A divided Sixth Circuit panel holds that, under Ohio’s “all sums” allocation scheme, “targeted” insurers may seek indemnity contribution from a policy reinsured by a captive insurer. The court rejected the insured’s argument that allowing contribution from a captive it partly owned would undermine the purpose of “all sums,” and explained that “[a]ll sums shifts the burden of calculating relative liability, but it doesn’t absolve the insured of all financial burden”. It distinguished cases from other jurisdictions that have not permitted contribution for uninsured or self-insured periods, reasoning that the insurers here did not seek contribution from the insured and “[n]o jurisdiction has prohibited contribution whenever an insured will face financial consequences down the line.”
DUTY TO DEFEND – OPIOID SUITS
Sixth Circuit, applying Kentucky law, holds that CGL insurers have no duty to defend a pharmaceutical distributor against claims by cities and municipalities seeking to recover costs expended in response to the “opioid epidemic.” Citing Acuity v. Masters Pharm., Inc., 2022 Ohio LEXIS 1814 (Ohio Sept. 7, 2022) and ACE Am. Ins. Co. v. Rite Aid Corp., 270 A.3d 239 (Del. 2022), the court reasoned that the underlying lawsuits did not seek damages “because of” (i.e., “on account of” or “by reason of”) “bodily injury,” but rather sought “to recover costs incurred due to the opioid epidemic” (e.g., expenses for police, emergency, health, prosecution, corrections, rehabilitation, and other services). “[T]he surrounding context and overall purposes of the policies make clear that an insured would not reasonably expect coverage of the underlying lawsuits,” the court said.
Rhode Island Supreme Court concludes that a pollution exclusion in a commercial package policy issued to a residential heating system installer is ambiguous as applied to a claim for a heating oil leak into a home. The court concluded that the policy’s definition of “pollutant”* – which did not expressly include home heating oil – was “reasonably susceptible of different constructions”. Noting that the issue was one of first impression in the state, it considered decisions from other jurisdictions, including the “extreme approach” taken by the Indiana Supreme Court in State Auto. Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845 (Ind. 2012) (concluding that an “insurer can and should) specify what falls within its pollution exclusion,” and where a failure to do so “renders its policy ambiguous, we construe the policy in favor of coverage”). According to the Rhode Island court, the “‘diversity of judicial thought’” regarding interpretation of the term “pollutants” was “‘proof positive of ambiguity’” (quoting Textron, Inc. v. Aetna Cas. & Sur. Co., 754 A.2d 742, 749 (R.I. 2000)).
* The policy defines “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
TIME-LIMITED SETTLEMENT DEMANDS
California establishes a statutory framework for use of “time-limited demands”* for settling property damage, personal or bodily injury, and wrongful death claims under auto, motor vehicle, homeowners, or commercial premises liability insurance policies. Effective January 1, 2023, the statute requires, among other things, that such demands be made in writing and labeled as a “time-limited demand” (or refer to the statute), allow at least 30 days for acceptance if transmitted by email or 33 days if transmitted by mail, provide certain details about the claim, describe the alleged injuries, and include “[r]easonable proof . . . to support the claim.” The insurer can respond by accepting the demand, seeking clarification or additional information (or an extension), or rejecting the demand by notifying the claimant in writing before the demand is set to expire and providing the basis for the rejection. A demand that does not “substantially comply” with the statute “shall not be considered to be a reasonable offer to settle the claims” within policy limits for purposes of a “bad faith” suit against the tortfeasor’s liability insurer.
* The statute defines “time-limited demand” as a pre-suit offer “to settle any cause of action or a claim for personal injury, property damage, bodily injury, or wrongful death made by or on behalf of a claimant to a tortfeasor with a liability insurance policy for purposes of settling the claim against the tortfeasor within the insurer’s limit of liability insurance, which by its terms must be accepted within a specified period of time.”
WAIVER AND ESTOPPEL
Eleventh Circuit holds, under Georgia law, that a liability insurer did not waive the ability to assert a pollution exclusion defense by not including it in an initial disclaimer letter. The court observed that Georgia’s “longstanding general rule” that neither waiver nor estoppel can be used to create coverage potentially was “call[ed] . . . into question” by the Georgia Supreme Court’s holding in Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012), that the insurer had waived a late notice defense by its alleged “continued failure to fairly inform [the insured]” of its intention to assert the defense. Citing its decision in AEGIS Elec. & Gas Int’l Servs. Ltd. v. ECI Mgmt. LLC, 967 F.3d 1216 (11th Cir. 2020), the Eleventh Circuit found no indication that the Hoover court “intended to upend the longstanding rule that an insurer cannot waive coverage defenses” (i.e., assertions that the policy does not cover the specific injury in question) as opposed to “policy defenses” (which are based on an insured’s failure to fulfill a procedural condition). The court concluded that the insurer did not waive its right to assert the pollution exclusion because it was a “coverage defense.”
2022 YEAR IN REVIEW
Cases to Know
Ohio Supreme Court holds that a CGL insurer has no duty to defend government lawsuits against a pharmaceutical distributor for claimed costs of responding to the “opioid epidemic” (e.g., for increased police patrols, judicial expenditures, prison and public-works expenditures, substance-abuse treatment, and emergency and medical-care services). The court determined that the phrase “damages because of bodily injury” in the liability policies at issue “requires more than a tenuous connection between the alleged bodily injury sustained by a person and the damages sought,” and concluded that the underlying complaints failed to tie the plaintiffs’ alleged economic losses to particular bodily injuries sustained by their citizens. To hold otherwise, the court said, “would be to conclude that a duty to defend exists simply because a consequence of the alleged public-health crisis is bodily injury, regardless of the fact that the underlying parties do not seek damages because of any particular bodily injury sustained by a person. We find this to be an extraordinarily expansive view and one that gives us much pause given the potential floodgates it might open.”
Business Interruption – COVID-19 Appeals
Claims by businesses for coverage under commercial property insurance policies for their COVID-19 pandemic-related income losses continued to attract attention over the last year as more federal and state appeals courts weighed in. The results in these cases have heavily favored insurers including at the appellate level.
During 2022, federal appeals courts for the First, Fourth and Fifth Circuits joined seven sister courts in siding with insurers.* State supreme courts in Connecticut, Delaware, Iowa, Louisiana, Maryland, Massachusetts, Ohio, Oklahoma, South Carolina, Washington and Wisconsin (along with various intermediate appellate courts) similarly concluded last year (or in early 2023) that policyholders’ claimed business income losses from the pandemic were not covered under the circumstances presented. This included cases where it was said or inferred that the virus was physically present at the insured’s premises.
The Wisconsin Supreme Court explained:
As the overwhelming majority of the other courts that have addressed the same issue have concluded, the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not “alter the appearance, shape, color, structure, or other material dimension of the property.” The virus does not necessitate structural “repairs or remediation”; it can be removed from a surface with a disinfectant. Likewise, COVID-19 does not render property “inherently dangerous” or “uninhabitable” in the same way as “ongoing rockfalls” or wildfire smoke might, because COVID-19 is not a “physical peril that ma[kes merely] entering a structure hazardous.” Rather, the danger of the virus is to “people in close proximity to one another,” not to the real property itself.
Colectivo Coffee Roasters, Inc. v. Society Ins., 974 N.W.2d 442, 447-48 (Wisc. 2022) (emphasis added – citations omitted); see also Neuro-Communication Servs. v. Cincinnati Ins. Co., 2022 Ohio LEXIS 2482, at *19 (Ohio Dec. 22, 2022) (“[W]ith respect to the three factual scenarios identified in the certified question, we conclude that direct physical loss or damage to property does not arise from (1) the general presence of Covid in the community, (2) the presence of Covid on surfaces at a premises, or (3) the presence on a premises of a person infected with Covid.”).
Policyholders achieved a measure of success when a majority of the Vermont Supreme Court found — under the state’s “extremely liberal pleading standards” — that allegations that the COVID-19 virus was “continuously present” at an insured’s facilities and altered property when it adhered to surfaces survived a motion for judgment on the pleadings. Huntington Ingalls Indus. v. ACE Am. Ins. Co., 2022 Vt. LEXIS 47 (Vt. Sept. 23, 2022). A forceful dissent argued that the case should be dismissed. “As a matter of law, human-generated droplets containing SARS-CoV-2 cannot cause ‘direct physical loss or damage to property’ under this insurance policy. No future litigation can change that reality,” the dissent said.
According to the University of Pennsylvania’s Covid Coverage Litigation Tracker, COVID business interruption coverage cases are pending before the highest courts in California, New Jersey and New York (among others).
*The Second, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Circuits had already issued rulings in these cases. Earlier this year, the Third Circuit held in this context that the claimed loss of use of a property’s “intended business purpose” is not a covered physical loss of property. Wilson v. USI Ins. Serv. LLC, 57 F.4th 131 (3d Cir. 2023) (New Jersey and Pennsylvania law).
Maryland Supreme Court holds that, absent public policy modifications or contractual language to the contrary, tort claimants are not third-party beneficiaries of a tortfeasor’s GL policy unless they are judgment creditors of or have entered into approved settlements with the tortfeasor. The court focused on “the plain language” of the policies, which it said made “clear” that the parties “understood and agreed that the [insured] would not ‘become legally obligated to pay’ any damages until the conclusion of a ‘suit seeking those damages.’” It further disagreed that existing Maryland public policy made all tort claimants intended beneficiaries of GL policies, and rejected their attempted reliance on Maryland’s “direct action” statute. As a result, the claimants, who alleged lead-paint related injuries, could not attempt to set aside post-injury settlements between the insured and its insurer that eliminated or reduced coverage under the policies at issue.
Ohio Supreme Court holds that alleged losses stemming from a ransomware attack on an insured’s computer-software systems (payment of ransom and costs associated with investigating and remediating the attack as well as upgrading the insured’s security systems) were not covered under a businessowners property policy that requires “direct physical loss of or damage to” property. The court reasoned that the policy’s “clear and unambiguous” requirement of “direct physical loss of or damage to” electronic equipment or media was not satisfied, because software “is an intangible item that cannot experience direct physical loss or direct physical damage”. It was “not persuaded” by the policyholder’s argument that software, despite being nonphysical, was covered “media,” which the policy defined to include “computer software and reproduction of data contained on covered media.” Citing decisions from other jurisdictions and an opinion by the Sixth Circuit in the COVID business interruption context (Santo’s Italian Café, LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021)), the court explained that “[t]he most natural reading of the phrase ‘direct physical loss of or damage to’ is that [the policyholder] is insured for direct physical loss of its media and insured for direct physical damage to its media.” “While a computer or other electronic medium has physical electronic components that are tangible in nature, the information stored there has no physical presence,” the court said.
New Jersey Supreme Court holds that facts outside the “four corners” of an underlying complaint are relevant to determining whether an exclusion precludes a duty to defend under a liability policy where trial in the underlying action will not resolve a factual issue bearing on coverage. Referring to its seminal decision in Burd v. Sussex Mut. Ins. Co., 267 A.2d 7 (N.J. 1970), the court explained that, “if coverage will not be an issue resolved during trial, it may not be sufficient to look only at the complaint because the duty to defend depends on facts not relevant to the causes of action in the complaint.” Here, the court found it was appropriate to consider facts from discovery concerning the location of the underlying incident because, although the location was relevant to the application of a policy exclusion, the issues in the underlying case “”would [not] require the factfinder to address the applicability of the policy exclusion.” The decision also reviewed the interpretation of certain exclusionary language (e.g., “arising out of”) and whether a casual connection is required between the excluded acts and the injury.