As predicted, the fallout of the Covid pandemic in the US has included a large wave of insurance coverage litigation, directed primarily at the issue of whether the business interruption coverage included in commercial insurance policies extends to the trillions of dollars in losses flowing from the virus.
What conclusions should, and shouldn’t, clients and lawyers draw from the record to date? As discussed below, the raw numbers are a starting point, and may seem to indicate momentum, but they don’t provide a sound basis for predicting the final outcome of what is sure to be a long and costly battle.
More than 1,900 Covid insurance cases are pending or have already been resolved in the state (about 650) and federal (about 1,300) courts.¹ Trial courts have issued merits rulings on more than 400 of them—roughly 85% of which have favored the insurers. New cases continue to be filed almost daily.
The forum factor
Interestingly, insurers have fared significantly better in dismissing policyholder claims in the federal courts (to which insurers have removed a number of cases originally filed in state court). Whereas the state court dismissal rate is around 57%, roughly 93% of federal cases have been dismissed at the early motion stage. Federal courts thus seem to be appreciably more aggressive in disposing of these cases at the pleading stage.
This trend is a bit surprising, on at least three grounds. First, insurance policy interpretation is, under the Erie doctrine, governed by the contract law of the different states. Second, the coverage issues presented have thus far not been addressed by most state courts. Third, many federal judges have lived through the great environmental insurance coverage wars that began in the 1980s and continue to the present, and so are well aware that the insurance industry will litigate defenses to coverage claims to the highest court of virtually every jurisdiction. Notably, federal district judges have thus far not shown much eagerness to certify those dispositive questions of state insurance law to those state supreme courts, as the rules of court in nearly all states permit them to do. (At least three federal Courts of Appeals have now done so.)
Why are at least the lower federal courts seemingly reaching out to decide novel questions of state law to dismiss cases at the pleading stage? Possible explanations include:
- Sophisticated policyholder lawyers are being choosier about their cases and the jurisdictions in which they file them, preferring to file them in state court, while lawyers with less insurance experience are filing weaker cases and opting for, or being removed to, federal court.
- Insurers are being selective in targeting their motions to dismiss, focusing on federal cases with relatively obvious pleading vulnerabilities. The statistics speak only to the judicial treatment of claims that insurers choose to attack by motion—not to those of cases they don’t.
- The federal courts are tacitly seeking to conserve judicial resources. A dismissal order will, after all, have one of two fates. If it is affirmed, the trial court got it right, and expended no more effort than necessary in doing so. If it is reversed, the trial court on remand will have the benefit of the appellate court’s ruling, and/or of the relevant state high court’s intervening determination of the dispositive issue(s)—ensuring that the record’s further development will be as efficient as possible.
Trends—or are they?
The raw numbers, especially with their federal-court component, seem to bode ill for efforts to recover benefits under business interruption coverage. But do they? There are several reasons to think not.
Results in weak cases don't predict results in strong cases
First, the nearly 2,000 Covid coverage actions filed to date are not cookie-cutter cases. Although the majority involve the same threshold issue concerning the coverage “trigger”—the requirement that the loss for which benefits are claimed result from “direct physical loss or damage” to property, which insurers deny is the case with the Covid virus—policies then start to diverge widely. Some contain virtually bulletproof exclusions for losses caused by virus. Others include “contamination” exclusions that do or don’t reference viruses. Some exclude “contamination” and yet at the same time extend coverage to loss caused by “communicable disease.” And some have no applicable exclusions at all.
Accordingly, gross dismissal numbers say very little about the quality of any given case or group of cases. Cases that fail to plead the actual physical presence of virus on the relevant property are almost all dismissed; policyholders who can plead and prove that the virus was present on the property stand a much better chance of surviving motion practice and reaching trial. Likewise, cases that seek to avoid a very carefully worded virus exclusion are an entirely different proposition from cases where the insurer, amazingly, opted out of using any of the various virus or contamination exclusions that the industry began to issue following the 2003 SARS and 2009 H1N1 epidemics.
Initial results don't predict final outcomes
As the recent presidential election teaches, in any sort of contest, an early lead often gives way to eventual defeat, and vice versa. Again, the history of environmental insurance disputes shows that trial and intermediate appellate rulings on crucial questions of policy interpretation are often overturned by state supreme courts. For example the granddaddy of environmental coverage disputes, the Montrose litigation, produced three watershed California Supreme Court rulings across four decades— all of which reversed the original trial court ruling. So—at least until the high courts of “opinion leader” jurisdictions like California, Washington, New York, Illinois and a few others have spoken—any “trend” apparent from the lower courts’ rulings is just that: A currently prevailing wind that may well shift as insureds and their lawyers study the landscape, weed out weak claims and perfect strong ones.
Insurer "sky is falling" arguments in the media don't predict results in the courts
While their lawyers have been busy addressing coverage lawsuits under the technical rules of pleading, insurers have also sought to litigate those cases in the court of public opinion, offering op-ed pieces contending that the Covid business interruption risk is an “uninsurable” one that they never meant to cover, and that judicial rulings to the contrary could threaten the viability of the insurance marketplace. There are at least a couple of reasons to cast a skeptical eye at those arguments, and every reason to think they will have no impact in court.
First, property insurers have known for decades that their standard “physical loss or damage” coverage trigger, while serving well in the case of fire, hurricane and other everyday perils, is quite blurry around the edges. The much-publicized Odwalla incident, involving transient E. coli bacteria contamination of a juice processing facility, produced coverage litigation hinging on “physical loss or damage” in 1999. (The case settled as the parties awaited a summary judgment ruling on the issue.) Similarly, computer server outages and malware attacks that left no permanent harm to the hardware following a reboot or reloading of memory have been the subject of multiple coverage lawsuits in the past 20-plus years. Insurers lost or settled a number of them. There is no “too big to fail” doctrine of insurability or of common sense that requires excusing insurers from covering a risk that was well known to them by 2019 if their policies did not unambiguously exclude it.
Second, insurers and courts outside the US are recognizing that the Covid business interruption risk is insurable, and is insured. In January 2021, the UK’s highest court ruled broadly to that effect. In May, the Paris Commercial Court expressly rejected a major insurer’s claim of uninsurability, and held it liable for its insured restaurants’ losses from a lockdown order; the insurer vowed to appeal, but then in June offered €300 million to settle the claims of 15,000 insured restaurants. There is no notion of “insurability” or “public policy” unique to the US preventing insurers from being similarly held to account if the courts find that their policies afford coverage by their express terms. If public policy really is on their side, insurers can seek recovery of their losses from public coffers through the legislative process. They shouldn’t claim that such a policy requires the courts to disregard their undertakings toward their insureds.
The US courts—few of them will be excepted—will be wrestling with Covid business interruption cases for years to come. If they can stay the course, companies with sound cases pressed by capable counsel have far better prospects of recovery than today’s headcount would suggest.
Andy Lundberg is a Managing Director and member of Burford’s Commitment Committee. He practiced for 35 years at Latham & Watkins, where was the Global Chair of the firm’s Insurance Coverage Litigation Practice and Chair of its Los Angeles Litigation Department, litigating dozens of coverage actions in state and federal courts and counseled numerous Fortune 500 companies on insurance matters. He is one of Lawdragon's Global 100 Leaders in Litigation Finance.