wimbledon had to be canceled for disease or virus.
So that's an example of the converse one, in fact, there's this specific grant of coverage or an exception to the exclusion in that case.
Moderator: [00:06:52] Okay. So, a lot of legal issues to be decided. Peter, where are you anticipating an increase in claims?
Peter Woodin: [00:07:00] Well, the first way, so to speak has been the business interruption and civil authority claims, but we're also starting to see some signs of some of the other more complex types of coverages, business coverages in particular, coming to the fore, and that may increase over time. An early example is a shareholder derivative action that's been brought against Norwegian Cruise Lines. In that case, the allegations are that senior management provided inaccurate or false or misleading information to customers and the public at large about the dangers posed by the virus and the ability of the Norwegian Cruise Lines to maintain the health and safety of its passengers. There's speculation that claims under directors’ and officers’ policies for the errors of senior management will grow under arguments, such as that name senior management was derelict in taking the appropriate steps in the face of the virus.
Moderator: [00:07:57] And Cassandra?
Cassandra Franklin: [00:07:58] I really think that there's going to be, or we're hearing that there's going to be an explosion of EPL claims. What that stands for is employment practices liability. There is insurance coverage under our policies, specifically issued to cover those types of claims. But of course, they too contain a number of exclusions and, of course, you have to fit within the coverage and also not fall within one of the exclusions in order to obtain coverage.
But the types of claims that we expect to see are, for example, retaliation based on negative reactions to those who wish to stay at home. They might file a claim that they were retaliated against because they expressed that desire. And things like quarantining because of travel. There could be allegations of harassment, career deprivation, et cetera. These are the types of EPL claims that we're sort of starting to see bubble up within the insurance arena. Then also we're really expecting a number of cyber claims because there's been so much nefarious cyber activity. We've all read about it in the news. For example, coronavirus or COVID-19 being used in an email in order to lure some unsuspecting reader into opening malware or ransomware. And of course, that story is very much south after that.
Moderator: [00:09:32] With so much at stake in these disputes, how do you think parties will approach these claims? Peter, I'll start with you.
Peter Woodin: [00:09:39] Well, on the policyholders’ side, the businesses and individuals, the loss is catastrophic and it's immediate.
So it's not surprising at all that the claims are pouring in and that insurers are being inundated with claims and the obligations to respond to the claims. In that sense, how are parties reacting? Well, those who are suffering the losses are moving forward in filing their claims and beginning lawsuits against the insurers in instances where the insurers have denied the claims.
Cassandra Franklin: [00:10:10] Peter is absolutely right.
You know, the situation with coronavirus really presents something of an existential threat as one commentator put it, to potentially both policyholders and insurers alike because of the catastrophic nature and the immediate need that Peter referred to. Policyholders are really filing claims at an unprecedented rate and insurers as they are bound to do, they are trying to look at these claims, trying to handle them in the way that they are trained to do. They have to look at the policy language, look at the circumstances of the claim, but as we've already alluded to, these claims present some pretty complex coverage issues with the answers varying even state to state in some instances.
And then even if you get beyond the coverage point, at least with these business interruption and event cancellation claims, the valuation issues can be extremely complex. The bottom line for insurers is that they are busier than they've ever been. There's just a tsunami of claims, as we said earlier, and they are basically trying to handle them as best they can, but it's an inundation.
Moderator: [00:11:33] And so what factors could cause parties to come to the negotiating table sooner rather than later? Cassandra?
Cassandra Franklin: [00:11:40] Well, I think the very factors that we just alluded to on the side of the carriers, there's tremendous pressure, not just from these claims, but also from because already there are hundreds of lawsuits filed across the country for business interruption and other types of claims. Then the predictions are that there will be thousands of these lawsuits, even just over the time element insurance coverage claims. And that'll be in both state and federal courts. So handling all of those claims and lawsuits and dealing with them is going to be really, very time consuming. And it'll take up a lot of the company's resources again on both sides of the V, but also given the very heavily impacted court systems.
I'll give an example. Here in Los Angeles, our courts have been closed. They were just opened last Friday, and initially most of the energy is going to be focused on handling emergency matters, maybe some complex matters, and then additionally criminal matters. That's going to be the bulk of it. And I suspect that's true in many areas across the country. So getting these insurance coverage claims, complex as they may be, before the courts for resolution is going to be extremely difficult and both sides have an interest in getting these claims resolved.
Moderator: [00:13:10] And Peter, what's your view? What factors do you see causing parties to come to the negotiating table?
Peter Woodin: [00:13:15] Well, of course on the policyholder side, as we've already mentioned, is just the dramatic need that companies are struggling to survive and they need to try and recover on their policies as quickly as possible.
So that's bringing the policyholders to the table, because I think they are willing to work with the insurers to try and resolve the claims. On the insurers side, the pressures are already enormous and will only be continuing. And those pressures come from the court. As Cassandra has already described, the courts are always willing, sooner or later, to step in and try and move cases towards resolution.
Also, there's a tremendous pressure being put on the insurers in the media, by the legislatures and politically. Legislation has been proposed that would alter the obligations of insurers under the policies to cover claims of loss arising from the coronavirus. Those have been floated in a number of jurisdictions.
Commentators have, for the most part, found those to be very problematic from simply a constitutional perspective as to whether or not constitutionally the government can step in and try and reorder private contractual responsibilities. The civil authority orders that have been issued have sometimes included language that could appear to emphasize the nature of property damage or physical damage as a basis, in part, at least for the orders, which would seem to create a presumption that the presence of coronavirus is a form of property damage. So, there are pressures, legislatively and politically, and those pressures are going to move them very strongly towards an effort to try and get claims resolved.
Because, of course, also that's the inherent obligation on the part of insurers to be responsive to the policyholders and try and manage the claims and cover those claims that are covered as promptly as possible.
Moderator: [00:15:10] And Peter, you have a lot of experience working with courts to resolve high volume of claims. How might that work in this situation?
Peter Woodin: [00:15:18] A mechanism that comes immediately to mind given the vast numbers of claims is some way to try and gather them together. There are vehicles in both state and federal court that can be used and have been used in many instances to accomplish exactly that purpose. In the federal courts, the multidistrict litigation provisions allow federal cases to be consolidated in one particular federal court for uniform treatment, at least for the purposes of moving forward in discovery and settlement negotiations. The vehicle of class actions are commonly utilized, and in fact, class actions have been filed already in court in an effort to get rulings on particular policy issues in a particular insurer's standard form policies. There are other mechanisms for aggregation that have been utilized in asbestos, for instance, in state courts to gather all the asbestos cases in a jurisdiction in front of one judge for more efficient treatment. Sooner or later, the courts begin to think of resolution, and again, will set up programs that can assist in the resolution of cases in a more comprehensive and efficient way.
Moderator: [00:16:29] Cassandra, how would the insurance industry respond to proposals aggregating these claims?
Cassandra Franklin: [00:16:35] Well, I think at this point, it really depends. At this point, I think the industry is uniformly, fairly uniformly, opposed to bundling the claims in, for example, a massive multidistrict litigation. On the ground that, as we've referred to earlier, with these policies, different states have different resolutions of even the same policy language.
And it's worth noting that all these types of policies have a wide variety of language. So, for example, one event cancellation policy is not necessarily going to say the same thing in its coverage grant as another. And similarly, as Peter pointed out earlier, the exclusions will be worded differently. Also they may contain endorsements that change them and actually grant the coverage with a lower limit, for example, what's known as a sub limit. So an issue really is that there are so many disparate questions and there's so much disparate language that I think the insurance industry is concerned that if it's all lumped together, that the basic principle of proper contract interpretation, which is to read the language of the policy or the contract and try to ascertain what the parties intended based on that language, will get lost, because if you're putting together too many disparate types of languages and treating them as the same, then you're basically rewriting some of the policies.
And that's something that courts across the country have said they are not willing to do even in insurance coverage. I think that the insurance industry is uniformly opposed to that kind of consolidation. On the other hand, I'm not so sure that the industry would be opposed to consolidation of certain types of issues in the sense that, as Peter pointed out, once these threshold issues with regard to particular phrases and language in policies are decided in a jurisdiction, then you can go ahead and consolidate the policies and claims with that particular language and have those resolved based on the claims before the court. There's one more factor that I'd like to point out, and that is that once you find coverage, you've got these valuation issues. So assuming that for example, the courts found that there was coverage in a particular area ,or based on particular policy language, and the absence of a particular type of exclusion. Then those types of claims under those particular policies could pretty readily be aggregated for valuation purposes.
And so that as well is a time when I think insurers would be at least open to considering ways to streamline the process and save everybody the costs and expense of wildly disparate claims and results across the country.
Moderator: [00:19:47] And, Peter, in light of the urgency and magnitude of these claims, do you see a path for insurers to move forward proactively?
Peter Woodin: [00:19:55] Yes. In the sense that insurers have, in the past, done exactly that with respect to hurricanes. For instance, I know that insurers, at least some, set up on their own initiative, claims resolution programs voluntarily in the sense that claimants were not required to participate in them, but programs in which claims were looked at again by new adjusters. If there was continuing disagreement with the policyholder, a mediation option was available with a third-party neutral. And even, if both parties agreed, an arbitration option to just move the claims to resolution much more quickly.
I want to circle back though to one way that the courts might work in the aggregation process, and that is, to pull from my own experience, the treatment of insurance claims arising out of Superstorm Sandy here in New York City. Thousands of those claims ended up in federal court in Brooklyn and the court created a Sandy Claim Mediation Program. I participated in getting it up and going and training mediators for that program, and under that program, the claims were sent through the mediation program for resolution, if possible. And it had a fair degree of success. Ultimately, I think two-thirds of the claims that went through the program got resolved. So once the court had given preliminary indications of certain kinds of issues that had been an obstacle to resolution, the claims could be more easily dealt with from a resolution perspective. And so that's an example of how a court can aggregate claims and expedite the resolution and use an ADR component to do so.
In terms of further steps that could be taken, the problem for the insurers arises just again from the magnitude already of never-encountered-claims coming in this quickly, of this magnitude, and just a simple difficulty of getting personnel to do the work that needs to be done is an obstacle. But there are, as I just said, vehicles available and the creation of claims resolution programs is one such example .
Moderator: [00:22:02] Cassandra, can you lay out why ADR is a good option to help businesses resolve these disputes?
Cassandra Franklin: [00:22:07] Well, I think Peter has just pointed out an excellent way that courts can sort of funnel these types of claims once they've resolved certain threshold issues, funnel these types of claims through the mediation process. And in that circumstance, the courts are basically trying to weed out claims from their dockets, so that only those that are truly live disputes proceed forward. And to try to bring the parties together with mediators who are trained or arbitrators, in some circumstances, who are trained to deal with these issues. And I think ADR really looks at instead, unless it's ordered by the court, it looks at the parties coming together voluntarily to try to resolve their dispute.
And just as in every other area where mediation or arbitration or some combination thereof is used, ADR tends to be far more efficient at resolving disputes. It allows the parties far greater control, and it also can give them a level of creativity, in terms of crafting dispute resolutions, that the courts would not necessarily be able to order.
Additionally, a real plus in this area is that both parties can select a mediator who not only has experience and training in mediation, or arbitration in the case of an arbitrator, but also has experience and training in the particular area, i.e. insurance coverage. And the benefit of that is that both at the coverage phase, and, should it proceed to that phase, at the valuation phase, that level of experience provides the parties with something that they would not necessarily get in court where, you know, judges are by nature, generalists, very bright, very talented, in most instances, but they don't have that deep level of experience, necessarily, in any particular area.
And when you add to that, the fact that the court systems are already overwhelmed with a backlog and claims are going to be coming in with more and more force and frequency, I think you've really got the benefit of that efficiency factor front and center. So really for all these reasons, I think that ADR provides an excellent vehicle for resolving these disputes. Should the parties wish to come together and voluntarily work together to create a dispute resolution mechanism that works well for both of them.
Moderator: [00:24:47] And Peter, how do you make good on the promise to resolve these claims quickly and efficiently? What are some of the best practices to follow?
Peter Woodin: [00:24:54] As we look at the landscape before us, clearly a best practice is to continue the ability to provide the mediation and arbitration mechanisms that we've always provided. And in these days that is to work remotely. JAMS transitioned very quickly into an entirely remote environment in which all mediations and arbitrations that are being conducted for the last two months have been conducted remotely.
We have for the most part used the Zoom platform, but others as well, Microsoft Teams, Blue Jeans, some of the others. We've had great success with it. And the experiences of both neutrals and participants has been, although many were skeptical at first, have experienced the power of the remote platform to deliver an experience that in most ways, very effectively replicates what's available in the in-person environment.
So while I think the preference will always be to provide the in-person experience, at least these days, the best practice is, a remote vehicle that allows the parties to continue their efforts to resolve disputes.
Moderator: [00:26:09] Okay, well, let's end it on this question. I want both of you to look into your crystal ball and tell me, how do you anticipate the pandemic will shape dispute resolution in the future. Peter?
Peter Woodin: [00:26:20] Well, I think first of all, now that people have dipped their toe in the water for remotely conducted mediations and arbitrations, they will realize that for many kinds of disputes, it's really the preferred alternative. I say that in disputes that involve many parties, scattered across the country and internationally, I've actually conducted some remote mediations with 25, 30 parties and the attorneys participating and the savings in expense and time for everyone is enormous.
No one is carving out three days from a busy calendar to come to New York, to sit with me for a day. The first day being for travel, the second day for mediation, and the third day for return travel. The expenses of course, are de minimis. Folks are sitting in their own offices or their own homes these days, and during the mediation day, when they are not engaged with the mediator or other parties, they can continue to get work done as they would any other day. So the savings of time and expense will, I think, tip the balance in either multi-party cases or in cases that don't warrant the expense in terms of the magnitude at issue in the dispute of traveling to New York and sitting down in person. Of course, I think that the preference will always remain for in-person mediation, but as I say, I think we're going to see in the future, a continuing use of the remote platforms in certain kinds of cases.
Moderator: [00:27:50] And Cassandra, what do you think?
Cassandra Franklin: [00:27:52] Well, I'm going to beg to differ very slightly. I'm not so sure that some people and some entities will not actually prefer virtual proceedings. And I think that for many of the reasons that Peter has mentioned, but I think there are also some intangibles about the way people relate with each other in virtual proceedings.
Particularly in mediations, you may not be able to see some of the body language in quite the same way, but you see much of it. Indeed, I think most of it. And the way that the parties behave in a virtual setting is sometimes a little bit more nuanced in the sense that it's perhaps a bit more restrained.
They may be a little more cordial with each other. And again, this may be just that it's at the inception of virtual proceedings and everybody's a little bit hesitant because we're all getting used to this new world, but I think virtual is here to stay. And it may be, in the context of mediations, where there are some in person, for example, if there were a mediation here in Los Angeles and some of the parties were based here, but some of the insurance representatives were in New York, and they didn't want to encumber themselves with the travel and expense of coming out here, they would readily be able to participate virtually. And so you'd have some people in person, some people virtually, and I really think that we're going to have kind of a, whatever works best in the particular circumstances, a real flexibility in offering procedural solutions, if you will, both virtual and in person, for all disputants to who want to use ADR going forward.
Moderator: [00:29:45] Well, I want to thank both of you for joining us for this fascinating conversation. I know we could keep going on, but we'll just end it there. So thank you very much.
Peter Woodin: [00:29:52] Thank you.
Cassandra Franklin: [00:29:52] Thank you. My pleasure.
Moderator: [00:29:54] You've been listening to a special podcast from JAMS, the world's largest private alternative dispute resolution provider. Our guests have been JAMS neutrals Peter Woodin and Cassandra Franklin.