The Complex Insurance Coverage Reporter – 2020 Year in Review

Welcome to CICR’s annual review of insurance cases. Here, we spotlight decisions from the last year that you should know about — and a few pending cases to watch.

As our picks for “Cases to Know” (below) indicate, despite COVID-19, 2020 was an active year for insurance coverage. Fueled by the pandemic, state and federal courts tackled business interruption coverage issues in dozens of cases, while others addressed more traditional topics such as the duty to defend and allocation under liability policies. You can read about these and other developments below.

Looking forward, the appeals courts in our “Cases to Watch” can be expected to provide guidance on some noteworthy issues. They include the availability of business interruption coverage under first-party property policies for pandemic claims and the impact of anti-assignment provisions in liability policies.

We hope you enjoy this special feature. As always, thank you for your continued interest in our publication.

Cases to Know

Erie Insurance Exchange v. Moore, 228 A.3d 258 (Pa. 2020) (Occurrence; Duty to Defend)

Pennsylvania Supreme Court, in a 4-3 decision, concludes that the claimed unintentional shooting of a third party during an insured’s planned murder-suicide alleged a potentially covered “occurrence” and gave rise to a homeowners insurer’s duty to defend. The majority reasoned that, “when taken as true and liberally construed,” the allegations within the “four corners” of the complaint, which included that the claimant had been shot after the insured “negligently, carelessly and recklessly caused” the gun to be fired, made out an accidental shooting.

Three dissenting justices found that the weapon discharge under the circumstances alleged did not “carry with it the degree of fortuity or unexpectedness necessary to constitute an accidental occurrence,” and that the majority’s reasoning ran contrary to the principle that “the legal characterizations of conduct in a complaint are not determinative, and cannot be employed to compel an insurer to defend where the factual allegations otherwise would not trigger coverage.” The dissent explained:

The facts are clear: while in the process of effecting a murder-suicide, McCutcheon [the insured] physically pulled Carly into the home, engaged in a physical struggle with Carly, while he, the aggressor, held and discharged a firearm. As this Court has recognized, an insurer is not obligated to defend against such intentional tortious conduct… Moreover, other than characterizing the events in the legal terms “negligently, carelessly and recklessly,” there are no descriptive terms within the four corners of this complaint that describe the events as those in the nature of an accident….

What further distinguishes my view from the Majority’s is that, under the facts alleged in the complaint, there is no occurrence alleged to justify insurance coverage even if the gunshot wound itself was unintended by McCutcheon. That is so because an “occurrence” must not merely be unintended but unexpected.

Montrose Chemical Corporation of California v. Superior Court, 460 P.3d 1201 (Cal. 2020) (Exhaustion)

California Supreme Court unanimously adopts “vertical exhaustion,” allowing a policyholder to access available coverage under any “triggered” excess liability policy once it has exhausted directly underlying policies for the same policy period. The court rejected the “horizontal exhaustion” rule, which would have allowed the policyholder to access an excess policy only after it had exhausted policies with lower attachment points in every policy period in which the environmental damage resulting in liability occurred. It found that the plain language of the policies’ “other insurance” clauses, standing alone, was inadequate to resolve the dispute in the insurers’ favor, and further noted that other policy provisions, such as attachment points expressed only in terms of the immediately underlying insurance, “strongly suggest that the exhaustion requirements were meant to apply to directly underlying insurance and not to insurance purchased in other periods.” The court concluded that, “in the absence of any more persuasive indication that the parties intended otherwise,” the policies were “most naturally read” to mean the policyholder “may access its excess insurance whenever it has exhausted the other directly underlying excess insurance policies that were purchased for the same policy period.”

Richards v. State Farm Lloyds, 597 S.W.3d 492 (Tex. 2020) (Duty to Defend; Extrinsic Evidence)

Texas Supreme Court, on certified question from the Fifth Circuit, opines that the state’s “eight-corners rule” to determine the duty to defend precludes consideration of an insurer’s extrinsic evidence barring coverage for underlying injury claims, even though the homeowners policy at issue did not contain language requiring defense of “groundless, false or fraudulent” suits. The court recognized, however, that

if an insurance policy contained language inconsistent with the eight-corners rule, the policy language would control. But the question here is not whether parties can contract around the eight-corners rule. They can. The question is whether these parties have contracted around it by declining to expressly agree that State Farm must defend claims “even if groundless, false or fraudulent.”

It concluded that, in this case, they did not. The court declined to address an exception to the rule applied by the Fifth Circuit, derived from Northfield Ins, Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), reh’g and reh’g en banc denied, 2004 U.S. App. LEXIS 8706 (Apr. 29, 2004), that, as described, “allows extrinsic evidence bearing on the duty to defend when (1) ‘it is initially impossible to discern whether coverage is potentially implicated’ and (2) ‘the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.’”

The Texas Supreme Court would go on to adopt an exception to the “eight corners rule” in cases of collusive fraud. Loya Ins. Co. v. Avalos, 2020 Tex. LEXIS 373 (Tex. May 1, 2020).

Rossello v. Zurich American Insurance Company, 226 A.3d 444 (Md. 2020) (Allocation)

Maryland’s highest court adopts pro rata allocation for asbestos-related bodily injury claims under liability policies. The court began by explaining that injury spanning many years often implicates multiple policies and, therefore, implicates a continuous or injury-in-fact trigger under Maryland law. Adopting the reasoning of Mayor & City Council of Baltimore v. Utica Mutual Ins. Co., 802 A.2d 1070 (Md. Ct. Spec. App. 2002), app. dismissed, 821 A.2d 369 (Md. 2003), it rejected joint and several allocation because of its “poor fit” under the policy language:

[T]he pro rata approach is unmistakably consistent with the language of standard CGL policies. Indeed, “there is no logic to support the notion that one single insurance policy among 20 or 30 years worth of policies could be expected to be held liable for the entire time period.” …Consistent with the policy language limiting coverage to that which occurs “during the policy period,” the timing of the injury dictates both the manner in which the policies are triggered and the portion of damages for which each policy is responsible.

The court emphasized that pro rata allocation serves important public policy objectives because of its ease of administration, efficiency and consistency with the parties’ reasonable expectations, and agreed that, unlike the equitable result under pro rata allocation, the joint and several approach creates a “false equivalence” between an insured who purchased coverage continuously for many years and an insured who purchased just one year of coverage.

Coronavirus (COVID-19) Business Interruption Coverage Trial Court Decisions (First-Party Property)

No doubt, this was the big insurance news story of 2020. Courts around the country were hit with a wave of business interruption coverage cases arising out of the COVID-19 pandemic. It did not take long for that to happen.

In a message to our readers in March 2020, we said:

Predictably, insurer and policyholder counsel are already squaring off over the existence of coverage for these claims. Just last week, the first COVID-19 business interruption coverage lawsuit was filed in Louisiana. There, the policyholder — which calls itself a “well-known New Orleans restaurant in the heart of the French Quarter” — alleges that a declaratory judgment will “prevent the plaintiffs from being left without vital coverage acquired to ensure the survival of their business should operations cease due to a global pandemic virus and civil authorities’ response.” Expect more to come.

And they did. Already, as of our December 2020 issue, there were at least 70 reported court decisions on motions by insurers to dismiss policyholder suits seeking business interruption coverage for these losses.

From the start, the results in these cases have heavily favored insurers.

In one early decision, a New York federal district court declined to issue a preliminary injunction requiring an insurer to cover revenue allegedly lost by a magazine publisher-insured after its operations ceased because of COVID-19 shutdown order. Social Life Magazine, Inc. v. Sentinel Ins. Co. Ltd., No. 20 Civ. 3311 (S.D.N.Y. May 14, 2020), app. dismissed, No. 20-1587 (2d Cir.). Ruling from the bench, the court found that business interruption coverage requires “some damage to the property to prohibit you from going.” It said that, although the insured deserved “an A for effort” and “a gold star for creativity,” “this is just not what’s covered under these insurance policies.”

A Michigan trial court, in another early case, found that restaurants closed by government order related to COVID-19 were not entitled to business interruption coverage. Gavrilides Mgmt Co. v. Michigan Ins. Co., 2020 Mich. Cir. LEXIS 395 (Mich. Cir. Ct., Ingham Cnty. July 1, 2020), app. pending, No. 354418 (Mich. Ct. App.). It explained that the policy language required the suspension of the insured’s operations to have been “caused by direct physical loss of or damage to property,” and that direct physical loss must involve “something with material existence, something that is tangible, something…that alters the physical integrity of the property.” That case is currently on appeal.

Since then, there have also been some rulings more favorable to policyholders including based on allegations that the virus was “likely” on their premises. Studio 417 v. Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 147600 (W.D. Mo. Aug. 12, 2020); North State Deli, LLC v. Cincinnati Ins. Co., No. 20-CVS-02569 (N.C. Super. Ct., Durham Cty., Oct. 9, 2020), app. pending, No. P21-22 (N.C. Ct. App.) (ruling that there was “direct physical loss” since the insureds were “expressly forbidden by government decree from accessing or putting their property to use for the income-generating purposes for which the property was insured”). But some have questioned whether even the presence of COVID-19 on an insured premises could qualify as “direct physical loss or damage”:

[E]ven when present, COVID-19 does not threaten the inanimate structures covered by property insurance policies, and its presence on surfaces can be eliminated with disinfectant. Thus, even actual presence of the virus would not be sufficient to trigger coverage for physical damage or physical loss to the property. Because routine cleaning, perhaps performed with greater frequency and care, eliminates the virus on surfaces, there would be nothing for an insurer to cover, and a covered “loss” is required to invoke the additional coverage for loss of business income under the Policy.

Uncork & Create LLC v. Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 204152, at *13 (S.D. W.Va. Nov. 2, 2020).

Some cases are now moving to the next phase: state and federal court appeals. They made our listing of “Cases to Watch” below.

Cases to Watch

In re Farmers Texas County Mutual Insurance Company, No. 19-0701 (Tex.) (Stowers Doctrine; Excess Judgment)

Texas Supreme Court to decide whether a viable Stowers (negligent failure to settle) claim may exist against a liability insurer where the underlying case settled prior to judgment and within policy limits (with the insured contributing a portion of the settlement). The insurer has argued (1) the insured had no claim for negligent failure to settle because such a claim requires that a negligent failure to settle result in an excess judgment against the insured (and since the case here settled, there would never be a final judgment in excess of policy limits); and (2) for this reason, the insured has sustained no injury and her claim was not ripe for adjudication. An appeals court denied the insurer mandamus relief on its motion to dismiss the Stowers claim (but granted relief on its motion to dismiss the insured’s breach of contract claim) noting that the viability of the claim as pled has not been clearly rejected by Texas courts.

The issue on review by the Supreme Court, as submitted by the insurer, is whether:

[t]he trial court abused its discretion in refusing to dismiss the Insured’s Stowers claim, because there can be no Stowers claim in the absence of excess judgment against the insured.

Video of the argument is available here.

Mt. Hawley Insurance Company v. Carriage Hill Associates of Charleston, LLC, No. 20-2004 (4th Cir.) (Duty to Defend; Extrinsic Evidence)

Fourth Circuit to review South Carolina federal court’s ruling that a CGL insurer had no duty to defend (or indemnify) an insured-contractor against claims for faulty workmanship in light of extrinsic evidence. In granting judgment on the pleadings to the insurer under Fed. R. Civ. P. 12(c), the district court considered permits attached to the insurer’s complaint, which showed that the insured’s work postdated one of the policy periods at issue. It held that, because there was no material issue of fact that the alleged property damage did not “occur[] during the policy period” as the policy required, the insurer had no duty to defend or indemnify under that policy. The court also held that coverage under three subsequent policies was barred by “your work” exclusions. The insured appealed to the Fourth Circuit and recently moved to vacate the trial court ruling based on an alleged lack of subject matter jurisdiction.

PCS Nitrogen, Inc. v. Continental Casualty Company, No. 2020-000445 (S.C.) (Anti-Assignment Clause)

South Carolina Supreme Court to consider whether an assignment of rights under liability policies is invalid where the insured fails to obtain insurer consent. The court is being asked to decide whether a state appeals court correctly rejected the plaintiff’s argument that, notwithstanding the policies’ express requirement, insurer consent was not required because the assignment took place after the environmental contamination at issue had begun (i.e., a so-called “post-loss” assignment). The insurers contend their consent was needed because, under South Carolina law, the insured can only assign its right to payment under the policy once its underlying liability has been fixed by a judgment, and there was no judgment at the time of the assignment here. The plaintiff’s alternative argument, also rejected below, is that the trial court should have denied summary judgment to the insurers because there is a question of fact as to whether there was a de facto merger between the insured and plaintiff’s predecessor.

Coronavirus (COVID-19) Business Interruption Coverage Appeals (First-Party Property)

As noted above, rulings under first-party policies for business interruption coverage related to the COVID-19 pandemic are being targeted for (potential) appeals. Mostly, these are by insureds but they also include the decision favoring the policyholders in North State Deli, LLC v. Cincinnati Ins. Co. (see above). Some may be withdrawn or dismissed along the way.

Expect a range of issues, such as presented by the insured in one case:

Whether the district court erred in dismissing [the insured’s] complaint for failure to state a claim against [its insurer] for wrongful denial coverage under an insurance policy covering claims for “physical loss of” property and actions of civil authority, where [the insured] alleged the loss of its restaurant space as a result of the Georgia Governor’s Executive Order admonishing businesses like [this] to close because of COVID-19.

Henry’s Louisiana Grill Inc. v. Allied Ins. Co. of Am., No. 20-14156 (11th Cir.).

Recently, a federal court certified the following question to the Ohio Supreme Court:

Does the general presence in the community, or on surfaces at a premises, of the novel coronavirus known as SARS-CoV-2, constitute direct physical loss or damage to property; or does the presence on a premises of a person infected with COVID-19 constitute direct physical loss or damage to property at that premises?

Neuro-Communication Servs. v. Cincinnati Ins. Co., No. 4-20-cv-1275 (N.D. Ohio Jan. 19, 2021). According to that court, this is an important question of state law that implicates many cases: “Dozens, if not hundreds of cases seeking coverage for losses related to the pandemic under policies similar or identical to that at issue in this case have been filed in both federal and state courts in Ohio… As these cases wend through the various court systems, differing interpretations of Ohio contract law by different courts threaten to undermine the uniform application of that law to similarly situated litigants.”

And at least one case that did not arise out of the pandemic, but is seen as having implications for COVID-19 claims, was the subject of a recent cert petition to the U.S. Supreme Court. Mama Jo’s Inc. v. Sparta Ins. Co., 823 F. App’x 868 (11th Cir. Aug. 18, 2020), cert. pending, No. 20-998 (S. Ct.). As described by the insured in its appeal petition, “[a]lthough this case involves physical construction dust and debris damage to a restaurant, certain issues presented overlap with the recent proliferation of COVID-19 insurance cases across the country.” It says that, as of the date of the petition (January 14, 2021), the Mama Jo’s Eleventh Circuit opinion has been cited over 50 times in briefs directed towards COVID-19 claims.

In their Statement of the Case, they allege:

The Opinion below construes the general provisions found in nearly all policies providing coverage for “direct” and “physical” losses to exclude coverage for items or structures that need to be cleaned instead of replaced… While this case pertains to cleaning construction dust and debris as well as actual physical loss to property and business income, the restrictive interpretation of “direct physical loss” extends to claims involving the cleaning and remediation of water, mold, smoke, soot, and viruses. Because there is a split amongst the Circuits as to the interpretation of “direct physical loss” in the face of damage that may be repaired through cleaning, there is cause for this Court to accept jurisdiction to resolve the conflict.

A response is due February 25, 2021. We continue to monitor developments in these and other cases.

Whiteside v. GEICO Indemnity Company, No. S21Q0227 (Ga.) (Bad Faith; Notice)

Georgia Supreme Court, on certified question from the Eleventh Circuit, to decide whether an auto insurer that did not accept a policy limits demand has no potential “bad faith” liability for a default excess judgment against its insured in a subsequent underlying lawsuit of which it had no notice. As described by the Eleventh Circuit, the case presents at least three novel issues under Georgia law, including whether such claims are barred by a statute (O.C.G.A. § 33-7-15) that potentially “relieves [motor vehicle] insurers not notified of lawsuits against their insured from ‘any liability to pay any judgment or other sum on behalf of its insureds’” and any obligation to defend. And, alternatively, whether an insured can sue for “bad faith” when, after the claim did not settle but before judgment was entered against the insured, the insured forfeited coverage for failure to comply with the statutory and related policy notice requirements (i.e., when is coverage relevant for a “bad faith” claim to accrue).

The certified questions specifically are:

    1. When an insurer has no notice of a lawsuit against its insured, does O.C.G.A. §33-7-15 and a virtually identical insuring provision relieve the insurer of liability from a follow-on suit for bad faith?
    2. If the notice provisions do not bar liability for a bad-faith claim, can an insured sue the insurer for bad faith when, after the insurer refused to settle but before judgment was entered against the insured, the insured lost coverage for failure to comply with a notice provision?
    3. Does a party have the right to contest actual damages in a follow-on suit for bad faith if that party had no prior notice of or participation in the original suit?