The issuance of various governmental orders requiring businesses to temporarily modify or close their operations during the COVID-19 pandemic led to an immediate avalanche of claims and lawsuits involving first-party commercial property policies. Suits relating to the pandemic have also involved, to a lesser extent, event cancellation policies, general liability policies, directors and officers liability policies, and other types of insurance policies. As resulting litigation and activity regarding these other policy types has been limited, the focus here will be on first-party commercial policies.
This article examines the current state of COVID-19 coverage litigation in the United States, where insurers have taken a commanding lead over policyholders. To date, trial court rulings have heavily favored insurers, and insurers have prevailed in the vast majority of appellate court decisions.
Legislation To Address COVID-19 Coverage Issues Has Been Proposed, But Not Enacted
Legislation has been proposed at the federal level that would establish a federal backstop for business interruption and event cancellation losses resulting from a future pandemic or public health emergency. Another bill would have had features similar to the Terrorism Risk Insurance Act. The Business Interruption Relief Act of 2020 would have reimbursed insurers that voluntarily paid COVID-19 business interruption claims under policies that include coverage for civil authority shutdowns, but exclude virus-related loss. These bills have not been enacted.
Perhaps more problematic for insurers were the legislative proposals in several states. Some of these proposals would have, by legislative fiat, retroactively required insurers to provide business interruption insurance under policies that expressly exclude coverage for virus claims and/or that do not apply due to lack of direct physical loss. These proposals would have faced substantial legal challenges if enacted, but to date no such proposals have become law. Accordingly, legislative declarations have not trumped insurance contract language agreed to by the contracting parties.
COVID-19 Coverage Claims Are Proceeding As Individual Cases In The United States
In contrast to England, COVID-19 coverage issues are being resolved in individual cases in the United States. On August 12, 2020, the United States Judicial Panel on Multidistrict Litigation denied motions to centralize nearly 300 COVID-19 related business interruption coverage actions filed against over 100 insurers in various district courts across the country, including in the Northern District of Illinois and in the Eastern District of Pennsylvania. The panel concluded that an industry-wide multidistrict litigation (“MDL”) in this instance will not promote a quick resolution of these matters as the substantial convenience and efficiency challenges posed by managing a litigation involving the entire insurance industry outweighs the limited number of common questions. The Panel also declined to create regional and state-based MDLs. Though there has not been mass consolidation or global resolution, courts generally have resolved COVID-19 coverage cases expeditiously.
An Avalanche Of COVID-19 Coverage Cases Filed Across The United States In A Compressed Time Period
According to the University of Pennsylvania Carey School of Law Covid Coverage Litigation Tracker, as of the end of May 2022, there were approximately 2,301 COVID-19 coverage cases filed in state and federal courts across the United States. The pace of new filings had slowed until a slight uptick in the first part of 2022, as the two-year contractual limitations period for filing suit under many first-party policies approached.
The Covid Coverage Litigation Tracker breaks down the coverage claims as follows: 2,091 involve business interruption; 1,893 involve extra expense; 1,801 involve civil authority; 245 involve ingress/egress; 123 involve contamination; 96 involve event cancellation; 91 involve sue and labor; 41 involve premium relief; 22 involve liability; and 229 are characterized as “other.” Approximately 474 cases have been filed as putative class actions and 824 cases include allegations of bad faith.
The Covid Coverage Litigation Tracker also reports that the top industries involved in the litigation by case number are: food and drink (750); ambulatory health care (273); accommodation (151); personal and laundry services (121); amusement, gambling, and recreation (115); real estate (106); professional, scientific, and technical services (82); clothing and accessories (78); performing arts and spectator sports (73); educational services (41); and hospitals (41).
Insurers Have Racked Up Victories In The Majority Of Decisions On Motions To Dismiss, Motions For Summary Judgment, And Have Prevailed In The First Two Trials
At the trial court level, through the end of April 2022, insurers have prevailed in more than 79 percent of the 203 rulings on motions to dismiss in state courts across the country and in more than 95 percent of the 638 rulings in federal courts. These victories have been predominately obtained on the following grounds: (1) the virus claims do not involve “direct physical loss or damage” to property as required by the language contained in most U.S. first-party policies; (2) governmental orders do not constitute loss of property; and (3) virus or other exclusions preclude coverage. Insurers have prevailed in approximately 63 summary judgment rulings (with partial summary judgment granted to insurers in another 14 cases), while policyholders have prevailed in whole or in part in just 11. Insurers have also prevailed in the first bench trial and in the first COVID-19 jury trial. While policyholders have voluntarily dismissed many suits, many more cases remain pending. The score card is subject to daily change, but insurers have, for the most part, continued to obtain favorable rulings.
Insurers Hold A Commanding Lead In Appellate Court Level Decisions
Until mid-June 2022, insurers had prevailed in every appellate court decision on COVID-19 coverage issues rendered on the merits by both federal and state court. Insurers had run the table in each of the decisions rendered by the United States Circuit Courts of Appeal so far, with the First, Second, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Eleventh Circuits having ruled for insurers under the laws of multiple states. Although the Third Circuit has not rendered any rulings, there are numerous appeals on its docket.
After federal courts began rendering decisions in favor of insurers on COVID-19 coverage issues, policyholder advocates complained that the issues were matters of state contract law that should be decided by state appellate courts. Such sophistry was nothing more than an attempt by policyholder advocates to deprive insurers of a federal forum for resolving coverage disputes. Federal court judges obviously are capable of readily ascertaining and applying state contract law, are frequently called upon to do so, and are vested with diversity jurisdiction to decide such matters. Not surprisingly, federal courts largely have declined to defer or delay resolving appeals on their dockets and, instead, have simply proceeded to resolve the COVID-19 coverage cases before them promptly. Occasionally, a case has been stayed. For example, the Ninth Circuit recently stayed a case pending a decision in a case before the Washington Supreme Court. Washington is one state where policyholders are hoping to obtain better results.
Many state appellate courts have yet to render decisions. Early results suggest that policyholder appeals of COVID-19 coverage rulings will not fare significantly better before state appellate courts, as policyholders they have lost the first 20 plus state appellate court COVID-19 coverage decisions. To date, the high courts in Iowa, Massachusetts, and Wisconsin have rendered COVID-19 coverage decisions in favor of insurers. Intermediate appellate courts in California, Florida, Illinois, Indiana, Maryland, Michigan, New York, and Ohio have rendered decisions in favor of insurers. Policyholders secured their first appellate court win in a COVID-19 coverage decision on June 15, 2022. This case, decided by the Louisiana Court of Appeal, was accompanied by two dissents. In light of these dissents and the perhaps somewhat questionable reasoning in the decision, many believe the case may be headed to the Louisiana Supreme Court for reversal.
Additionally, in another recent case, a policyholder was able to secure an affirmance of a trial court’s denial of a motion to dismiss on its contingent business interruption clams under a Pollution Legal Liability Policy, where the insurer acknowledged that COVID-19 constitutes a “pollution incident” as defined by the policy and the insurer failed to establish at the motion to dismiss stage that contingent business interruption was only available where the policyholder was denied complete access to its property.
The COVID-19 Coverage Wars Will Wage On For Some Time
A limited number of policies may afford some coverage for the COVID-19 business interruption cases. However, where any coverage is afforded it is usually quite limited in scope and often subject to low limits of liability and/or sub-limits.
Notably, the litigation realities have caused some policyholders to voluntarily dismiss their claims. Yet, given the high stakes, many policyholders will continue to pursue coverage for their COVID-19 losses notwithstanding their disappointment in the results. Indeed, there is a long way to go in the COVID-19 coverage wars, as many appeals remain pending. There are over 160 appeals pending in federal court and at least 65 pending in state court. Many cases are still pending at the trial court level.
It is difficult to state the number of policies containing virus exclusions. An analysis of the policies subject to rulings on motion practice suggests approximately 65% contain exclusions. We suspect very few commercial first-party policies issued after the pandemic were issued without virus exclusions.
No one expected that insurers would remain essentially undefeated in COVID-19 coverage actions at the appellate court level. Some policyholder advocates are claiming that the tide has turned with the single Louisiana Court of Appeals decision, Still, at this junction, it seems fair to say that policyholders are beginning to run out of arguments as well as jurisdictions with respect to first-party COVID-19 business interruption coverage claims.