Luke Skywalker: “I won’t fail you. I am not afraid.”
Yoda: “You will be. You will be.” (“The Empire Strikes Back” – 1980)
By now it’s been well-established that 2020 has been a bit of a letdown. The process of “lawyering” has been turned upside down and has needed to be reimagined at the same time. We have gone from crowded courtrooms to buffering Zoom internet rooms. Our hands burn from too much sanitizer. Our dogs tend to bark at the worst times during conference calls. On the upside, however, it is a lot of fun to wear a mask into a bank.
So, in the age of COVID-19, why am I quoting Luke Skywalker and Yoda? We know that a Jedi uses the Force for knowledge and defense and never for attack. In the world of insurance, it is our colleagues on the plaintiffs’ side who pride themselves on being on the “attack” for the recovery of funds or damages. Absent of any federal protection from COVID-19 claims, my sources are telling me to rest assured that they are planning their litigation assault on business-interruption policies by unleashing squadrons of coverage actions.
For those who may have never been involved with lead paint claims, asbestos litigation, or any other toxic-tort matters, the same financially motivated factors are at play by plaintiffs’ counsel to create coverage under business-interruption polices. If you spend time talking to plaintiffs’ counsel, it quickly becomes evident that they view COVID-19-related claims—especially business-interruption claims, no matter the odds—as a delicious legal sirloin steak that is too tasty to pass up.
But policyholders are losing COVID-19 business-interruption claims, right? Not only are plaintiffs’ counsel losing these cases, but also they are being routed across the country, right? They are in full retreat, correct? Well, not exactly. If you are listening to the rebel outposts, you will hear that they are in full “regroup” mode with new cases to come.
We know the basic concepts when it comes to COVID-19/business-interruption coverage litigation. There is a myriad of complex articles by very accomplished practitioners that detail the full history of business-interruption coverage, the virus exclusion, the development of ISO forms, and all the coverage actions that have followed. Suffice it to say, this piece will not be one of them.
A New Hope
For our purposes, it is important to note that policy language excluding claims for the loss of business income due to the occurrence of a “virus” was developed due to the SARS outbreak back in 2006. At its root, the basic coverage principle is that business-interruption insurance is triggered by “direct physical loss or damage” to covered property under a subject policy. However, this coverage may be excluded if the “loss or damage” was caused “by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, and disease.” It also should be noted that not all policies contain the same precise coverage language and exclusions, which could account for different outcomes in future litigation.
If you tried to present this general policy language to plaintiffs’ counsel, however, they would probably say, “Yes, there are coverage hurdles to climb, but we are only one judicial decision away from cracking open a new line of financial recovery and legal fees.”
Upon further probing, plaintiffs’ counsel would say that the initial coverage lawsuits were brought by personal injury lawyers. “These attorneys,” they might say, “are not skilled in coverage matters and did not ‘tee up’ the coverage claims properly like us plaintiffs’ counsel coverage ‘masters’ would.” However, these so-called unskilled personal injury attorneys have done a tremendous service for plaintiffs’ counsel, as they now have seen and understand the legal mountain that they must scale in order to create coverage.
According to published reports, there are over 700 pending COVID-19-related business-interruption lawsuits in the U.S. It is not surprising that many of the outcomes have gone the insurers’ way. As recently as Aug. 13, 2020, a federal judge in Texas dismissed a business-interruption coverage lawsuit premised on a governmental shutdown of barbershops due to the coronavirus. In this Texas case, the court sympathized with barbershop owners, finding that the businesses certainly had suffered losses. However, the court concluded that there was no coverage due to “no direct physical loss [under the subject policy], and even if there were direct physical loss, the virus exclusion applies,” which would bar the claim.
Based on the forgoing, if you are a plaintiff’s counsel, you know that you must now clearly show “direct physical loss” to covered property and also overcome the virus exclusion. So how will you address these epic tasks in a coverage action? (C’mon you’re better than that.)
First, you bring action in the most unpredictable jurisdiction you can find that also has the most favorable state laws for policyholders. Second, you try to find weaker business-interruption policies that may contain language that can be exploited, and then try to push the bad decision as far as the state appellate courts will allow.
To be sure, this isn’t some Force prophecy subject to interpretation; this approach to litigation is on the horizon like the twin suns of Tatooine. On Aug. 12, 2020, a Missouri federal judge refused to dismiss a COVID-19-related business-interruption lawsuit on a motion to dismiss. While the court did not pass on the ultimate merits of the case, the judge found that the “presence of COVID-19” is not a “benign condition,” and also that the plaintiffs—a group of hair salons and restaurant owners—may claim that the virus attached to and damaged their property, rendering them “unsafe and unusable.” No matter how preliminary this decision may be, this result on the motion to dismiss was widely welcomed by the other side and served to create a disturbance in the Force.
Path to the Dark Side
Now that we have set up the parameters of legal issues, let’s look a little deeper into what we can anticipate from future coverage actions. Initially, it is critical to note that plaintiffs’ counsel are urging their clients to get policy determinations early on from an insurer. Once a proof of claim has been submitted, plaintiffs’ counsel are routinely anticipating denial letters, which they use to commence lawsuits in as many questionable venues as possible. Again, with plaintiffs’ attorneys, the prevailing view is that “bad law” is going to be created somewhere.
The first line of attack will be to break the legal connection regarding policy language concerning “direct physical loss.” For policyholders, the ultimate goal is to legally equate “physical loss” with businesses closing or business property being rendered unusable by the coronavirus. Plaintiffs’ attorneys will look to pre-pandemic decisions out of the federal courts, including the Federal District of New Jersey and the 3rd Circuit Court of Appeals, where this interpretation can arise and possibly be extended to this type of situation. There have been instances where asbestos, smoke, and ammonia discharges have been argued to bridge the gap to create direct physical loss and associated business interruption. Again, it is important to note that these arguments were made before the time of COVID-19. However, if plaintiffs’ counsel can change the argument to extend coverage from structural loss to a simple unusable condition of a business or business property, then they are half-way home.
The next hurdle is that pesky virus exclusion. Even though Yoda said there is no “try,” they are going to try and try again to declaw this policy condition. You will definitely hear that the virus exclusion is far too broad, illusory, and makes no sense. Are we talking about viruses or fungi? We know COVID-19 is no fungus. The vast majority of the written history of the virus exclusion relates to SARS, which did not become a pandemic in the U.S. So plaintiffs’ counsel will claim that the coronavirus creates a different factual situation; namely, a pandemic the likes of which we have not seen in the U.S. in 100 years.
Finally, you guessed it, plaintiffs’ counsel will say that COVID-19 should not be excluded due to overwhelming public policy concerns and fundamental fairness. Policies that have failed to be refined since the SARS outbreak simply could not contemplate to exclude an occurrence as widespread and devastating as this international pandemic, they’ll say.
How to Strike Back
The aforementioned describes the bumpy playing field for business-interruption policies written before the COVID-19 pandemic. Maybe plaintiffs’ attorneys do not have the cleanest plan to create coverage, but we all have read bad decisions that make us feel like we had been Jedi mind-tricked. The immediate future requires updated, specific policy language that excludes claims for COVID-19. If policy forms are not updated, then insurers will continue to face coverage litigation, no matter how shaky. Plaintiffs’ attorneys will “try” until they “do,” so prepare for incoming fire.