Third Circuit clarifies the applicability of a channeling injunction to claims against an insured-debtor’s liability insurer where the insurer is alleged to have rendered services in addition to “provision of insurance.” It explained that, under Section 524(g) of the Bankruptcy Code, a third party is entitled to protection under a channeling injunction if, among other things, its liability arises by reason of a “statutory relationship,” such as “provision of insurance to the debtor or a related party.” According to the asbestos mineworker claimants here, this requirement was not met because the debtor’s insurer also had inspected the mine and provided industrial hygiene services to the workers. Stating that the test was whether “the services allegedly provided by [the insurer] were incidental to its provision of insurance,” the Third Circuit remanded for a determination of whether inspections and loss-control recommendations “are [generally] central to insurance underwriting and risk management.”
New York federal bankruptcy court rules that an opioid manufacturer’s Chapter 11 plan need not be completely “insurance neutral” and, with adequate notice, it could rule on the ability of the debtor’s insurers to contest claims submitted to the plan trust. It found that the plan – which established a process for channeling, adjusting and settling over 600,000 claims representing trillions of dollars of potential exposure – properly provided for the assignment of the debtor’s insurance policies to the plan trusts, notwithstanding the policies’ anti-assignment provisions. The court also determined that the procedures for resolving claims did not infringe on the insurers’ rights to control the defense of claims and require consent to claim settlements, reasoning that such contract rights may be modified under a bankruptcy plan. In the court’s view, the insurers’ insistence that the plan be fully insurance neutral was not grounded in bankruptcy law but rather in due process, which was satisfied by the plan notice and hearing process.
BUSINESS INTERRUPTION – CORONAVIRUS (COVID-19)
As reported in our last issue, the Eighth and Eleventh Circuits were the first appellate courts in the country to address whether alleged COVID-19 business income losses predicated on loss of use or a reduction in services qualify as “physical loss” of property under commercial property insurance policies. Since then, they have been joined by the Sixth and Ninth Circuits in siding with insurers on this issue.
In Santo’s, the Sixth Circuit held that, under Ohio law, a restaurant-insured’s commercial property policy did not cover loss of business income resulting from a statewide COVID-19 indoor dining ban. It reasoned that the insured had failed to demonstrate its loss of income was “caused by a direct physical loss or damage to property,” as required under the policy, noting that neither the novel coronavirus nor the resulting shutdown had tangibly altered, affected or destroyed the insured’s physical property. Likening the ban to an order “rezon[ing] all restaurants in the State solely for takeout dining,” the court explained that “loss of use” is not equivalent to “direct physical loss.”
A week later, the Sixth Circuit decided In re Zurich, reversing a ruling that had found coverage for another insured’s loss of income due to the same indoor dining ban. The court cited its decision in Santo’s for the proposition that, under Ohio jurisprudence, a “pandemic-triggered government order” prohibiting indoor dining does not qualify as “direct physical loss or damage” to property.
Audio of the argument in Santo’s is available here.
The Ninth Circuit issued a trio of decisions on October 1.
Mudpie affirmed the dismissal of a proposed class action by retailers seeking coverage under commercial property policies for business interruption losses due to the COVID-19 pandemic and California stay-at-home orders. The Ninth Circuit predicted that California would interpret the phrase “physical loss or damage to” in the policies “as requiring an insured to allege physical alteration of its property.” Under this standard, the federal appeals court held that the plaintiff had sustained mere “loss of use” of, and not physical damage to, the insured property due to the pandemic and related stay-at-home orders.
Selane Products upheld the dismissal of another proposed class action on the grounds that the complaint failed to allege that the insured had been forced to suspend operations because of “direct physical loss of or damage to” its property under California law. According to the court, the complaint did not plausibly allege either that: (1) SARS-CoV-2 had been present on the insured property to cause any damage; or (2) the pandemic-related stay-at-home orders had caused physical alteration to the property.
Chattanooga affirmed the dismissal of the insureds’ complaint on the basis that coverage was barred by the policies’ virus exclusions. Applying the law of the ten states in which the insureds’ facilities were located, it reasoned that the “efficient proximate cause” of the losses was the spread of COVID-19 and not, as the insureds contended, other causes allegedly not implicated by the virus, such as the attendant disease, resulting pandemic, and government responses to the pandemic.
Pennsylvania appeals court holds that liability insurers may be permitted to intervene in underlying litigation to propose a special verdict form and jury interrogatories to assist in determining indemnity coverage. It concluded that the order denying the insurers’ petition to intervene was immediately appealable under Pa. R. App. P. 313(a)* because, among other things, the ability to submit jury interrogatories or a special verdict form “would be lost following the close of trial.” Finding that the trial court “manifestly abused its discretion” in denying the petition, the appeals court explained that: (1) the insurers’ rights would not be adequately represented by retained defense counsel, who is “not expected” to address coverage issues; and (2) intervention was particularly appropriate given “a clear potential for conflict” between the insurers and defense counsel as to whether any award of punitive damages was based on direct or vicarious liability as addressed in Butterfield v. Giuntoli, 670 A.2d 646 (Pa. Super. Ct. 1995).
* Pa. R. App. P. 313(a) states: “A collateral order is an order separable from and collateral to the main cause of action where the right involved is too important to be denied review and the question presented is such that if review is postponed until final judgment in the case, the claim will be irreparably lost.”
Maryland appeals court holds that injured tort claimants are intended third-party beneficiaries of a tortfeasor’s liability policy and that their rights (1) vested when they sustained lead-paint related injuries; and (2) could not be modified by later agreements between the insured and its insurer that rescinded or significantly reduced coverage. The court said that there were no Maryland appellate decisions “unequivocally” finding that injured tort claimants are intended third-party beneficiaries, and that it aligned with “the overwhelming weight of authority” in other jurisdictions that an intended beneficiary’s rights under a liability policy vest at the time of injury and cannot be subsequently modified by the insured and its insurer.
Video of the argument is available here.