The recent procedural ruling by a Pennsylvania federal court highlights another area of uncertainty in the growing wave of insurance litigation related to COVID-19: will these cases proceed in state or federal courts? The U.S. District Court for the Western District of Pennsylvania on its own volition remanded a Pittsburgh restaurant’s lawsuit seeking insurance coverage for business interruption losses stemming from the COVID-19 shutdown. The court questioned but did not determine whether it had diversity jurisdiction over the case, but instead exercised its discretionary authority to decline jurisdiction under the Declaratory Judgment Act, 28 U.S.C. s 2201(a). The court applied a balancing test, but the scale was tipped against federal court jurisdiction due to the novel insurance coverage issues under Pennsylvania law “best reserved for the state court to resolve in the first instance.” The court noted the lack of Pennsylvania caselaw due to the relative recency of the COVID-19 pandemic and concluded that “it is counterproductive for a district court to entertain jurisdiction over a declaratory judgment action that implicated unsettled questions of state law.” Given that insurance claims related to COVID-19 will raise novel issues of state law around the country, other federal courts may follow suit and decline to exercise jurisdiction over such insurance claims.
Is Civil Authority Insurance Coverage the Solution for Businesses Sustaining Losses from COVID-19?
Many of the early insurance-related COVID-19 lawsuits seek insurance coverage under the civil authority coverage grant in commercial property policies. Restaurants filed the first cases (Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al. and French Laundry Partners LP, et al. v. Hartford Fire Insurance Co., et al.) quickly followed by similar lawsuits filed by the Chickasaw and Choctaw tribes in Oklahoma. Even more recently, restaurants in Chicago and Tampa filed suit including claims under this coverage. These lawsuits rely on governmental prohibitions, such as “shelter-in-place” and “stay-at-home” orders, to trigger business income coverage in their commercial property policies. No doubt hundreds, if not thousands, of insureds are submitting insurance claims under this same civil authority coverage – with more lawsuits to follow.
Civil authority coverage pays for losses when a government bars access to an insureds’ property due to a covered cause of loss some place other than the insured property. The time length can vary and can be as short as four weeks. Typical (but by no means universal) policy language is:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises.
Insurers generally insist that the “civil authority” (usually local, state, or federal government entities) must prohibit access to the business – governmental recommendations do not suffice. So insurers will deny coverage for claims based on the early governmental orders that did not prohibit access to businesses, but instead limited capacity or recommended cancellation of conferences and conventions (for example, the D.C. Health Advisory from March 11, 2020). Those insurer defenses erode under government prohibitions. For example, on March 13, 2020, D.C. changed its prior recommendations about limiting capacity to prohibitions of mass gatherings, and then on March 24, 2020, D.C. ordered closures of businesses such as gyms, theaters, and retail clothing stores. Insurers will likely argue that only the later government prohibitions that required business closures constitute the requisite prohibition, but this will be the subject of extensive litigation.
Most policies, as illustrated above, require the civil authority order be related to damage. For more discussion on what constitutes “physical loss or damage,” please see our previous blog posts here and here.
In what may be an effort to bolster insureds’ civil authority claims, some governments, including those in New Orleans, Louisiana, and Napa County, California, tied their closure orders to the physical damage caused by COVID-19. Napa County’s order expressly recognizes the physical damage caused by COVID-19: “[t]his Order 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.” Insurers will attempt to rebut this governmental determination that COVID-19 causes physical damage, just as insureds will rely on this language to support coverage claims under property policies.
Insurers will also attempt to foist all policy limitations and exclusions on the civil authority coverage, but not all may apply, or may create an ambiguity, thus preserving coverage. Given the complexities of civil authority coverage, and its interaction with other policy terms, insurers may race to favorable jurisdictions to generate helpful precedent. Insureds with civil authority coverage should move aggressively to protect their insurance coverage for COVID-19 by examining their policies and seeking professional advice as soon as possible.
Watch this blog for other insurance coverage developments connected to COVID-19.
Louisiana Seeks to Protect Businesses, Big or Small, from COVID-19
Louisiana, like many other states, has proposed two insurance coverage bills in response to COVID-19’s devastating impact on businesses. While Louisiana’s House bill is limited to small businesses, the Senate bill is not. Both require insurers to cover COVID-19 related losses under certain circumstances.
House Bill 858 requires every insurance policy issued to insureds with less than 100 full-time employees that covers loss or damage to property, including the loss of use and occupancy and business interruption, to cover COVID-19 losses. Those policies “shall be construed to include among the covered perils under such a policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Emergency Proclamation Number 25 JBE 2020 and the related supplemental proclamations concerning the coronavirus disease 2019 pandemic” (see HB 858). In response to COVID-19, the governor issued Emergency Proclamation Numbers 25 JBE 2020, 27 JBE 2020, 30 JBE 2020, 32 JBE 2020, 33 JBE 20202, 37 JBE 2020, and 41 JBE 2020. Proclamation Number 25 declared a state of emergency and the supplemental proclamations gradually extended the restrictions in the state. On April 2, 2020, Emergency Proclamation 41 JBE 2020, among other things, renewed all the previous COVID-19 proclamations and continued the general stay-at-home order (absent essential activities), closure of nonessential businesses, a restriction on those businesses not defined as nonessential to continue operations with only essential employees and minimal public contact with no more than 10 gathering at once, and a curfew from 10:00 p.m. to 5:00 a.m. If this bill becomes law, the scope of available coverage could involve interpretations of governmental proclamations. The bill also defines the coverage period by requiring insurers to indemnify policyholders, subject to limits, for business interruption and loss of business that occurs during the duration of the public health emergency.
Senate Bill 477 is not limited to particular insureds and likewise requires business interruption coverage to include COVID-19: “[n]otwithstanding any other provision of law to the contrary, every policy of insurance in force in this state on March 11, 2020, and thereafter insuring against loss or damage to property that includes the loss of use, loss of occupancy, or business interruption shall be construed to include among the perils covered under that policy, coverage for business interruption due to imminent threat posed by COVID-19 [. . .]” (see SB 477. Under this bill, the “imminent threat posed by COVID-19” constitutes a covered peril, in an apparent response to insurers’ expected threat defense, i.e., that fear or threat of the virus does not trigger coverage. Under this bill, it does.
Senate Bill 477 also requires any business interruption policy issued on or after August 1, 2020, to include a notice of all exclusions on a designated form signed by the insurer and either the named insured or the named insured’s legal counsel. The signed exclusion form will become a rebuttable presumption that the insured knowingly contracted for the coverage with the specified exclusions. Insurers may seize on the countersignature requirement as a defense to policyholder claims that they did not understand the coverage sold to them.
Watch this blog for future updates.