TOP DEVELOPMENTS – SEPTEMBER 2021

BUSINESS INTERRUPTION

Hastings Mutual Insurance Company v. Mengel Dairy Farms, LLC, 2021 U.S. App. LEXIS 21138 (6th Cir. July 16, 2021)

Sixth Circuit holds that, under Ohio law, a “suspension of operations” under a commercial property insurance policy occurs when business operations are temporarily shut down and not merely reduced. In affirming the dismissal of the insured-dairy farm’s complaint seeking coverage for business interruption losses resulting from reduced milk production following the electrocution of cattle, the court looked to the dictionary definition of “suspension” and other appeals court decisions interpreting “suspension of operations” to require a complete shutdown of business operations. It determined that no “suspension” had occurred under the policy* because, although the farm produced less milk, the insured never shut down its operations and a lull in business did not qualify. Further, the court rejected the insured’s argument that requiring a complete cessation of business would render the coverage illusory. It concluded: “Litigation has a way of transforming common-sense questions into impenetrable legal mazes. But in this case, for once, the issues are just as they seem. A business suspends its operations when it temporarily stops all business activity.”

* The policy provides coverage for “loss of business income . . . due to the necessary suspension of the insured’s operations.”


BUSINESS INTERRUPTION – CORONAVIRUS (COVID-19)

Oral Surgeons, P.C. v. Cincinnati Insurance Company, 2021 U.S. App. LEXIS 19775 (8th Cir. July 2, 2021)

Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Insurance Company, 2021 U.S. App. LEXIS 26196 (11th Cir. Aug. 31, 2021)

In the first appellate decisions addressing the issue nationwide, Eighth and Eleventh Circuits hold that, under Iowa and Georgia law, respectively, alleged COVID-19 losses predicated on loss of use or a reduction in services do not qualify as “physical loss” of property under a commercial property insurance policy. As noted in a recent issue of the Coverage Reporter, in Oral Surgeons, the Eighth Circuit reviewed the dismissal of a dental office-insured’s complaint against its property insurer seeking business interruption coverage for losses resulting from a COVID-19 related closure. In affirming the ruling, the court explained that, to state a claim for direct “physical loss” or “physical damage”, “there must be some physicality to the loss or damage of property – e.g., a physical alteration, physical contamination, or physical destruction[.]”*

In Gilreath, the Eleventh Circuit reviewed the dismissal of a similar complaint, in which another dental office-insured sought business interruption coverage related to a reduction in services due to adherence to a COVID-19 closure order and CDC guidance. In affirming, the court explained that, under Georgia case law, “direct physical loss or damage” requires “‘an actual change in insured property’ that either makes the property ‘unsatisfactory for future use’ or requires that ‘repairs be made[.]’” It concluded that the order did not damage or change the property in a way that required repair or precluded its future use and that, even if viral particles were present at the dental office as alleged, the insured had failed to prove “direct physical loss or damage” to property. “[The insured] finds it problematic that its office is an enclosed space where viral particles tend to linger, and where patients and staff must interact with each other in close quarters. Even so, we do not see how the presence of those particles would cause physical damage or loss to the property,” the court said.

According to the University of Pennsylvania’s COVID Coverage Litigation Tracker, in addition to various state court appeals, over 190 appeals are currently pending in federal courts, including the Eighth and Eleventh Circuits.

* The policy defines “loss” as “accidental physical loss or accidental physical damage.”


EXHAUSTION

Gull Industries, Inc. v. Granite State Insurance Company, 2021 Wash. App. LEXIS 2130 (Wash. Ct. App. Aug. 23, 2021)

Washington appeals court applies vertical exhaustion in an environmental insurance coverage action involving numerous retail gas stations, and also concludes that the policyholder was not required to establish a certain amount or level of third-party “property damage” to “trigger” its excess liability coverage. On the issue of exhaustion, the court looked to California and the reasoning in Montrose Chemical Corporation v. Superior Court, 260 Cal. Rptr. 3d 822 (Cal. 2020) and SantaFe Braun, Inc. v. Insurance Company of North America, 265 Cal. Rptr. 3d 692 (Cal. Ct. App., 1st Dist.), rev. denied, 2020 Cal. LEXIS 6628 (Cal., Sept. 30, 2020), and further determined that no provision of the excess policies at issue (including their “other insurance” condition) expressly requires horizontal exhaustion of all primary policies issued over various periods. (The policyholder would, however, be required to exhaust both the underlying CGL and auto liability policies in light of the excess policy “occurrence” definition.*) As respects the issue of the extent of third-party “property damage,” the court disagreed it was necessary to show that contamination during the policy period exceeded mandatory state cleanup levels, including since the policyholder’s coverage action did not seek relief based solely on statutory liability. Rather, according to the court, “any amount of third party property damage, no matter how small, that is the result of an ‘occurrence’ during the policy period is sufficient to trigger coverage.”

* “Occurrence” is defined as “. . .an accident, or a happening, or event, or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence.”


SETTLEMENT DEMANDS

Owners Insurance Company v. Dockstader, 2021 U.S. App. LEXIS 19369 (10th Cir. June 29, 2021)

Tenth Circuit (in a 2-1 decision) concludes, under Utah law, that an insurer that defended an insured under a reservation of rights had no duty to accept a settlement demand within policy limits where a district court ultimately found no coverage in the insurer’s declaratory judgment (DJ) action. The majority explained that Utah law provides two options for an insurer that accepts a defense while disputing coverage: (1) defend “under a reservation of its right to seek repayment later,” if the policy contains a clause “specifically allowing reimbursement”; or (2) “protect its interests” through a DJ action seeking a determination of coverage. In this case, the insurer proceeded under the second option because the homeowner’s policy at issue did not have a reimbursement clause. The claimant intervened in the insurer’s DJ action against the insured, arguing that the insurer had a duty to settle within policy limits while the DJ action was pending because the insured faced “a significant likelihood” of an excess judgment. The majority rejected that argument, concluding it would “undermine Utah law by making the insurer’s right to seek a [DJ] action illusory.” It explained that “Utah law requires reasonableness” and, here, the reasonableness of the insurer’s position – that it would pay the policy limit if coverage existed – was confirmed by the district court’s “uncontested determination” that an exclusion in the policy barred coverage.

According to the dissent, an insurer is obligated to “zealously guard” its insured’s interests in considering whether to accept a claimant’s settlement demand, but the insurer here considered only the strength of its coverage defenses and not the strength of the underlying claims in deciding whether to accept the demand.

Audio of the argument is available here.