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.

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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.”

Winning Arbitration Battle in the Connecticut Supreme Court Regarding Historic Home Restoration Costs Still Leaves Insurer Defending Legal War in State Trial Court

Concluding that the trial court “improperly substituted its judgment” for that of an appraisal panel, the Connecticut Supreme Court invalidated the trial court’s decision to vacate an arbitration award for property loss caused by a tree falling on the insured’s home. See Kellogg v. Middlesex Mut. Assurance Co., 326 Conn. 638 (2017). Pending the outcome of this appeal, the insured filed a second suit against her insurer, Middlesex Mutual Assurance Company (“Middlesex”), alleging breach of contract under the homeowner’s “Restorationist” insurance policy, as well as various extra-contractual claims based on the allegedly improper and delayed adjustment of the claim. Notwithstanding the overlapping nature of these claims with those addressed by the arbitration panel, the court denied the insurer’s Motion to Dismiss. Thus, the second lawsuit remains pending despite the Supreme Court’s finding in favor of the insurer.

Both cases revolve around Sally Kellogg’s single-family property located in Norwalk, Connecticut, which is listed on the National Registry of Historic Places and sits in Norwalk’s Green Historic District. When Kellogg, an interior designer, purchased the property in 2002, she also purchased the Restorationist policy on the home and its contents. The policy provided for unlimited coverage for repairs, including the replacement or restoration cost of the property without deduction for depreciation.

Eight years later, a four-and-a-half ton tree fell on the house during a severe storm, breaking through the roof and causing extensive structural and other property damage. Following the insured’s submission of her claim, a dispute arose regarding the extent of the damage and the cost of repair. Kellogg invoked the appraisal provision of the policy, which provided for unrestricted arbitration in which a panel of three arbitrators—one appointed by each party, and a referee appointed by the two other arbitrators—had the power to decide issues of law and fact not subject to judicial review. The arbitration proceedings resulted in a combined award of $539,901.84 for both replacement/restoration cost and actual cash value loss to personal property contained within the house.

Kellogg, who had argued for restoration costs exceeding $1.5 million, filed an application in the Connecticut Superior Court to vacate the arbitration award, which Middlesex attempted to dismiss as untimely. Though the trial court stated it would only rule on the motion to dismiss, it went on to hold eight days of trial, which ultimately resulted in a finding that the award violated Connecticut General Statutes Section 52–418(a) because: (1) the trial court disagreed with the amount of the award, and (2) the decision of the appraisal panel “evidenced a manifest disregard of the nature and terms and conditions of the Restorationist insurance policy” in violation of the statute. The trial court vacated the arbitration award and denied Middlesex’s Motion to Dismiss.

In overturning this decision on Middlesex’s appeal, the Connecticut Supreme Court held that the trial court had improperly substituted its own judgment for that of the arbitration panel and failed to follow the proper standard for evaluating a claim of “manifest disregard of the law.” In doing so, the Court recognized the high level of deference paid to arbitrators in unrestricted arbitration proceedings, such that “a court may vacate an unrestricted arbitration award only under certain limited conditions: (1) the award rules on the constitutionality of a statute, (2) the award violates clear public policy, or (3) the award contravenes one or more of the statutory proscriptions of § 52–418.” (Internal citations removed). Further, the award resulting from unrestricted arbitration is not subject to de novo review even for errors of law.

Under this standard, the Supreme Court held, the trial court overstepped the scope of its judicial review, erroneously substituting its judgment for that of the arbitrators by essentially re-trying all of the facts found by the arbitrators regarding an appropriate award to the insured. To permit a party to object to an award simply because the party dislikes the outcome, the Court said, “would completely destroy the deference our law affords to the arbitration process by allowing the trial court to substitute its own judgment on the merits of the question submitted to arbitration.” In the absence of a claim that “the arbitrators refused to postpone a hearing, refused to hear any of the plaintiff’s evidence, or otherwise committed a procedural error,” the trial court should not have vacated the arbitration award, which was “final and binding.” The trial court further erred by construing policy language, when it should not have engaged in de novo review of the policy language at all. However, disagreeing with the trial court’s construction of policy language, the Supreme Court also declined to vacate the arbitration award on the premise that the panel had “manifestly disregard[ed]” the law in violation of Connecticut General Statutes Section 52-418(a)(4) “when it permitted the defendant to withhold depreciation costs until the plaintiff had incurred a debt for the repair or replacement of the property.”

Despite this good news for Middlesex, the company is still saddled with the defense of the second lawsuit. Stemming from the same property loss and claim, this subsequent lawsuit asserts both contractual and extra-contractual claims of bad faith, negligent adjustment of the claim, violations of Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Act, negligent infliction of emotional distress, and estoppel. Middlesex moved to dismiss the complaint for lack of ripeness as well as under the “prior pending action” doctrine on the basis that all of the causes of action complained of arose from Middlesex’s allegedly improper conduct in the adjustment and appraisal of the claim.

Nonetheless, the Superior Court sided with Kellogg, categorically denying Middlesex’s motion to dismiss. In doing so, it held that the new action is separate and distinct from the insured’s application to vacate the award, and that her current claims are (or were) not contingent on the outcome of the arbitration appeal. The Court thus allowed the underlying action to proceed, notwithstanding that Kellogg’s claims directly related to the disputed adjustment and appraisal of the loss. For the same reasons, the Superior Court also denied Middlesex’s subsequent motion to stay the proceedings pending the outcome of the appeal.

Insurers should thus take note: a win in connection with issues of coverage and appraisal does not always avoid other potential liabilities arising from the adjustment of claims.

A link to the Connecticut Supreme Court’s decision is available on the judicial branch website: (p. 100).

Doctrine of Superior Equities Does Not Bar Assignment of Claim against Insurance Broker

In a recent decision from the Fifth District Court of Appeal, the court held that a negligence cause of action against an insurance broker could be assigned to a third party, including the insurer of an injured party. In AMCO Insurance Company v. All Solutions Insurance Agency, LLC, 16 C.D.O.S. 1521, two separate lawsuits were filed against Amarjit Singh (“Singh”) in connection with a fire caused by Singh’s negligence. Hideo Ogawa and Myong Echols (collectively, “Ogawa”) owned a restaurant that was damaged by the fire. David Saari (“Saari”) owned commercial property that was damaged by the fire. AMCO Insurance Company (“AMCO”) was the commercial property insurer for Saari and paid $371,326 to Saari for damages caused by the fire. AMCO then brought a subrogation action against Singh. Ogawa also brought suit against Singh for losses caused by the fire. Singh tendered the claims to his insurance company but the claims were denied because there was no policy in effect on the date of the fire as a result of the negligence of Singh’s insurance broker, All Solutions Insurance Agency, Inc. (“All Solutions”). Subsequently, Singh entered into stipulated judgments with AMCO and Ogawa and assigned his claims against All Solutions to AMCO and Ogawa.

AMCO and Ogawa as assignees of Singh filed suit against All Solutions. The trial court granted summary judgment to All Solutions holding that Singh’s claim for broker negligence against All Solutions was not assignable. In addition, the trial court held that AMCO and Ogawa’s claims were precluded by the rule of superior equities.

The Court of Appeal noted that the general rule in California favors the assignability of tort causes of action. However, there are exceptions for causes of action for wrongs done to the person, the reputation or feelings of the injured party. Other exceptions include legal malpractice based upon the highly personal and confidential relationship between an attorney and client. All Solutions argued that the same reasons for prohibiting assignment of legal malpractice claims were equally applicable to insurance malpractice claims. However, the Court of Appeal rejected this argument stating that the communications between an insurance broker and client are not privileged or confidential and because of the standardized nature of insurance policies, the product delivered by the insurance broker to the client is not highly unique or personal.

The Court of Appeal also held that AMCO and Ogawa’s claims were not barred by equitable subrogation principles or the doctrine of superior equities. Equitable subrogation refers to the transfer of rights against a third party that arises in equity and occurs only by operation of law because a party (i.e., the subrogee) has paid a loss of another (i.e., the subrogor). The most common equitable subrogation action is one brought by an insurer against a wrongdoer who caused the loss paid by the insurer. In these instances, the doctrine of superior equities has developed based on the idea that an insurer who has been compensated (by receipt of premiums) for issuing a policy should not be allowed to shift the very loss contemplated by the policy to an innocent party. An insurer pursuing a claim for equitable subrogation must demonstrate that it is not attempting to shift the loss to an innocent party. California does not recognize a difference between equitable subrogation and conventional (i.e. contractual subrogation). Accordingly, even a contractual assignment to an insurer from its insured is subject to the doctrine of superior equities. All Solutions contended that the doctrine of superior equities limited the contractual assignments because it was Singh, and not All Solutions, who caused the fire.

With regards to Ogawa, the Court of Appeal held that the doctrine of superior equities did not apply because Ogawa was not a surety (i.e., an insurer). The Court of Appeal also found that AMCO was not subject to the doctrine of superior equities because it did not have a subrogee-subrogor (i.e., insurer-insured) relationship with Singh who had caused the fire. Rather, AMCO insured Saari who had been damaged by Singh. The doctrine of superior equities would have precluded the contractual assignment to AMCO if AMCO had insured Singh. However, AMCO’s insured was Saari and AMCO pursued its equitable subrogation claim against Singh for payments AMCO made to Saari. Accordingly, the doctrine of superior equities did not apply.

Finally, the Court of Appeal held that even if the doctrine of superior equities did apply, All Solutions had not demonstrated through material facts that its equitable position was equal or superior to AMCO. The Court of Appeal criticized the separate statement of undisputed material facts that All Solutions had submitted in support of summary judgment. No facts were introduced demonstrating how the fire losses would have been allocated if All Solutions had obtained the proper insurance for Singh. As a result, the Court of Appeal was unable to determine how the unobtained coverage would have related to coverage provided by AMCO. Accordingly, All Solutions did not demonstrate that its equitable position was equal or superior to AMCO’s equitable position. The Court of Appeal reversed the trial court granting All Solutions’ motions for summary judgment.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.