New Washington Regulation Requires Mandatory Language in an Insurer’s Denial Letter

The Washington State Office of the Insurance Commissioner (the “OIC”) has issued a new regulation, WAC 284-30-770, which mandates that insurers include specific advisory language in “adverse notifications” sent to insureds. Beginning on August 1, 2020, insurers will be required to include the mandatory language in any notice, statement, or document, wherein the insurer denies a claim, issues final payment for less than the amount of the claim submitted, makes an adverse benefit determination, or rescinds, terminates, cancels, or does not renew a policy. In any such notice, the insurer must include the following language:

“If you have questions or concerns about the actions of your insurance company or agent, or would like information on your rights to file an appeal, contact the Washington state Office of the Insurance Commissioner’s consumer protection hotline at 1-800-562-6900 or visit www.insurance.wa.gov. The insurance commissioner protects and educates insurance consumers, advances the public interest, and provides fair and efficient regulation of the insurance industry.”

This language must appear on either the first page or at the end of the adverse notification, and must be in the same font and font size as used in the majority of the notification. The OIC has advised that the purpose of the new rule is to “increase consumer awareness of available agency assistance and to help consumers with their insurance questions by requiring contact information for the Office of the Insurance Commissioner on adverse notifications.”

Many insurers already include similar language in claims correspondences sent to insureds in states other than Washington. Please be advised that beginning on August 1, 2020, insurers will also be required to include the above-stated language in certain adverse correspondences regarding insurance matters in Washington.

To the extent you have questions regarding this new regulation or another insurance-related issue, please do not hesitate to contact the insurance coverage team at Gordon Rees Scully Mansukhani, LLP.

Colorado General Assembly Sets Forth Prerequisites for an Insurance Company to Use Failure to Cooperate as a Defense to a Claim for First Party Insurance Benefits

Despite first party insurance policies generally requiring cooperation from an insured in the investigation of a claim, insurers can no longer rely on the failure to cooperate as a defense in a claim for first party insurance benefits in Colorado unless certain conditions are met.

The Bill:

On July 2, 2020, Colorado Governor Jared S. Polis signed House Bill 20-1290 which addresses the ability of an insurer to use a failure to cooperate defense in an action where the insured has made a claim for benefits under an insurance policy. This bill bars an insurer from raising the failure to cooperate unless the following conditions are met:

  • The insurer submitted a written request to the insured or the insured’s representative for the information (via electronic means if consent was given by insured or insured’s representative, or via certified mail);
  • The information is not available to the insurer without the assistance of the insured;
  • The written request provides the insured 60 days to respond;
  • The written request is for information a reasonable person would determine the insurer needs to adjust the claim filed by the insured or to prevent fraud; and
  • The insurer gives the insured an opportunity to cure, which must:
    • Provide written notice to the insured of the alleged failure to cooperate, describing with particularity the alleged failure within 60 days after the alleged failure; and
    • Allow the insured 60 days after receipt of the written notice to cure the alleged failure to cooperate.

A failure to cooperate defense acts as a defense to the portion of the claim materially and substantially prejudiced to the extent the insurer could not evaluate or pay that portion of the claim.

The duty to cooperate in a policy does not relieve the insurer of its duty to investigate or to comply with Colo. Rev. Stat. § 10-3-1104, the Unfair Claim Settlement Practices Act. Any language in a first-party policy that conflicts with this section is void as against Colorado public policy.

An insurer is not liable in a civil action based on a common law bad faith claim or under statutory violation of Colo. Rev. Stat. §§ 10-3-1115 and -1116 because the insurer provides the insured with the required amount of time to: (a) respond to the insurer’s written request with 60 days and (b) to cure the alleged failure to cooperate as required by the statute.

This act takes effect on September 14, 2020, except that if a referendum petition is filed against this act or an item, section, or part of this act within such period, then the act, item, section or part will not take effect unless approved by the people at the general election in the November 2020 election. In such case, it will take effect on the date of the official declaration of the vote by the governor.

Effect on Claims Handling:

Consistent with prior Colorado legal decisions, for an insurer to assert the failure to cooperate as a defense, the insurer must prove the insured failed to cooperate in some material and substantial respect and that the insurer was prejudiced. If these conditions were met, the insured forfeited his or her right to benefits under the insurance policy. This bill now requires an insurer to give written notice of a request for information, give the insured 60 days to respond, and the requested information must be information that a reasonable person would determine the insurer needs to adjust the claim or to prevent fraud. Further, the insurer must give the insured an opportunity to cure the failure to cooperate, including furnishing written notice of the failure to cooperate within 60 days of the alleged failure. These steps must be taken in advance of pleading a failure to cooperate defense in a court of law or an arbitration.

Attention must be paid to this bill as it will impact claims handling in first party insurance matters. If there are any questions regarding the above or if you need assistance with bad faith issues in Colorado, please contact the attorneys at Gordon Rees Scully Mansukhani, LLP.

Insurers Face Two New Cases Seeking Commercial Property Coverage For COVID-19; One Alleges Extracontractual Claims

Two Napa-based restaurants and a number of Chicago-area businesses claiming economic losses from closing their doors to prevent the spread of COVID-19 filed suits in California and Illinois, respectively, late last week. The plaintiffs in the Illinois suit allege statutory bad faith based, in part, on a memorandum setting forth the insurance company’s views on coverage and an alleged failure to investigate.

The owners of French Laundry, a prominent restaurant in Napa, California and another Napa establishment owned by prominent restauranteur Thomas Keller filed suit in Napa County Superior Court. See French Laundry Partners, LP d/b/a The French Laundry, et. al. v. Hartford Fire Insurance Company, et. al. The plaintiffs are represented by counsel including the Louisiana-based attorneys who filed the Cajun Conti case, believed to be the first case of its kind seeking coverage under a commercial property policy for business closures related to COVID-19. Additionally, owners of restaurants, pubs, and a theater in Chicago filed suit in the United States District Court for the Northern District of Illinois. See Big Onion Tavern Group, LLC, et. al. v. Society Insurance, Inc. In what appears to be one of the first cases to do so, the Big Onion plaintiffs assert extra-contractual claims based on an alleged failure to investigate and seek statutory penalties.

The French Laundry plaintiffs make allegations similar to the Cajun Conti plaintiffs. However, the French Laundry plaintiffs further allege that their “Property Choice Deluxe Form specifically extends coverage to direct physical loss or damage caused by virus.” The French Laundry plaintiffs further rely on an order of the health officer of Napa County which they assert “specifically states that it is being issued based on evidence of physical damage to property.” The Order states, in part, that it is “issued based on evidence of increasing occurrence of COVID-19 throughout the Bay Area, increasing likelihood of occurrence of COVID-19 within the County, and the physical damage to property caused by the virus.”

The French Laundry complaint goes on to allege that “property that is damaged is in the immediate area of the Insured Properties.” This allegation is apparently aimed at triggering Civil Authority Coverage, which can provide coverage following civil action or order by a civil authority where there is direct physical loss or damage to other or adjacent property. The common allegation in the initial COVID-19 coverage lawsuits that the presence of a virus on any property—whether the covered property or adjacent property—will continue to be a hotly contested issue in the absence of any actual evidence that COVID-19 is present inside the insured premises or nearby properties, let alone causes direct physical loss or damage. Further, the primary bases for the orders that are being issued by various state and local governments and agencies are to prevent the spread of COVID-19 due to public health concerns and to promote social distancing.

The Big Onion plaintiffs allege that they obtained business interruption coverage “to protect their businesses from situations like these, which threaten their livelihoods based on factors wholly outside of their control.” The Big Onion complaint cites to the lack of a virus exclusion in the subject policies. According to the Big Onion plaintiffs, such exclusions typically provide that the insurer will “not pay for loss, cost, or expense caused by, resulting from, or relating to any virus. . . that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.” Some exclusions go on to provide that the policy does not apply to any expense incurred as a result of contamination or “denial of access to property because of any virus. . . .” The plaintiffs in Big Onion appear to focus more on the lack of an exclusion for viruses for the proposition that the presence of a virus should be viewed to involve physical harm, rather than on specific allegations that COVID-19 is present within any covered premises or other or adjacent property. They contend that if viruses could never cause “physical harm,” there would be no need for a virus exclusion, which is a debatable proposition at best.

Of note, the Big Onion complaint cites to and attaches a memorandum purportedly issued “before many of the Plaintiffs had submitted their claims” by “the CEO of Society Insurance . . . prospectively concluding that Society Insurance’s policies would likely not provide coverage for losses due to a ‘governmental imposed shutdown due to COVID-19 (coronavirus).’”1 The complaint asserts a claim for “Statutory Penalty for Bad Faith Denial of Insurance Under 215 ILCS 5/155” based on an alleged failure by Society Insurance to conduct an investigation as well as the referenced memorandum. The Big Onion plaintiffs allege that “[t]o make matters worse, based on information and belief, Society Insurance directed its insurance agents, who are not Plaintiffs’ agents, to make sham claim notifications before Society Insurance’s policyholders even noticed their claims. Society Insurance took these actions, before claims were even submitted, as part of its plan to discourage claim notifications and to avoid any responsibility for its policyholders’ staggering losses. . . .”

It remains to be seen whether the insurer defendants in these cases will seek to dismiss these complaints based on the lack of a triggering event. Indeed, without any evidence that COVID-19 contaminated covered property or adjacent property, the mere order to close a business to prevent the spread of the virus should be insufficient to trigger coverage. This is in addition to the fact that case law across the country supports the conclusion that the presence of a virus, which can be removed with ordinary cleaning products, does not constitute physical harm. Nonetheless, insurers should take heed of the inclusion in the Big Onion complaint of the memorandum, possibly prepared in anticipation of a request for such a statement from state regulators, before preparing such statements for public distribution.

Visit our COVID-19 Hub for ongoing updates.

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1 The risk of—and due process implications of—states such as New Jersey attempting to require insures to issue such advance statements is demonstrated by the Big Onion complaint. The Maryland Insurance Administration took a different approach and on March 18, 2020 issued an Advisory on Business Interruption Insurance that states, in part:

“Business Interruption coverage is typically triggered under a commercial insurance policy when a covered risk / peril causes physical damage to the insured premises resulting in the need to shut down business operations. . . . Some commercial policies provide Business Interruption coverage when a business is shut down due to an Order by a civil authority. However, the policy still typically requires a physical loss from a covered peril as the underlying cause of the business shut down to apply.”

COVID-19 Is Not Direct Physical Loss Or Damage

Is a cash register that is not being used damaged property? When you need to wash a table, a chair, or a section of flooring with readily available cleaning products to make them safe and useable, are you repairing damaged property? Is a spilled cup of coffee waiting to be wiped up actual damage to the premises? If your customers stay home to help stop the spread of a virus, has there been a physical loss inside your shuttered store or restaurant?

The insuring agreements typically found in commercial property insurance policies require “direct physical loss of or damage to” covered property as the triggering event. Without establishing direct physical loss or damage a policyholder cannot meet its burden to trigger coverage for a purely economic loss of business income resulting from shuttering its business due to concerns over exposure to—or even the actual presence of—COVID-19. Despite this well-understood policy language, it is already beyond question that insurers will confront creative—albeit strained—arguments from policyholder firms attempting to trigger coverage for pure economic loss. The scope of the human and economic tragedy we all face will be matched by the scope of the effort to force the financial harm onto insurance companies.

The plaintiffs in what appears to be the first-filed case seeking a declaratory judgment in the context of first-party insurance coverage rely on the assertion that “contamination of the insured premises by the Coronavirus would be a direct physical loss needing remediation to clean the surfaces” of its establishment, a New Orleans restaurant, to trigger coverage for business interruption.[1] See Cajun Conti, LLC, et. al. v. Certain Underwriters at Lloyd’s, London, et. al. Civil District Court for the Parish of Orleans, State of Louisiana. The complaint alleges that the property is insured under an “all risk policy” defining “covered causes of loss” as “direct physical loss.” The plaintiffs rely on the alleged presence of the virus on “the surface of objects” in certain conditions and the need to clean those surfaces. They go so far as to claim that “[a]ny effort by [the insurer] to deny the reality that the virus causes physical damage and loss would constitute a false and potentially fraudulent misrepresentation. . . .”

The complaint cites a case from the Court of Appeal of Louisiana, Widder v. Louisiana Citizens Property Insurance Corporation, 82 So. 3d 294 (La. App. 2011), writ denied, 76 So. 3d 1179 (La. 2011), for the proposition that “[s]imilar to the Coronavirus, Louisiana Courts have interpreted that the intrusion of lead or gaseous fumes constitute a direct physical loss under insurance policies that would need to be remediated.”

The assertion of fraudulent misrepresentation seems to be largely a matter of projection, as the truth seems to have been stretched by the claims that the possible presence of an easily cleaned virus damaged the restaurant sufficiently to trigger coverage for business interruption at the plaintiffs’ restaurant. As an initial matter, Widder involved a house contaminated with “inorganic lead which makes it uninhabitable until it has been gutted and remediated.” 82 So. 3d 294, 296. Gutting and remediating a home to remove materials which must be treated as hazardous waste is a far cry from cleaning property with disinfectant. In Widder an inspection revealed the presence of lead dust on walls, which originated in part from lead paint outside of the house. Id. at 295. Apparently without any scientific foundation, the Widder court compared the loss before it to the emission of gaseous fumes from Chinese drywall and reversed the trial court’s summary judgment in favor of the insurer.

Glaringly, the alleged presence of a virus on objects is not analogous to noxious odors or gaseous releases. In Widder the alleged physical harm involved tangible damage. Further, gaseous emissions from Chinese drywall corroded building components and in some instances required demolition and rebuilding of entire physical structures to remediate the condition. The proposition that the alleged presence of Coronavirus is somehow analogous to this type of harm is, at best, a contrived argument to attempt to trigger coverage. Indeed, whether and to what extent Coronavirus stays present on physical surfaces is as yet untested under Daubert. We do know that government health officials believe that proper cleaning with standard disinfectants will kill the virus. In any event, there is no indication or evidence that the virus corrodes physical surfaces.

Courts in other jurisdictions have addressed more analogous circumstances and found a lack of coverage. For instance, a federal district court applying Michigan law found that the presence of mold and bacteria in ductwork and a resulting odor did not constitute direct physical harm despite that the ductwork needed to be physically cleaned as part of remediation. Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010). A water leak caused the mold, bacteria, and odor, and the policyholder argued that the “pervasive odor, mold and bacterial contamination (both visual and aerosolized), as well as water damage” constituted direct physical loss. The court concluded that the policyholder did not demonstrate “that it suffered any structural or any other tangible damage to the insured property. Rather, the bulk of [the policyholder’s] argument relies upon proof that it suffered such intangible harms as strong odors and the presence of mold and/or bacteria in the air and ventilation system within its Building which, in its judgment, rendered the insured premises useless.” Id. at 719. Citing a case from Oregon, the court stated that “even physical damage that occurs at the molecular or microscopic level must be ‘distinct and demonstrable.’” Id. (citing Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civil No. 98-434-HU 1999, U.S. Dist. LEXIS 11873 (D. Or. Aug. 4, 1999)).

At least two courts—a federal court in Florida and an appellate court in Ohio—have recognized that if the alleged physical harm can be cleaned, then there is no physical harm. Mama Jo’s, Inc. v. Sparta Ins. Co., No. 17-CV-23362-KMM, 2018 U.S. Dist. LEXIS 201852 (S.D. Fla. June 11, 2018) (debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops and the court held that “cleaning is not considered direct physical loss.”); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio 2008) (affirming lower court’s ruling that dark staining from mold did not constitute “physical loss” where plaintiff’s expert testified that mold could be removed from wood surface by cleaning).

Further, the mere risk of contamination has been deemed insufficient to trigger coverage. Specifically, loss of income due to an embargo by the United States Department of Agriculture because of the risk that “mad cow disease” contaminated beef product was not “direct physical loss” to beef product. Source Food Tech., Inc. v. United States Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (applying Minnesota law). The Eighth Circuit distinguished between the actual presence of contamination and the inability to sell a product because of the fear of contamination. “Although Source Food’s beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not—as Source Foods concedes—physically contaminated or damaged in any manner. To characterize Source Food’s inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word ‘physical’ meaningless.” Id. at 838.

As of this writing the insurers had not yet moved to dismiss the Cajun Conti complaint. However, we believe that on the face of the complaint, which expressly incorporates the policy language requiring direct physical loss or damage, there is no triggering event. Even assuming that COVID-19 is, at a molecular level, present on physical surfaces, we also believe that disinfecting of surfaces does not constitute physical harm sufficient to trigger coverage.

Gordon & Rees is carefully tracking the coronavirus (COVID-19) pandemic and working to assist clients with the evolving legal ramifications of the outbreak to their businesses.

Visit our COVID-19 Hub for ongoing updates.

Emerging Coverage Considerations for Insurers Relating to Claims in Connection with COVID-19

The only thing equally inevitable to the spread of the novel coronavirus 2019 disease (“COVID-19”) will be the resulting onslaught of first-party and third-party insurance claims and insurance coverage litigation seeking to mitigate business losses through recoveries from the insurance industry. Prominent policyholder firms are already pitching corporate America to seek coverage first and ask questions later. The immediacy of claims and litigation will be expedited and their impact multiplied because of the economic downturn. Policy language and actual coverage will be subject to sustained attacks and creative arguments reflecting the huge sums of money that will be at stake. The impact and aftermath of the COVID-19 pandemic stands to present coverage questions for insurers under a variety of coverage forms, including Commercial Property, Commercial General Liability, Professional Liability and Healthcare Liability, and Directors and Officers Liability coverage forms. We summarize below the issues that have already arisen, as well as those that we expect to arise as policyholders submit claims under their insurance assets in connection with COVID-19.

First Business Income Claim Filed

Louisiana appears to be the first state in which an insured filed a lawsuit seeking first-party insurance coverage for business income loss related toCOVID-19. Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana. In response to the New Orleans mayor’s restrictions on restaurant operation in relation to the public health emergency, the restaurant owner sought coverage under its “all risks” policy, which provides coverage for “direct physical loss unless the loss is specifically excluded or limited.” In its complaint the policyholder asks the court to declare that s “because the policy provided by Lloyd’s does not contain an exclusion for a viral pandemic, the policy provides coverage to [the business] for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination and that the policy provides business income coverage in the event that the contamination has contaminated the insured premises.” Notably, however, the declaratory judgment specifically “do[es] not seek any determination of whether the Coronavirus is physically present in the insured premises, amount of damages, or any other remedy besides the declaratory relief.” Gordon Rees Scully Mansukhani will continue to monitor this developing litigation and advise of developments that may impact insurers.

ISO Commercial Property Forms Typically Exclude Coverage for Communicable Diseases

Essential to the resolution of the Cajun Conti case and future claims like it will be the scope of coverage afforded under ISO Commercial Property forms. In 2006, after learning from prior major viral outbreaks, ISO adopted a mandatory exclusion for business interruption policies that specifically excludes coverage for lost business income arising from viruses. ISO form CP 01 40 07 06, “Exclusion for Loss Due To Virus Or Bacteria,” specifically applies to business income, and provides in relevant part that the underwriter “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Absent this exclusion, however, triggering business interruption coverage under the ISO form fundamentally requires “direct physical loss of or damage to property at premises which are described in the Declarations.” Needless to say the proper interpretation of the terms “direct physical loss of or damage to property at premises” is expected to be one of the foremost topics of disagreement between policyholders and their insurers as these claims begin to mount. From a policyholder advocate perspective, the presence of COVID-19 in the building may be sufficient. In this regard, recent articles published by policyholder firms point to cases in which courts have held that the presence of gaseous or other non-visible substances constituted a “direct physical loss” to premises where the substance rendered the premises uninhabitable, even absent physical alteration to the structure itself. These arguments unreasonably expand the plain meaning of the language used in property policies. Indeed, many courts confronted with coverage disagreements involving similar conditions—such as the presence of asbestos, mold, or other debris in a building–concluded that the requisite “direct physical loss of or damage to” covered property was lacking

In Some Instances Manuscript Policies May Present A Closer Question

The focus of coverage disputes under manuscript policies are far less easy to predict, as they contain terms negotiated by the insured or its broker. One such area of attention may be the applicability of Civil Authority Coverage, which in some cases may extend business interruption coverage to orders or actions of a governmental agency or other civil authority. With everything from auto production factories to nail salons closing pursuant to state government emergency orders this will likely be hot button issue in the courts. As is the case with all coverage questions, the scope of coverage will be determined by the particular facts and circumstances of the loss and the plain meaning of the terms of the policy.

State Efforts to Extend Coverage

Insurers are cautioned to pay particular attention to state efforts to mandate the payment of business income losses related to COVID-19 under the property provisions of the Commercial Package and Business owner policies. The first state to offer legislation of this type is New Jersey, which has proposed a law titled as an act “concerning certain covered perils under business interruption insurance.” The draft bill in the state is aimed to force insurers to cover business income loss relating to COVID-19 and the governmental efforts to prevent its spread—including for policies that explicitly exclude viral coverage (such as policies bearing the ISO exclusion)—regardless of the policy terms and provisions.

Despite the legislature’s effort to hold harmless a segment of the business sector with the foresight to purchase business interruption coverage, this proposed legislation seemingly shifts the burden of compensating businesses for virus-related losses from the state or federal government onto private insurers, including those who have specifically contracted out of this coverage. It also raises a significant question of due process and the freedom of insurers to contract to limit the coverage provided under their policies.

The State of New York has also entered the fray, but not to coerce insurers to pay uninsured losses. On March 10, 2020, the New York Department of Financial Services (NYDFS) issued a letter directing insurers who write business interruption coverage to “explain” to policyholders the benefits under their policies and the protections provided in connection with COVID-19. While the directive is targeted to preemptively address insured questions concerning the scope of business interruption coverage, it fosters an erroneous “one size fits all” approach to construing policy coverage and it arguably requires insurers to issue advisory opinions concerning the interpretation of “covered perils” and “physical loss or damage” in their policies without first knowing the particular facts and circumstances of any given loss or claim. Notably, in October 2019, NYDFS implemented Section 308 of the Insurance Law requiring insurers to complete a questionnaire in order to ascertain the level of pandemic influenza preparedness, purportedly in the hope that this information would help raise the general level of preparedness of our licensees.

Most recently the Maryland Insurance Administration released and Advisory or Business Interruption on Business Interruption Insurance on March 18, 2020, which states that it has been received a high volume of inquiries related to business interruption insurance. The Advisory states in pertinent part:

Business Interruption coverage is typically triggered under a commercial insurance policy when a covered risk / peril causes physical damage to the insured premises resulting in the need to shut down business operations. For example, if a fire damages a business and the business cannot operate during repairs, business interruption coverage would be available subject to the terms and limits in the policy.

. . .

Some commercial policies provide Business Interruption coverage when a business is shut down due to an Order by a civil authority. However, the policy still typically requires a physical loss from a covered peril as the underlying cause of the business shut down to apply.

. . .

All insurance policies have exclusions of coverage for risks that are too great to be underwritten at an affordable price. For example, commercial and personal property insurance policies typically contain specific exclusions for loss or damage caused by war, nuclear action and radiation. The potential loss costs from such perils are so extreme that providing coverage would jeopardize the financial solvency of property insurers. Global pandemics like COVID-19 usually fall into this category. However, policies can be different. We recommend that businesses review their policies and reach out to their insurance professionals with any questions.

This approach is less aggressive than those taken by New Jersey and New York, and at least at this time Maryland has not required insurers to take on obligations for which they did not contract or otherwise issue advisory opinions. We will provided updates as other states and insurance departments begin to take positions on insurance coverage related to COVID-19.

Commercial General Liability

Commercial General Liability (“CGL”) policies will surely also be noticed by insureds and lead to extensive coverage litigation given the myriad of possible factual situations that will arise. Since CGL provides coverage for liability to third parties arising from “bodily injury” or “property damage” resulting from unintentional acts, there are many potential avenues for negligence claims around issues of exposure to COVID-19.

In CGL policies, the definition of “bodily injury” generally includes “sickness” or “disease.” The most likely avenue for claims will most likely be parties alleging liability for the spread of the coronavirus. Considering the ubiquitous effects of the virus on businesses worldwide, claims could come in many forms: restaurants, bars, or gyms that did not close, or theaters or concert venues that did not postpone events, are just a few examples. The early outbreak at the nursing home in Washington will raise many questions about the standard of care that should have been in place in any facility handling vulnerable populations. Airlines, hotels, conference centers, travel agents, or cruise ship companies could also be targets for moving forward with events or bookings in the face of worldwide news cycle warning of dangers. All of these entities could face liability for failing to take appropriate action to prevent infection from employees that appeared sick, or high-touch surfaces that were not appropriately de-contaminated. Similar claims could allege a lack of preparedness or training of employees that led to the spread of infection.

Other claims not directly related to the spread of disease, but rather as a result of the actions taken to prevent the spread, may arise. For example, if a real estate owner closes a building, there may be claims for wrongful eviction. This would fit within the standard definition of “personal and advertising injury.”

While it is true that CGL policies often include pollution exclusions, the effect of such exclusions will depend largely on the precise language of the exclusion and law of the state where it is being applied. Some CGL policies also contain exclusions for viruses or communicable diseases. The most difficult obstacle for claims will be sickened individuals attempting to pinpoint where they were sickened, and by whom. However, even the smallest claims that stick past the motion to dismiss stage may lead to a copycat effect. There are many jurisdictions where the insurance industry struggles to get fair treatment in the courts, which will present even greater peril if COVID-19 impacts a measurable percentage of the local population with serious permanent impairment or death.

Directors & Officers Liability

It is also worth considering the potential for claims against Directors & Officers, Errors & Omissions, Management Liability, or any form of Professional Liability Insurance policies, including Healthcare Professional Liability policies. Claims could be made against managers, directors, officers, or professionals for a failure to make decisions that would have prevented the spread of disease. Potentially more costly could be claims by investors, who have seen the value of their holdings dwindle, seeking to assert claims against officers alleging that a lack of response (or inadequate response) led to a reduction in share price. Policyholders will argue that pollution exclusions have limited effect against such claims.

Visit our COVID-19 Hub for ongoing updates.

Leveraging the 50-State Initiative, Connecticut and Maine Team Secure Full Dismissal of Coverage Claim for Catastrophic Property Loss

On behalf of Gordon & Rees’ surplus lines insurer client, Hartford insurance coverage attorneys Dennis Brown, Joseph Blyskal, and Regen O’Malley, with the assistance of associates Kelcie Reid, Alexandria McFarlane, and Justyn Stokely, and Maine counsel Lauren Thomas, secured a full dismissal of a $15 million commercial property loss claim before the Maine Business and Consumer Court on January 23, 2020. The insured, a wood pellet manufacturer, sustained catastrophic fire loss to its plant in 2018 – just one day after its surplus lines policy expired.

Following the insurer’s declination of coverage for the loss, the wood pellet manufacturer brought suit against both its agent, claiming it had failed to timely secure property coverage, as well as the insurer, alleging that it had had failed to comply with Maine’s statutory notice requirements. The surplus lines insurer agreed to extend the prior policy several times by endorsement, but declined to do so again. Notably, the insured alleged that the agent received written notice of the non-renewal prior to the policy’s expiration 13 days before the policy’s expiration. However, the insured (as well as the agent by way of a cross-claim) asserted that the policy remained effective at the time of the loss as the insured did not receive direct notice of the decision not to renew coverage and notice to the agent was not timely. Although Maine’s Attorney General and Superintendent intervened in support of the insured’s and agent’s argument that the statute’s notice provision applied such that coverage would still be owed under the expired policy, Gordon & Rees convinced the Court otherwise.

At issue, specifically, was whether the alleged violation of the 14-day notice provision in Section 2009-A of the Surplus Lines Law (24-A M.R.S. § 2009-A), which governs the “cancellation and nonrenewal” of surplus lines policies, required coverage notwithstanding the expiration of the policy. The insured, the agent, and the State of Maine intervenors argued that “cancellation or nonrenewal” was sufficient to trigger the statute’s notice requirement, and thus Section 2009-A required the insurer to notify the insured directly of nonrenewal. In its motion to dismiss, Gordon & Rees argued on behalf of its client that Section 2009-A requires both “cancellation and nonrenewal” in order for the statute to apply. Since there was no cancellation in this case – only nonrenewal – Gordon & Rees argued that Section 2009-A is inapt and that the insurer is not obligated to provide the manufacturer with notice of nonrenewal. Alternatively, it argued that the statute is unconstitutionally vague and unenforceable.

The Court agreed with Gordon & Rees’ client that the statue is unambiguous because the terms “cancellation and nonrenewal” are not “mutually exclusive,” as was argued by the insured, agent and State intervenors. In doing so, the Court held that it was not bound by the definitions of “cancellation” and “non-renewal” found in Maine’s personal lines statutes (the definitions there expressly do not apply) and must interpret those terms based on their plain and common meanings. Based on this, the Court held: “the phrase ‘cancellation and non-renewal’ refers to the termination of a surplus lines insurance policy prior to the end of the policy period, with a failure to renew the policy.” The Court dismissed the complaint and cross-claim as no cancellation occurred, and the statute does not apply. Accordingly, there was no need to reach the arguments regarding constitutional infirmity.

The Washington State Supreme Court Rules that Claims Adjusters May Not Be Held Personally Liable for Insurance Bad Faith

In 2018, the Washington Court of Appeals, Division 1, issued a ruling which rippled through the insurance community by finding that a claims adjuster may be held personally liable for the tort of insurance bad faith. However, in October 2019, the Washington State Supreme Court held that a claims adjuster may not be personally sued for insurance bad faith or for alleged violations of Washington’s Consumer Protection Act, RCW 19.86 et seq. (“CPA”). Keodalah v. Allstate Ins. Co., Slip. Op. No. 95867-0, 2019 WL 4877438 (Wash. Oct. 3, 2019).

In Keodalah v. Allstate Ins. Co., the Supreme Court ruled there is no statutory basis for a bad faith claim against an adjuster under RCW 48.01.030 because this statute does not create an implied cause of action. The Supreme Court also re-affirmed that a bad faith claim premised upon the common law may not be pursued against an adjuster, since an adjuster is outside the quasi-fiduciary relationship between the insurer and its insured. Further, the Supreme Court held that a CPA claim may not proceed against a claims adjuster as a matter of law, regardless of whether it is premised upon a per se regulatory violation or upon alleged bad faith.

In Keodalah, an insured brought suit against their insurer and its claims adjuster for the tort of insurance bad faith and the alleged violation of the CPA in connection with the insured’s claim for underinsured motorist (“UIM”) benefits. The insured alleged that the adjuster had improperly undervalued the UIM claim by relying on incorrect information regarding the subject auto accident. Id. In part, the insured premised his bad faith claim against the adjuster on RCW 48.01.030, which broadly provides “that all persons be actuated by good faith . . . in all insurance matters.” The Supreme Court thus evaluated whether RCW 48.01.030 created an implied cause of action for bad faith against a claims adjuster.

After analyzing the issue under the 3-prong “Bennett test”, the Supreme Court held that “RCW 48.01.030 does not create an implied cause of action for insurance bad faith.” This is because RCW 48.01.030 benefits the general public interest, rather than a specific, identifiable class of persons. RCW 48.01.030 also does not contain a specific enforcement mechanism which, the Supreme Court found, “suggests that the legislature did not intend to imply a cause of action based on violations of RCW 48.01.030.” Moreover, the Supreme Court reasoned that “[i]f we were to read the statute to imply a cause of action, by the statute’s plain language, such implied cause of action would apply against insureds as well. That is, insurers would be empowered to sue their insured … [which] would not be consistent with the legislature’s purpose in enacting the statute[.]” Accordingly, the Supreme Court held that a bad faith claim may not be pursued against a claims adjuster based upon a statutory violation of RCW 48.01.030.

Notably, the Keodalah decision also re-affirmed the Supreme Court’s prior rulings that a bad faith claim premised upon the common law may not be brought against anyone other than an insurer. In citing its ruling in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1333 (1986), the Supreme Court in Keodalah stated that “this court has limited bad-faith tort claims to the context of the insurer-insured relationship[.]” This is because such claims are premised upon “the fiduciary relationship existing between the insurer and insured.” Keodalah, at *15 – 16, n. 6 (quoting Tank, 105 Wn.2d at 385). The Supreme Court found that no such fiduciary relationship exists with respect to a claims adjuster, and that limiting common law bad faith claims to actions against an insurer was consistent with a long line of Washington precedent. See, e.g., St. Paul Fire & Marine Ins. Co. v Onvia, Inc., 165 Wn.2d 122, 130 n.3, 196 P.3d 664 (2008).

Finally, the Supreme Court held that a CPA claim may not be pursued against a claims adjuster, regardless of whether the claim is premised upon alleged bad faith or upon a per se violation of Washington’s regulation concerning unfair claims settlement practices, WAC 284-30-330. By its terms, WAC 284-30-330 only applies to “unfair or deceptive acts or practices of the insurer.” Keodalah, at *14 (citing WAC 284-30-330) (emphasis original). Moreover, because “RCW 48.01.030 does not itself provide an actionable duty” for bad faith, it cannot form the basis for CPA liability against an adjuster. The Supreme Court explained that it has “limited CPA claims based on breach of the statutory duty of good faith” to the insurer because it is the insurer – not the adjuster – who owes a quasi-fiduciary duty to the insured. As a result, the Supreme Court held that “[b]ecause Keodalah claims a breach of the duty of good faith by someone outside the quasi-fiduciary relationship, his CPA claim based on RCW 48.01.030 was properly dismissed.”

The Washington Supreme Court Rules that a Holder of a Certificate of Insurance Is Entitled to Coverage

The Washington courts have historically found that the purpose of a certificate of insurance is to advise others as to the existence of insurance, but that a certificate is not the equivalent of an insurance policy. However, the Washington State Supreme Court recently held that, under certain circumstances, an insurer may be bound by the representations that its insurance agent makes in a certificate of insurance as to the additional insured (“AI”) status of a third party. Specifically, in T-Mobile USA, Inc. v. Selective Ins. Co. of America, the Supreme Court found that where an insurance agent had erroneously indicated in a certificate of insurance that an entity was an AI under a liability policy, that entity would be considered as an AI based upon the agent’s apparent authority, despite boilerplate disclaimer language contained in the certificate. T-Mobile USA, Inc. v. Selective Ins. Co. of America, Slip. Op. No. 96500-5, 2019 WL 5076647 (Wash. Oct. 10, 2019).

In this case, Selective Insurance Company of America (“Selective”) issued a liability policy to a contractor who had been retained by T-Mobile Northeast (“T-Mobile NE”) to construct a cell tower. The policy conferred AI status to a third party if the insured-contractor had agreed in a written contract to add the third party as an AI to the policy. Under the terms of the subject construction contract, the contractor was required to name T-Mobile NE as an AI under the policy. T-Mobile NE was therefore properly considered as an AI because the contractor was required to provide AI coverage to T-Mobile NE under the terms of their contract.

However, over the course of approximately seven years, Selective’s own insurance agent issued a series of certificates of insurance that erroneously identified a different company, “T-Mobile USA”, as an AI under the policy. This was in error because there was no contractual requirement that T-Mobile USA be added as an AI. Nonetheless, the certificates stated that T-Mobile USA was an AI, and they were signed by the agent as Selective’s “authorized representative.”

In the ensuing coverage action, a question arose as to whether T-Mobile USA could be considered as an AI given the representations in the certificates. Significantly, the Washington State Supreme Court heard the matter pursuant to a certified question from the Ninth Circuit Court of Appeals, which had previously made several important findings that guided the Supreme Court’s treatment of the case. Chief among them, the Ninth Circuit had already concluded that Selective’s “agent [had] acted with apparent authority in issuing the certificate at issue[.]”

Based upon that predicate, the Supreme Court found that Selective was bound by the representations made by its authorized insurance agent in the certificate of insurance. The Supreme Court noted the general rule in Washington that an “insurance company is bound by all acts, contracts or representations of its agent … which are within the scope of [the agent’s] real or apparent authority[.]” Because the Ninth Circuit had already found that Selective’s insurance “agent acted with apparent authority when it issued the certificate to T-Mobile USA,” pursuant to this general rule in Washington, the Supreme Court concluded that “Selective [was] bound by the representations its agent made in the certificate of insurance.”

Selective sought to argue that T-Mobile USA’s reliance on the agent’s representations was unreasonable because T-Mobile USA knew it was not a party to the construction contract, and therefore knew it was not an AI. However, the Supreme Court found this argument was foreclosed by the fact that the Ninth Circuit had already “rul[ed] that the agent acted with apparent authority[.]” As a result, the Supreme Court reasoned that “the Ninth Circuit necessarily decided that T-Mobile USA’s belief that the agent was authorized to issue a certificate naming it as an additional insured was ‘objectively reasonable’ … [and thus] its reliance on that certificate [was] reasonable.”

The Supreme Court also rejected Selective’s argument that boilerplate disclaimer language in the certificate negated the grant of AI coverage to T-Mobile USA. For example, the boilerplate language stated that the certificate “confers no rights” and “does not affirmatively or negatively amend, extend or alter the coverage afforded by the [policy].” The Supreme Court noted, however, that these disclaimers conflicted with the apparent grant of AI coverage to T-Mobile USA, which had been specifically written into the certificate by the insurer’s agent. Applying a canon of contract interpretation, the Supreme Court held that, in this instance, the “specific written-in additional insured statement [in the certificate] … prevails over the preprinted general disclaimers.”

It is questionable whether this finding can be applied more broadly. The Supreme Court was careful to note that “we do not hold that all disclaimers are ineffective. We hold that the disclaimers at issue here are ineffective because they completely and absolutely contradict the other, more specific promises in that same certificate.” Had the disclaimers not been so directly contradicted by the specific representations in the certificates, or if the Ninth Circuit had not previously held that Selective’s agent acted with apparent authority, this case may have been decided differently.

In any event, the T-Mobile USA case is a stark reminder of the significance that representations by an insurer’s authorized agents may have on coverage issues.

Insurer Not Required to Show Prejudice from an Insured’s Late Notice When the Parties Contract for a Specific Reporting Period

The Fifth Circuit Court of Appeals recently affirmed an order granting summary judgment in favor of the Firm’s insurer client on an issue of first impression in Texas. The issue before the trial court was whether, under Texas law, an insurer is required to demonstrate prejudice resulting from an insured’s failure to comply with an agreed term set in an endorsement to the parties’ insurance contract establishing a specific time limit for an insured to give the insurer notice of a claim.

The case involved alleged damage to an insured’s commercial property from a hailstorm. The insured did not report the alleged loss to its insurer until approximately 17 months after the date of loss. The insurer denied the claim based on a one-year notice requirement in a policy endorsement. The Texas Windstorm or Hail Loss Conditions Amendment Endorsement stated that:

In addition to your obligation to provide us with prompt notice of loss or damage, with respect to any claim where notice of the claim is reported to us more than one year after the reported date of loss or damage, this policy shall not provide coverage for such claims.

The insured sued the insurer in Houston federal court, alleging causes of action for breach of contract and violations of the Texas Insurance Code. The insured argued the insurer was required to show prejudice from the insured’s late notice; the insurer argued that a showing of prejudice was not required. The trial court recognized that this issue had not been decided by the Texas Supreme Court of the Fifth Circuit Court of Appeals.

The Firm moved for summary judgment on behalf of the insurer based on the policy’s endorsement. The trial court granted summary judgment in favor of the insurer and dismissed the insured’s claims.

The Fifth Circuit Court of Appeals affirmed the trial court’s order and held that while insurers are required to show prejudice following the insured’s breach of general provisions requiring notice of loss or damage “as soon as practicable” (and variations thereof), that shifting burden was not required in this case where the parties signed a very specific endorsement that required the insured to submit claims for wind or hail losses within one year.

The Fifth Circuit’s decision is a significant victory for insurers which are often faced with the heavy evidentiary burden of establishing prejudice from an insured’s late notice of property damage claims.

Large Insurer Overturns $12M Arbitration Award in New York Appellate Court

Gordon Rees Scully Mansukhani partners Dennis O. Brown and Greil Roberts obtained a significant appeal win in a complex insurance coverage case for a major insurer on October 25, 2018, when a New York state appeals court vacated a nearly $12 Million arbitration award to Allied Capital Corporation.

The appeal arose out of an arbitration that began in 2010.  Allied Capital sought coverage from its insurer for a $10.1 million payment made to settle claims by the federal government arising out of the False Claims Act. The insurer denied coverage, and Allied filed for arbitration under its insurance policies, seeking to be compensated for the $10.1 million settlement payment plus defense costs.

In March 2016, in a 2-1 decision, the arbitration panel said the $10.1 million settlement was not a “Loss” under the policy; thus, Allied could not recover that amount. However, the arbitration panel decided that Allied was entitled to its defense costs, though the arbitration panel reserved the amount of defense costs to be awarded for a subsequent proceeding.

Not long thereafter, Allied sought reconsideration of the March 2016 award on the basis that the majority of the arbitration panel erred in finding that Allied did not suffer a “Loss” under the policy. The arbitration panel, in another 2-1 decision, determined that it was permitted to reconsider the March 2016 award and reversed itself, finding that the $10.1 million amount was a “Loss” under the policy.

The insurance company petitioned in New York state court for an order vacating the reconsidered award as having been rendered in excess of the powers and authority available to the arbitration panel. Specifically, the insurance company argued that the panel exceeded its authority based on the common law doctrine of functus officio. Under functus officio, an arbitrator cannot alter its final award except in limited circumstances.

The insurer argued that the March 2016 partial final award was final in the sense that it determined the extent of the insurer’s liability for Allied’s claim.  The insurance company argued that Allied’s counsel agreed to bifurcation of two issues: (1) the issue of coverage for Allied’s claim to be indemnified for the $10.1 million, and (2) whether Allied was entitled to recover defense costs and, if so, the amount of such recovery. Since the arbitration panel had resolved the first issue completely in the March 2016 award, the arbitration panel had no authority to subsequently alter that award. For its part, Allied argued that there had been no bifurcation, and since the issue of defense costs had not been fully resolved, there was no final award and the arbitration panel was permitted to reconsider its decision.

The state court denied the petition, and the insurance company appealed.  On October 25, 2018, in a 4-1 decision, the Appellate Division of the Supreme Court of New York, First Department, agreed with the insurance company’s position that the panel exceeded its authority and improperly reconsidered the original partial final award:

There is nothing in the record that remotely suggests that the parties or the panel believed that the [March 2016 award] would be anything less than a final determination of such issues and under the functus officio doctrine, it would be improper and in excess of the panel’s authority for such final determination to be revisited.

The mere fact that the amount of defense costs had not been decided, the Court found, did not permit the panel’s reconsideration of the award: “In this case, the panel was functus officio with respect to the [partial final award] and thus, the panel’s reconsideration of the [partial final award] on substantive grounds was improper and exceeded its authority.”

The Court rejected Allied’s argument that, since the arbitration panel itself had found that it was not functus officio, it was entitled to reconsider the March 2016 award. The Court reasoned that, by Allied’s arguments, an arbitrator could avoid exceeding its authority when reconsidering a partial final award as long as the arbitrator stated that the parties did not bifurcate the proceedings or that the arbitrator did not intend for the award to be final as to a particular issue. However, “there is no support for such theory in the relevant case law,” the Court concluded.