It goes without saying that 2020 has been filled with substantial change, rampant uncertainty, and unexpected challenges for nearly every one of our clients and friends. Like all of you, our firm has seen first-hand the wide-ranging effects of the COVID-19 pandemic on businesses. Together with the movement to fight social injustice and the impact of the presidential election, 2020 will unquestionably have a lasting and historic effect on our economy, in both the short and long-term.
The insurance market, likewise, has not been immune to the “new normal.” Insurers and policyholders affected by the pandemic have been litigating throughout the year over whether there is insurance coverage when an entire economy shuts down. Amanda M. Leffler, in her article Insurance Coverage for Losses and Claims Arising from COVID-19, discusses these cases and the prospect for policyholders recovering under their property, liability, and other policies.
We expect that many of these issues will be resolved in 2021 at the earliest. This uncertainty is just one of the factors contributing to a hardening insurance market. In her article What to Expect When you are Renewing, Stacy RC Berliner addresses these changes in the market and shares practical tips for your next renewal.
Meagan L. Moore, in her article Contaminants of Emerging Concern and Insurance Coverage, addresses an issue that will become potentially more prominent in a Democratic administration. She discusses coverage for environmental liabilities arising out of historically unregulated constituents not previously classified as hazardous under federal or state laws.
Of course, even in times of change, some things are constant. And, in 2020, like in other years, insurance claims, particularly large insurance claims, were denied with some frequency without evident or appropriate regard by insurers for their merit. In articles written by Andrew W. Miller, P. Wesley Lambert, Jodi Spencer Johnson, Lucas M. Blower, and Paul A. Rose, we discuss significant decisions rendered by courts—both in Ohio and nationally—where policyholders have prevailed against insurers that have wrongfully denied valid claims.
As we look forward to the next year, we expect that many of these issues will continue to arise in disputes between insurers and their policyholders. The attorneys at Brouse McDowell, as always, are committed to both informing and protecting policyholders in Ohio and throughout the nation.
It is our sincere hope that you find this newsletter useful.
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Insurance Coverage for Losses and Claims Arising From COVID-19
Amanda M. Leffler
COVID-19 has impacted nearly every aspect of our lives, resulting in catastrophic losses and prospective liability for businesses of every size across the globe. Over the past nine months, our firm has counseled clients, brokers, and friends, helping them navigate the complex world of insurance to answer the question keeping them up at night: is my business going to be covered for all of this?
As with nearly any insurance claim, the answer to that simple question depends on the specific language of your insurance policy and the unique facts applicable to your claim. Some trends have developed since the pandemic began, however, and new issues continue to emerge as employees head back to the office and stakeholders consider ways to recoup their own losses. These trends and issues are discussed below.
Business Interruption Insurance
By this point, nearly everyone has heard of business interruption insurance—the first-party coverage that is provided with some, but not all, property policies. This insurance is designed to indemnify the insured for lost profits when its business is unable to operate as a result of an unforeseen event. When the pandemic forced countless businesses to close their doors or severely restrict their operations, numerous insureds turned to their insurers for relief. In virtually every case, though, the insurers denied these claims.
Insurers identified several bases for their denials: (1) that the policy only covers damage to, or destruction of property, which doesn’t exist in the context of coronavirus claims; (2) that, even if property damage exists, it didn’t cause the insured’s loss of income (i.e., the insured didn’t close because of property damage, but to limit the spread of the virus); and (3) that viral/bacterial exclusions preclude coverage in any event. In response, thousands of insureds in nearly every state filed lawsuits against the insurers. The insureds noted that there are multiple cases which have found coverage under similar circumstances, i.e., cases where courts have held that property can sustain “physical damage” even if it hasn’t suffered “structural alteration.”
Only a handful of these cases have been decided. While most cases remain pending, several trial courts have dismissed claims, generally on the grounds that the insured failed to plead that it suffered any “direct loss or damage” to the insured premises. These dismissals have made one thing clear—hiring experienced insurance counsel is critical. Many sophisticated insurance commentators agree that at least some of these cases would not have been dismissed if they had been pled to more clearly fall within the coverage of the policy. Of course, these cases are subject to appeal and, more recently, we’ve seen a handful of trial courts affirmatively deny insurers’ attempts to avoid their coverage obligations for business income losses. Simply put, we are quite early in the development of the case law on coverage for COVID-19 losses, and whether there will generally be coverage for these losses remains undecided in every jurisdiction.
In addition to the litigation, we have also seen numerous states, and even Congress, begin to consider legislation that would address the catastrophic losses suffered by businesses. Some states have proposed laws that would retroactively invalidate viral exclusions that are found in many (but not all) policies. Some have proposed laws that would require the phrase “physical loss or damage” to be construed in a manner that would require coverage. Most have limited their application only to businesses with one hundred or less employees. And the federal government has begun to consider a federally-backed insurance program for future pandemics, similar to flood or terrorism insurance.
Insurers, for their part, have asserted that any attempt to retroactively modify existing policies would result in constitutional challenges and yet more litigation. As of the date of this article, no such legislation has been passed and its future is, again, uncertain.
Other First-Party Coverages
Communicable Disease. Some insureds carry Communicable Disease coverage, usually written as an additional coverage or endorsement on their property policy. This coverage generally applies where there has been an order of a public health authority (or in some policies, direct loss or damage) that requires an insured location to be evacuated, decontaminated, or disinfected due to an outbreak of a disease or virus. It covers both the cost of any decontamination and, often, business interruption losses as well, though usually both coverages are subject to significantly lower sub-limits. While at first blush, Communicable Disease coverage would clearly seem to apply to COVID-19 losses, and some claims have indeed been paid, insurers have been denying other claims where the insured has not demonstrated an actual outbreak at their premises. Insureds contend that the virus was, in fact, everywhere where people congregated—a fact confirmed by state governors when they passed stay-at-home orders, and even by the Pennsylvania Supreme Court in upholding that state’s order.
Event Cancellation. Insureds with Event Cancellation insurance also sought coverage for pandemic-related cancellations of sporting events, concerts, and more. These policies generally cover at least some lost revenues and out-of-pocket expenses, and may include communicable diseases or pandemics as covered causes of loss. However, some insurers have denied claims on the grounds that coverage is not triggered if an organizer cancelled an event merely due to fear of the virus in the community.
Pollution. Pollution policies provide coverage for clean-up costs and, sometimes, business interruption losses when there has been a pollution event. While policy wording varies, a pollution event may include the dispersal or discharge of a virus, rendering an insurer responsible for resulting losses. Even when acknowledging a pollution event, however, some insurers have denied COVID-19-related claims on the basis that the losses were not related to the discharge of pollutants (i.e., the virus), but rather the result of governmental shut-downs that were prophylactic in nature.
Third-Party, Liability Coverages
General Liability. As restrictive governmental orders were lifted, allowing businesses to reopen, many questioned their liability exposure if customers, vendors, or others were to become infected. Early in the pandemic, Princess Cruise Lines was sued for failing to take precautions to prevent an outbreak after two passengers on the previous sailing ship reported symptoms. Generally though, we have not yet seen an avalanche of customer claims. In part, this may be because it would be extraordinarily difficult to prove that someone became infected at a particular location, a necessary element of any negligence case. Further, some states, such as Ohio, have enacted laws to shield organizations from liability except in extreme circumstances.
To the extent such claims are made, however, coverage prospects appear quite good—at least for policies issued before the pandemic that don’t contain a viral or communicable disease exclusion. General liability policies cover an insured’s legal liability for damages arising from bodily injury, so long as it was caused by an accident. While insurers may argue standard-form pollution exclusions preclude coverage for viral injuries, there is little in the policy language or its history of development that would support that argument. That said, insurers are more likely to insist on the inclusion of communicable disease or viral exclusions for policy renewals going forward.
Directors & Officers Insurance. Shareholders may bring lawsuits where the actions or inaction of a company’s directors and officers have caused the company loss—i.e., the failure to develop a contingency plan or the failure to disclose risks posed to financial performance. Several such suits have been filed in the wake of the pandemic. While D&O coverage is incredibly broad for individual insureds—generally covering all allegations of acts, errors, omissions, or misstatements—policies generally include an exclusion for bodily injury. The precise wording of the exclusion varies—while some policies preclude coverage for any claim relating in any way to bodily injury, others do not preclude coverage for the economic damage suffered by others (i.e., shareholders).
Employment Practices Liability Insurance. COVID-19 has created unique workplace challenges for employers. For example, can companies require their employees to travel to affected areas for work? Can companies terminate employees that refuse to come to work or insist on working from home? While EPLI coverage provides protection against employee claims of wrongful termination and similar claims, some coverages are limited. For example, most policies exclude coverage for violations of OSHA or FMLA (except for retaliation). Most exclude, or limit, coverage for wage and hour claims and FLSA violations. Because these types of claims are more likely in the context of the pandemic, insureds should carefully review their policies to identify prospective coverages.
Brouse McDowell will continue to update our clients and friends as these issues develop. You can read all our coronavirus-related updates on our webpage. In the interim, we are assisting our policyholder clients in analyzing their policies and potential claims arising from this pandemic, and we encourage policyholders to carefully review their policies to determine if coverage is available to them.
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“Late” Notice? Remain Calm; All May Be Well.
Andrew W. Miller
Everyone has heard a late notice story. There is a loss; and there is insurance that potentially covers that loss. But for reasons that make sense at the time, the policyholder does not immediately provide notice to the insurer. Maybe the policyholder did not know that coverage was available for the loss; maybe the policyholder wanted to get more information about the loss before submitting; or maybe the policyholder’s dog ran away. The possible reasons are endless.
But “late” notice happens. And when it does, insurers are quick to point out that their policy requires the policy-holder to provide “prompt” or “timely” notice. But in Ohio, the validity of the insurers’ late notice defense is subject to a two-part inquiry:
Did the policyholder breach the insurance policy by failing to provide notice “with-in a reasonable time in light of all the surrounding facts and circumstances;” and
If the policyholder did breach the policy’s notice provision, did that breach prejudice the insurer?
See Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St.3d 186 (2002). If the answer to either inquiry is no, then the insurers’ late notice defense fails.
Recently, in LTF 55 Properties, LTD v. Charter Oak Fire Ins. Co., No. CV18905321, 2020-Ohio-4294 (8th Dist. Sept. 3), an insurer asked the Ohio Court of Appeals to turn the long-standing two-part inquiry on its head, seeking a holding that “delays predicated on expediency or self-interest are per se unreasonable.”
LTF owned a commercial property in Cleveland. It rented part of the property to Garda Arch Fab, LLC, with which it had some overlap in management. NEO Contractors also rented portions of the property from LTF, but those en-tities were not related.
Profac, Inc. contracted with LTF and Garda to operate LTF’s property and agreed that, at some point in the future, it would buy out those entities. In connection with its agreement to operate LTF and Garda and the eventual buy-out, Profac insured the property through Charter Oak, listing both LTF and Garda as additional named insureds.
A fire broke out at LTF’s property on October 19, 2016. Ultimately, the origin of the fire was determined to be a NEO-owned truck stored at the property. Following the fire, NEO notified Grange (its insurer) of the potential claim. LTF and Garda sent notice to Profac and inquired about providing notice to Charter Oak. Profac’s president responded by saying that it would handle the claim, that Profac had notified the agent who secured the policy with Charter Oak, and that LTF and Garda were to take no further action regarding the potential insurance claim.
Approximately one month after the fire, LTF and Garda accepted $100,000 from NEO’s insurer Grange and fully released NEO and Grange from any claims regarding the fire. But in January 2017, LTF and Garda determined that the $100,000 was insufficient to repair the fire damage. However, LTF and Garda still did not provide notice to Charter Oak, as by this time the deal with Profac had soured and the parties were negotiating the terms of their “business divorce.”
Finally, in March of 2017, LTF and Garda provided notice of the fire to Charter Oak, along with a proof of loss for over $350,000, the unreimbursed portion of their loss. Charter Oak denied LTF and Garda’s claim, taking the position that the five-month delay in providing notice was unreasonable and had prejudiced its ability to investigate the loss. LTF and Garda filed suit, but the court granted summary judgment in Charter Oak’s favor on the lack of notice issue, finding that the delay was “unreasonable and deliberate” and that the delay had prejudiced the insurer. Garda and LTF appealed.
On appeal, Charter Oak focused on the circumstances surrounding the late notice. Charter Oak took exception to the reason for the five-month delay: LTF and Garda’s commercial interest in not souring their pending deal with Profac. Charter Oak’s position was that because the reason for the delay was commercial self-interest, the delay was per se unreasonable.
But the court took issue with Charter Oak’s attempts to invoke a per se rule regarding delay. First, the court noted that Charter Oak had the burden to demonstrate that there were no issues of material fact regarding the reasona-bleness of the delay. While the court conceded “the circumstances of [LTF and Garda’s] notice appear to be undisputed,” that does not mean that there is no factual dispute regarding the reasonableness of the delay. And here, there were facts that might make the delay reasonable, including LTF’s and Garda’s belief that the $100,000 payment from Grange was sufficient to restore the property, the president of Profac’s statement that Profac would handle the loss, and his statement that he had already reported the fire to the applicable insurance agent.
So, what are the takeaways?
First and foremost, a policyholder should treat notice like voting in Chicago in the 1960s: give notice early and give notice often. Second, if you are going to insure multiple companies with different owners and managers, you should have a clear understanding of all parties’ rights and responsibilities. LTF and Garda could have avoided litigation if Charter Oak was notified when those entities provided notice to Profac. Post-loss responsibilities among the companies insured by Charter Oak could have – and perhaps should have – been set forth in an agreement among them. Finally, if the insured says your notice is “late,” it is the beginning of the inquiry, not the end. Whether that notice was late for some benign reason or even if it was late because you were protecting your economic interest, all is not lost. The question is not “why was it late” but instead “no matter why, was it reasonable?”
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