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.”

Gordon & Rees Partner Matthew S. Foy Appointed to Chair of DRI’s Insurance Law Committee

San Francisco partner Matthew S. Foy was recently appointed to serve a two-year term as Chair of the Defense Research Institute’s (DRI) Insurance Law Committee. The Insurance Law Committee is one of DRI’s largest and most active committees with more than 2,700 members and is the resource for professionals whose careers are devoted to or influenced by insurance.

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Matthew Foy is a partner in Gordon & Rees’s San Francisco office and serves as the National Practice Group Leader for the firm’s Property and Casualty Practice Group. Mr. Foy maintains a national practice and has represented the insurance industry for 20 years at the claims stage, in trial, and on appeal. Matt can be reached at (415) 875-3174 or MFoy@gordonrees.com.

Excess Insurer Forced To Contribute To A Settlement May Sue Primary Insurer For Unreasonably Refusing To Settle Within Primary Limits Despite The Lack Of Any Excess Judgment Against The Insured

In Ace American Ins. Co. v. Fireman’s Fund Ins. Co. (2016) 2016 Cal.App. LEXIS 647 (Aug. 5, 2016), the California Court of Appeal, Second Appellate District, Division Four, reversed the trial court which had sustained a primary insurer’s demurrer to a lawsuit brought an excess insurer. The excess insurer, Ace American Insurance Company (“Ace”), asserted causes of action against the primary insurer, Fireman’s Fund Insurance Company (“Fireman’s Fund”), for equitable subrogation and breach of the duty of good faith and fair dealing based on the primary insurer’s alleged unreasonable failure to settle an underlying action within primary policy limits. The Court of Appeal held that an excess insurer could maintain claims against a primary insurer even in the absence of a litigated judgment in the underlying action against their mutual insured.

The appellate court held that Ace’s lawsuit against Fireman’s Fund could have been brought by the insured or its assignee “despite the absence of a litigated excess judgment.” The court held that “an excess insurer which has settled and discharged the insured’s liability may recover from the primary insurer an amount in excess of the primary insurer’s policy limits if the excess insurer can prove the primary insurer’s unreasonable refusal to settle within its policy limits resulted in loss to the excess insurer in an amount in excess of the policy limits of the primary insurer it would not otherwise have had.” The court further held that an “excess judgment is not a required element of a cause of action for equitable subrogation or breach of the duty of good faith and fair dealing; where the insured or excess insurer has actually contributed to an excess settlement, the plaintiff may allege that the primary insurer’s breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement.”

The Court of Appeal also rejected Fireman’s Fund public policy argument that “[p]rimary insurers would be hesitant to participate with excess insurers in settlements, for fear of the excess insurers turning around and suing them.” The court reasoned that primary insurers already have the duty to accept reasonable settlement offers within policy limits and are liable for resulting damages in the event of a breach of that duty.

California Court of Appeal Rules Parent Company Lacks Standing to Bring Declaratory Relief Action Against Subsidiary’s Insurer

In an opinion filed March 30, 2016, the California Court of Appeal for the First Appellate District held that the trial court properly sustained a demurrer, without leave to amend, as to a parent corporation’s declaratory relief complaint against its subsidiary’s insurer. D. Cummins Corporation v. United States Fidelity and Guaranty Company (2016) 2016 Cal.App.LEXIS 342. The court found that the parent company failed to show that an actual controversy between it and its subsidiary’s insurer existed.

The insured was D. Cummins Corporation (“Subsidiary”), a corporation engaged in the business of installing asbestos containing products. The Subsidiary and its parent, Cummins Holding LLC (“Parent”), brought a state court declaratory relief action against the Subsidiary’s insurer, United States Fidelity and Guaranty Company (“Insurer”). The Subsidiary and Parent sought a declaration relating to insurance coverage for underlying asbestos bodily injury claims.

The Insurer removed the action to federal court on the ground that the Parent, whose inclusion in the lawsuit defeated diversity jurisdiction, was fraudulently joined. The federal court remanded the case and the Insurer demurred to the Parent’s declaratory relief claim on the ground it lacked standing. The trial court sustained the demurrer and the Parent appealed.

The court of appeal cited to California’s declaratory relief statute, Code of Civil Procedure (“CCP”) section 1060, which provides that “[a]ny person interested under a written instrument … may, in cases of actual controversy … bring an original action … for a declaration … including a determination of any question of construction or validity arising under the instrument or contract.” Further, CCP section 1061 provides that the court may refuse to issue a declaratory judgment where the court’s “declaration or determination is not necessary and proper.”

The Parent argued that it had standing because it had a “practical interest in the proper interpretation of [its Subsidiary’s] insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” The appellate court rejected this argument because the Parent had not shown how this alleged indirect interest translated into “a legally cognizable theory of declaratory relief.”

The Parent next argued that its participation in the litigation was necessary since Subsidiary had no assets of its own. The appellate court rejected this argument because the Subsidiary’s lawsuit was continuing in the trial court notwithstanding the fact Parent’s claims were dismissed. Finally, the Parent cited to a number of decisions for the proposition that in some cases, parties have been permitted to bring declaratory relief actions even though they were not directly affected by the challenged contract, regulation or statute. The appellate court rejected this argument as well, finding that Parent had not alleged any theory showing it had more than an indirect interest in the policies at issue.

The appellate court held that because Parent had no contractual privity with the Insurer and was not otherwise interested in the policy, the trial court acted within its discretion in holding a declaration of Parent’s rights was “not necessary or proper at the time under all the circumstances.”

The practical significance of this case is twofold. First, it highlights that, while California’s declaratory relief statutes are broad, they are not limitless. Second, the constraints on California’s declaratory relief statutes articulated in the decision will make it more difficult for plaintiffs to include parties with no practical interest in declaratory relief actions for the purpose of defeating diversity jurisdiction.

Ninth Circuit Zaps Insured’s Suit Seeking Coverage for Zip Code Claims

In Big 5 Sporting Goods Corp. v. Zurich American Ins. Co., et al., Case No. 13-56249 (9th Cir. Dec. 7, 2015), the Ninth Circuit, interpreting California law, held that underlying putative class action lawsuits asserting Song-Beverly Act claims alongside causes of action for invasion of privacy and negligence were not covered and did not trigger a duty to defend under CGL policies issued by Zurich and Hartford. The Ninth Circuit affirmed the decision of the Central District Court Judge Dolly Gee.

The Song-Beverly Act prohibits retailers from requesting and recording personal identification information (e.g., Zip codes) in conjunction with point-of-sale credit card transactions. Big 5 was sued in a series of underlying class action lawsuits asserting causes of action based on alleged violations of the Song-Beverly Act. Some of those complaints also asserted common law and constitutional invasion of privacy claims as well as negligence causes of action.

The policies included “Distribution of Material” exclusions which eliminated coverage for personal and advertising injury arising directly or indirectly out of any act or omission that violates or is alleged to violate any statute that prohibits or limits the sending, transmitting, communicating, distribution, etc., of material or information. Additionally, the Hartford policy included a “Right of Privacy Created by Statute” exclusion which eliminated coverage for personal and advertising injury arising out of the violation of a person’s right of privacy created by statute.

The Ninth Circuit affirmed District Court, holding that these exclusions eliminated coverage and any duty to defend the underlying suits based on the alleged violations of the Song-Beverly Act. The Court determined that the Act was undeniably a statute and that the alleged violations of the Act amounted to acts or omissions that were excluded from coverage.

Significantly, the Ninth Circuit rejected Big 5’s argument that the underlying common law and California constitutional invasion of privacy claims independently triggered a duty to defend. In doing so, the Court determined that in the context of the at-issue garden variety Song-Beverly Act complaints, such invasion of privacy claims “simply do not exist.” The Court further stated:

California does not recognize any common law or constitutional privacy right causes of action for requesting, sending, transmitting, communicating, distributing, or commercially using ZIP Codes. The only possible claim is for statutory penalties, not damages.

As support for this conclusion, the Ninth Circuit recognized that the Song-Beverly Act created a new right to protection in a consumer’s personal identification information that that did not previously exist and that the remedy for violations of the Act were specified statutory penalties. It also relied on the decision in Fogelstrom v. Lamps Plus, Inc. (2011) 195 Cal. App. 4th 986, which concluded that in the context of Song-Beverly class actions, there was no actionable invasion of privacy cause of action as the required element of a serious invasion of privacy or egregious breach of social norms was not present.

The Ninth Circuit further held that the underlying negligence causes of action did not trigger a duty to defend, stating that “[j]ust as a rose by any other name is still a rose, so a ZIP Code case under any other label remains a ZIP Code case.” The Court recognized that under California law, artful drafting and the assertion of superfluous negligence claims does not create a duty to defend where such a duty does not otherwise exist under the facts alleged.

With its decision in Big 5, the Ninth Circuit joins a growing number of Courts from across the country that have held that statutory class action lawsuits do not trigger a duty to defend under CGL policies.

The Ninth Circuit’s decision in Big 5 is not published and its citation is governed by 9th Cir. R. 36-3.

General Liability Insurer Entitled to Subrogate Against its Insured’s Indemnitor

In Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc., the California Court of Appeal for the Fourth Appellate District held that an insurer was entitled to equitably subrogate a breach of express indemnity claim against its insured’s indemnitor.

Valley Crest was a general contractor for exterior improvements at the St. Regis resort and subcontracted with Mission Pools to install a swimming pool. The subcontract provided that Mission Pools would defend and indemnify Valley Crest. Jeffrey Epp suffered a severe spinal cord injury diving into the pool and he subsequently sued Valley Crest and Mission Pools. The Epps alleged that Mission Pools was liable because the vertical tile depth markers were illegible and the use of “French gray” plaster in the pool made it difficult to determine depth.

Valley Crest’s general liability insurer, National Union, defended and indemnified Valley Crest, but Mission Pools did not. Valley Crest cross complained against Mission Pools for breach of the subcontract’s indemnity provision. National Union subsequently intervened as a cross-complainant asserting an equitable subrogation claim against Mission Pools.

The trial court found that Missions Pools was liable to National Union for all amounts it incurred on Valley Crest’s behalf. The court of appeal affirmed, rejecting Mission Pools’ argument that National Union was not entitled to be equitably subrogated to Valley Crest’s claims because National Union’s equitable position was, on balance, inferior to that of Mission Pools. In considering this argument, the court recognized that in order to succeed on an equitable subrogation claim, the plaintiff must establish that justice requires the loss be borne by the party with the inferior equitable position.

The court considered a number of equitable factors. It ultimately found that the factor which tipped the scale in favor of National Union was compliance with contractual obligations. It determined that because National Union had honored its contractual obligations to Valley Crest by agreeing to provide a defense, while Mission Pools had not, National Union was entitled to equitably subrogate.

Sony’s Interview Quagmire: A Watershed Moment for Cyberinsurance

Gordon & Rees Partner, Matthew Foy, recently co-authored an article published in the Spring 2015 edition of DRI’s In-House Defense Quarterly, entitled “Sony’s Interview Quagmire: A Watershed Moment for Cyberinsurance.” The article addresses the implications of the November 2014 Sony data breach and discusses why companies of all sizes should be giving a hard look at the cyberinsurance market and not simply relying on their CGL policies.

To read the full article, click here.

Ninth Circuit Holds That “Use” of Motor Vehicle Includes Unloading Injured Passenger

In California, motor vehicle policies confer insured status on any person while “using” a motor vehicle with the permission of the owner.  The Ninth U.S. Circuit Court of Appeals recently addressed whether unloading an injured passenger from a motor vehicle constituted “use” of that motor vehicle under California law.  In holding that unloading an injured passenger from a motor vehicle constituted “use,” the court reasoned that the subject policy incorporated California Insurance Code § 11580.06(g), which defines “use” to include “unloading” a motor vehicle.

In Encompass Insurance Co. v. Coast National Insurance Co., decided Aug. 13, 2014, Encompass sought contribution from Coast National Insurance Co. and Mid-Continent Insurance Co. in connection with a settlement it paid on behalf of its insured, Lisa Torti, arising from the personal injury claim of Alexandra Van Horn.  Van Horn was a passenger in a vehicle operated by Anthony Glen Watson.  Watson lost control of his vehicle and struck a light pole.  Torti was the passenger in a vehicle passing by when she stopped to render aid.  Fearing that the Watson vehicle would catch fire, Torti removed Van Horn.  Van Horn claimed that Torti caused her severe spinal injuries.

Encompass issued a package policy to Torti providing, among other things, motor vehicle and personal excess liability coverage.  Mid-Continent issued a motor vehicle policy to Torti and Coast issued a motor vehicle policy to Watson (the driver of the vehicle in which Van Horn was a passenger).  The Mid-Continent and Coast policies provided coverage for the “use” of the vehicle if such use was with the permission of the owner.  The court addressed the meaning of the term “use,” but did not evaluate the issue of “permission.”

The court recognized that the Mid-Continent and Coast policies incorporated the definition of “use” from California Insurance Code § 11580.06(g), which unambiguously equates “unloading” of a motor vehicle with the “use” of a motor vehicle.  Hence, the court held that “use” included Torti’s unloading of Van Horn from the Watson vehicle.

The court rejected the dissent’s arguments that unloading of a vehicle constitutes use only when it is part of the user’s act of availing himself or herself of the vehicle because there was an absence of case law adopting such a theory.  The court also stated that the dissent’s attempt to create a distinction between commercial and noncommercial vehicles was unavailing in light of the fact that the statutory definition of “motor vehicle” included “any vehicle designed for use principally upon the streets and highways and subject to the motor vehicle registration under the law of this state.”  Moreover, the court noted that there were at least two cases where California courts held that unloading noncommercial vehicles constituted use of those vehicles.

The court also rejected the defendants’ argument that unloading only constitutes use when it is integral to the function of the vehicle as a means of transport such that the person unloading the vehicle gains a benefit.  In the case upon which the defendants relied, Travelers Ins. Co. v. Northwestern Mut. Ins. Co. (1972) 104 Cal. Rptr. 283, the California Court of Appeal held that performing maintenance on a vehicle without more was not necessarily use of the motor vehicle.  The Ninth Circuit stated that Travelers did not limit the circumstances under which maintaining a vehicle constitutes use, and therefore imposed no limits on “unloading.”  Travelers also was decided 12 years prior to the enactment of § 11580.06(g) and to the extent that Travelers was inconsistent, the court was bound to follow the Insurance Code.

The court remanded the decision for further proceedings.  Notably, the court never determined whether Torti had Watson’s permission to use his motor vehicle.  With the issue of whether unloading constitutes use resolved, the ultimate coverage determination will likely turn on the issue of permission.

No Coverage for Data Breach Under Personal Injury Provision in General Liability Policy

In Recall Total Information Management, Inc. v. Federal Ins. Co., 147 Conn. App. 450 (2014), Connecticut’s Appellate Court held there is no coverage for a data breach under a general liability policy’s “personal injury” coverage in the absence of evidence that the files were accessed by third parties.  

Recall, a records storage company, contracted to store tapes containing electronic personal information, including names and Social Security numbers, of 500,000 past and current IBM employees.  Recall subcontracted with a transport company to ship the tapes by truck, and was named as an additional insured on the transport company’s primary and umbrella general liability policies.  While the tapes were in transit, they fell off the transport company’s truck and were taken by an unknown person.  The tapes were never recovered.

IBM incurred over $6 million in mitigation costs as a result of the data breach, including notification to affected persons and providing credit monitoring services. IBM demanded Recall reimburse these costs.  Recall notified its insurers, but they denied coverage and declined to participate in settlement negotiations.  Recall settled with IBM and then obtained assignments from the transport company under its policies.  Recall sued the insurers, but the insurers prevailed on summary judgment.  In January, the Appellate Court upheld the judgment of the trial court.

The Appellate Court first rejected Recall’s contention a defense was owed because the court found no “suit” had been brought.  The Appellate Court next addressed the substantive coverage question.  The policies covered damages for “personal injury,” which was defined to include “injury caused by an offense of electronic, oral, written or other publication of material that violates a person’s right to privacy.”  Recall argued the personal information stored on the tapes had been “published” to the thief or other unknown persons, subjecting Recall to potential claims and liability for the costs of notifying the owners of the lost data and providing them with credit monitoring services.

The Appellate Court found, however, that Recall had failed to cite any evidence the electronically stored information was published and that speculation about a publication was insufficient.  Neither the complaint nor affidavits Recall submitted contained facts suggesting the data had been accessed, which the Appellate Court found was a prerequisite for the “publication” requirement.

The Appellate Court was also unconvinced by Recall’s argument the triggering of data breach notification statutes presupposes an invasion of privacy.  The Appellate Court explained the statutes in question do not address or provide compensation for identity theft; they simply require notice to the owner of the personal information involved in a data breach so that the victims may protect themselves from potential harm.  “Merely triggering a notification statute,” reasoned the court, “is not a substitute for a personal injury.”

Given the prevalence of data breach cases, these insurance issues will continue to be litigated.

Contractors Dismayed by Decision Expanding Right to Repair Act

The California Court of Appeal, Fourth Appellate District, held that California’s Right to Repair Act, Civil Code section 895, et seq., does not provide the exclusive remedy for homeowners when alleged construction defects have resulted in actual damage.

CON BLOG_contractorsThe Aug. 28 decision in Liberty Mutual Insurance Company v. Brookfield Crystal Cove, LLC involved a 2008 pipe failure in a sprinkler system at a newly constructed home.  While the builder (Brookfield) performed repairs and remediation at the property, the homeowner’s insurance company (Liberty Mutual) paid for the homeowner’s relocation expenses.  In 2011, Liberty Mutual filed a subrogation lawsuit against Brookfield to recover those expenses.

The Right to Repair Act had been expected to limit a contractor’s exposure for construction defects and procedural remedies. Liberty Mutual’s claim would have been time-barred under the Act. However, because its insured sustained consequential damages, Liberty Mutual had the right to pursue them outside the Act’s limitations. As the court noted, other remedies available to homeowners continue to exist.

Image courtesy of Flickr by Kansas City District U.S. Army Corps of Engineers