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Insurance Law Blog Legal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Western District of Texas provides insureds with "out" to skirt federal jurisdiction in COVID-19 business interruption coverage cases

October 20, 2020 | Brett Simon

Like many businesses during the COVID-19 pandemic, Texas dentist Louis Orsatti’s practice suffered significant lost business income as a result of the local government’s shelter-in-place order in the spring and early summer of 2020. And also like many other businesses, Orsatti made a claim on his practice’s insurance policy issued by Allstate. Allstate assigned a claims adjuster, Blesssing Sefofo Wonyaku, who allegedly summarily denied Orsatti’s claim without performing any kind of investigation whatsoever.

Orsatti filed a bad faith suit in Texas state court against Allstate after his claim was denied, joining Wonyaku as a defendant. Allstate removed the case to the United States District Court for the Western District of Texas arguing that Wonyaku, a citizen of Texas, had been fraudulently joined solely for the purpose of defeating federal diversity of citizenship jurisdiction. Finding that a claim was properly asserted against Wonyaku, the federal magistrate judge recommended the case be remanded back to state court (as of the date of this posting, the district judge has neither accepted nor rejected the recommendation).

Despite recognizing that many cases have held a claims adjuster cannot be individually liable for bad faith claims made against an insurer, the court here held that the allegations here implicated Wonyaku based on “her conduct as an individual adjuster.” Specifically, the court focused on Wonyaku’s allegedly pre-textual, results-oriented investigation, her failure to request additional information from the insured, and her “immediate” issuance of a denial letter. Consequently, the court held the complaint asserted a valid cause of action against Wonyaku and the case was accordingly remanded for lack of subject matter jurisdiction. The case is Orsatti v. Allstate Ins. Co., No. 5-20-CV-00840-FB-RBF, 2020 U.S. Dist. LEXIS 185935 (W.D. Tex. Oct. 7, 2020), and the magistrate’s report and recommendation can be found here.  

Policyholders may be tempted to stretch the Orsatti case to its limits to avoid federal jurisdiction when a non-diverse claims adjuster is involved. This may be especially true if the judicial panel on multidistrict litigation opts to create carrier-specific MDLs,[1] since struggling business may be looking for some much-needed quick money rather than being bogged down in protracted MDL proceedings. This may be particularly worrisome in jurisdictions such as Missouri, where the waters get murky when it comes to an adjuster’s personal liability in first-party claims. While Missouri generally bars such liability in third-party bad faith claims (Shobe v. Kelly, 279 S.W.3d 203 (Mo. App W.D. 2009)), first-party bad faith claims fall within the ambit of Missouri’s vexatious refusal to pay statutes (RSMo §§ 375.296 and 375.420) which generally displace other causes of action arising from an insurer’s denial of coverage. On its face, the vexatious refusal statute only permits a suit to be filed “against any insurance company,” which would seem to preclude individual liability on the adjuster’s part. However, some courts have recognized that despite the vexatious refusal statute’s exclusivity, other torts may still be viable where they are not based strictly on the insurer’s denial of coverage. In fact, United States District Court for the Eastern District of Missouri specifically held that conduct “which may have occurred during the insurer’s investigation or claims handling” can support a cause of action against an individual adjuster independent from a vexatious refusal claim. (Travelers Indem. Co. of Am. v. Holtzman Props., L.L.C., No. 4:08-CV-351 CAS, 2008 U.S. Dist. LEXIS 63966 (E.D. Mo. Aug. 21, 2008)).     

The Orsatti case provides another arrow in policyholders’ quivers to remain in state court by joining an individual adjuster as a defendant. It specifically brings deficiencies in claims handling to the forefront of the analysis, which prior Missouri precedent demonstrates may be sufficient to support an independent claim aside from a vexatious refusal claim against the carrier.  

The case also highlights the need not to be too quick to deny a COVID-related business interruption claim. While it may be tempting after reviewing dozens or hundreds of similar claims involving similar policy language to issue a form denial letter without giving it a second thought, Orsatti illustrates how this may expose the adjuster to personal liability and prevent coverage counsel from litigating in their preferred court.

[1] As of the date of this writing, requests to create five “single-insurer” MDLs were under advisement by the JMPL. The carriers in question are The Hartford, Cincinnati Insurance Co., Society Insurance Co., Travelers, and various underwriters at Lloyd’s of London. A request to create a single MDL encompassing all carriers was previously denied, which was discussed in another post found here.

Missouri Court of Appeals Upholds Limitations on Stacking of Uninsured Motorist Coverage

September 23, 2020 | Richard Woolf

In Johnson v. State Farm Mutual Automobile Insurance Co., the Missouri Court of Appeals, Southern District, enforced insurance policy language to limit the extent of stacking of uninsured motorist coverage (“UM”) under multiple personal auto policies. The decision allows insurers with appropriate exclusionary language to limit “stacking” to the $25,000 limit of the Missouri Motor Vehicle Financial Responsibility Law (“MVFRL”) as to each additional vehicle insured that was not directly involved in the accident.

Plaintiff Tim Johnson appealed the trial court’s granting of summary judgment to State Farm, which limited UM stacking. The State Farm policies contained owned-vehicle exclusions with respect to the UM coverage that provided for no coverage in excess of the amount required by the MVFRL for an insured who sustains a bodily injury while “occupying a motor vehicle owned by you if it is not your car or a newly acquired car.” At issue on appeal was the definition of “your car” in the policy language and whether the owned-vehicle exclusion was applicable in this case.

Johnson owned three vehicles, all of which were insured by State Farm under separate policies that included UM coverage. Each of the policies stated a UM limit of $100,000 per person, and included the above-referenced owned-vehicle exclusion which allowed the insurer to reduce the amount of UM coverage with respect to insured vehicles that were not directly involved in the collision to the amount required under Missouri’s Financial Responsibility Law, or $25,000. Johnson was in one of his three insured vehicles when he was involved in a collision with an uninsured motorist. The insurer provided Johnson with the full limit of UM coverage pursuant to the policy on the vehicle he was driving, $100,000, and the minimum amount of UM coverage required by the MVFRLor  on the other two policies, $25,000 per policy, pursuant to the policies’ owned-vehicle exclusion.

Subsequently, Johnson sued State Farm claiming breach of contract and vexatious refusal to pay for failing to pay the maximum $100,000 UM policy limits stacked by each of  his two insured vehicles that were not involved in the accident. Johnson moved for partial summary judgment arguing that the owned-vehicle exclusion did not apply, was ambiguous, and conflicted with public policy and Missouri law. State Farm filed a motion for summary judgment arguing that the owned-vehicle exclusion did apply and that its $25,000 payment per policy was proper in accordance with the policy’s language and Missouri statutory requirements. The trial court granted State Farm’s motion for summary judgment.

On appeal, Johnson raised similar issues and the appellate court affirmed the lower court’s decision to uphold the owned-vehicle exclusion, limiting the Plaintiff’s recovery to $25,000 per policy for Johnson’s additional insured vehicles that were not involved in the collision.

In his first point on appeal, Johnson claimed that the owned-vehicle exclusion did not apply because the vehicle he was occupying was “your car” as listed on the Declarations Page in any of his three policies at the time of the collision. However, the policies’ Declarations Page listed only one vehicle under “your car” in each policy, and Johnson was only in one “your car” at the time of the crash. The Court, citing the Missouri Supreme Court’s Floyd-Tunnell v. Shelter Mutual Insurance Co. 493 S.W.3d 215 (Mo. banc 2014), upheld the unambiguous policy language as written, finding that Johnson was not in a “your car” as defined by the policy’s language for the two vehicles not involved in the accident and, therefore, the owned-vehicle exclusion applied on those two policies.

Points two and three asserted that the trial court erred in granting summary judgment in the insurer’s favor because of ambiguities in the policies that should be resolved in Johnson’s favor. The Court ruled that both of Johnson’s arguments were effectively foreclosed by Floyd-Tunnel, 493 S.W. 3d at 221, wherein the Missouri Supreme Court found similar policy language clear and unambiguous. 

In his final point on appeal, Johnson argued that the owned-vehicle exclusion reduced the amount of UM coverage available to the insured and was therefore void as against public policy and Missouri law. The court denied Johnson’s point. State Farm provided Johnson with the full amount of UM coverage for the insured vehicle he was occupying during the collision, as well as the MVFRL- required amount of coverage on the other two policies, in accordance with the plain owned-vehicle exclusion language of the policies’ UM coverage.

The Court of Appeals decision in Johnson reaffirms the Missouri judiciary’s commitment to upholding the plain meaning of insurance policy exclusions as written. Moving forward, insurers should consider checking the language of the owned-vehicle exclusions under their policies’ UM clauses and ensure that whatever language is used clearly indicates which vehicle the policy applies to and which vehicles qualify under the owned-vehicle exclusion.  

* Hannah Chanin, Law Clerk in the St. Louis office of Baker Sterchi, assisted in the research and drafting of this post. Chanin is a 3L student at the Washington University St. Louis School of Law.

Related Services: Insurance

Attorneys: Richard Woolf

Federal Court Denies Motion to Dismiss Action for COVID-19 Related Losses under an All-Risk Policy

September 14, 2020 | Richard Woolf and Kyra Short

On August 12, 2020, the United States District Court for the Western District of Missouri, Southern Division, in Studio 417, Inc., et al. v. The Cincinnati Insurance Company, denied defendant Cincinnati Insurance Company’s Motion to Dismiss Plaintiffs’ First Amended Complaint. Plaintiffs alleged losses due to COVID-19 and resulting from COVID-19 county Closure Orders in the Springfield and Kansas City metropolitan areas. Plaintiffs filed suit against Defendant after Defendant denied coverage for Plaintiffs’ COVID-19 related losses.

Plaintiff Studio 417, Inc. operates hair salons in the Springfield, Missouri metropolitan area. The remaining plaintiffs own and operate full-service restaurants in the Kansas City metropolitan area. Plaintiffs purchased “all-risk” property insurance policies from Defendant. The policies provided payment for direct loss unless the loss was excluded or limited. Under the policies, a “Covered Cause of Loss” was defined as an “accidental [direct] physical loss or accidental [direct] physical damage.” None of the policies included any exclusion for losses caused by viruses or communicable diseases.

Plaintiffs alleged that their businesses were rendered unusable by the presence of COVID-19 and the issuance of Closure Orders forcing them to either suspend or reduce their business, causing a direct physical loss or damage to their premises. Plaintiffs sought a declaratory judgment against Defendant and sued Defendant for breach of contract based on the following policy provisions: Business Income coverage; Extra Expense coverage; Dependent Property coverage; Civil Authority coverage; Extended Business Income coverage; Ingress and Egress coverage; and Sue and Labor coverage. Plaintiffs also sought class certification for 14 nationwide classes and a Missouri subclass for Defendant’s Missouri policyholders that were denied coverage due to COVID-19 losses.

Defendant filed its Motion to Dismiss primarily arguing that the policies only provide coverage for “income tied to physical damage to property[.]” Plaintiffs emphasized that the policy expressly covered for “loss” or “damage”, distinguishing the two terms for use of the disjunctive. Neither “physical loss” nor “physical damage” was defined by the policy.

The Court found, based on the record, that Plaintiffs adequately stated a claim for direct physical loss, relying on the plain and ordinary meaning of the phrase. In so finding, the Court relied on other court cases that recognized a physical loss may occur when the property has been determined to be uninhabitable or unusable. The Court did, however, acknowledge that case law exists to support Defendant’s proposition that physical damage is required to show a physical loss. However, the Court found that those cases were distinguishable from the present case in that the cases cited by Defendant were decided at the summary judgment stage and the Plaintiffs here adequately plead the existence of physical and active substances, whether on surfaces or in the air, to have plausibly met their burden. The Court denied Defendant’s Motion to Dismiss in its entirety, but the Court made clear that it was not holding that physical loss would be found whenever a business suffers any economic harm, rather under the circumstances this case.

Though Defendant’s Motion to Dismiss was denied, the Court’s ruling is not the final determination in this case on the issue of whether Plaintiffs’ COVID-19 losses will be covered by the policy. Here, the Court emphasized that to survive a Motion to Dismiss, Plaintiffs must have merely pled enough facts (which are accepted as true) to proceed to discovery. The Court found that they did. Defendant will likely take another bite at the apple and file a motion for summary judgment later in the case.

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