Business interruption insurance is a hot topic in insurance coverage law. Most policies afford coverage for lost income only if the business has sustained “property damage.” Property damage is typically defined to mean direct physical injury to tangible property. Policyholders seeking to obtain coverage for COVID-19 stay-home orders may seek to leverage a recent Pennsylvania Supreme Court decision in a case not related to insurance to advance the argument that COVID-19, and/or governmental stay-home orders, has caused “property damage.” In that case, the Pennsylvania Supreme Court found that any location, including an individual business, is within a disaster area. We expect policyholders to argue that their business have, thus, arguably sustained “property damage,” triggering their coverage.
In Friends of DeVito, et al. v. Tom Wolf, Governor, et al. 2020 WL 1847100 (PA, April 13, 2020), the Pennsylvania Supreme Court shot down a lawsuit challenging Gov. Tom Wolf’s authority under state law to order “non-life-sustaining” businesses to shut down as a means of reducing the spread of COVID-19. The challengers in the case included Republican state legislative candidate, a public golf course, and a licensed realtor. They all argued that Gov. Wolf lacked authority to issue his Executive Order because the COVID-19 pandemic did not fall under the list of natural disasters outlined in the State’s emergency code.
The Pennsylvania Emergency Code defines “natural disaster” as:
Any hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.
While this code points to specific disasters (i.e., hurricane, tornado, storm etc.…), it also includes a catchall phrase for any “other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.”
The challengers argued that pandemics could not be classified as a “natural disaster” under this code because they are too dissimilar to the natural disasters specifically listed. However, the Pennsylvania Supreme Court disagreed, noting that there was no commonality among the listed natural disaster in the code as some were weather-related and others, were not.
Most importantly, and the interesting language we are tracking, the Pennsylvania Supreme Court went on to hold that COVID-19 is a “natural disaster” because it “results in substantial damage to property, hardship, suffering or possible loss of life.” Because the virus is spread from person-to-person contact, has an incubation period of up to fourteen days and can live on surfaces for up to four days, any location, including an individual business, is within a disaster area and is thus damaged. Additionally, the Pennsylvania Supreme Court rejected the argument that the actual presence of the disease at a specific location was required before it could be shutdown, thus holding that all properties were damaged because of the manner in which the disease spreads. This could have implications in policy interpretation regarding physical damage.
In enforcing the governor’s authority, the court held that the “COVID-19 pandemic is, by all definitions, a natural disaster and a catastrophe of massive proportions.” We expect that policyholders may argue that the Pennsylvania Executive Order, like many other State’s orders, is a declaration that business property has been damaged and is unsafe due to the Coronavirus. Because policyholders have the burden of proving that a loss is within a policy’s insuring agreement, we expect to see a multitude of approaches to try to bring COVID-19 business disruptions within the ambit of “property damage,” and the Pennsylvania Supreme Court, while addressing right-to-assemble claims, may have provided one argument that we could see advanced in the skirmishes over coverage for business interruption losses.
It should be noted that Pennsylvania, New York, Massachusetts, Ohio, and New Jersey have proposed legislation prohibiting insurers from denying business interruption claims for losses caused by COVID-19 to small business in their respective states. However, Congress is also considering legislation that would cap the insurance industry’s exposure to COVID-19 pandemic claims. We will continue to monitor this ever changing, fluid situation.
In what is likely to be one of many court rulings to come regarding the scope of an insurer’s duty to defend an insured in a biometric privacy lawsuit, the Illinois First District Court of Appeals recently weighed in on this issue. In West Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2020 IL App (1st) 191834, the court determined that West Bend Mutual Insurance Company owed a duty to defend its insured in an underlying lawsuit filed under the Illinois Biometric Information Privacy Act (“BIPA”). The complete opinion can be found here.
In that case, Krishna, a franchisee of L.A. Tan Enterprises, was sued for allegedly violating BIPA. According to the underlying complaint, Krishna’s customers were required to have their fingerprints scanned to verify their identification. The plaintiff further alleged that after having her fingerprints scanned by Krishna, the company failed to provide her with, or obtain, a written release allowing Krishna to disclose her biometric data to any third party. She claimed that Krishna disclosed her biometric information to a third-party vendor without her consent.
Krishna sought coverage from West Bend for the lawsuit under two insurance policies West Bend had issued to Krishna. West Bend defended Krishna in the underlying lawsuit pursuant to a reservation of rights. Subsequently, West Bend filed a declaratory judgment action seeking a declaration that it owed no duty to defend or indemnify Krishna in the underlying lawsuit. West Bend alleged that the underlying lawsuit did not trigger coverage because the plaintiff’s underlying allegations did not describe a “personal injury,” her allegations did not implicate a data compromise endorsement contained in one of the policies, and coverage was barred by the policies’ violation of statutes exclusion. In response, Krishna filed a counterclaim, arguing that it was entitled to coverage in the underlying lawsuit and damages under Section 155 of the Insurance Code for vexatious and unreasonable delay in providing coverage. Ultimately, the trial court granted Krishna’s motion for summary judgment in part, concluding that West Bend owed a duty to defend Krishna in the underlying lawsuit, but denying the section of the motion seeking damages under Section 155.
On appeal, the court first examined whether the underlying complaint allegations were encompassed by the policies’ definition of “personal injury.” The policies indicated that West Bend would pay “those sums that [Krishna] becomes legally obligated to pay as damages because of *** ‘personal injury’ ***” and that West Bend would have a duty to defend Krishna against “any ‘suit’ seeking those damages.” The policies defined “personal injury” to include any injury arising out of “[o]ral or written publication of material that violates a person’s right of privacy.” Krishna argued that the plaintiff in the underlying lawsuit alleged an injury arising from publication because she claimed that Krishna violated BIPA by providing her fingerprint data to a third-party vendor. West Bend argued that publication required communication of information to the public at large, not just to a single third-party.
Because the policies did not define the term “publication,” the court gave the term its “plain, ordinary, and popular meaning.” Relying on guidance from the Illinois Second District Appellate Court’s holding in Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 359 Ill. App. 3d 872 (2d Dist. 2005), the Oxford English Dictionary, and Black’s Law Dictionary, the court concluded that the term publication includes both the broad sharing of information to multiple recipients and a more limited sharing with a single third-party. According to the court, had West Bend intended for the term to apply only to communication of information to a large group of people, it could have explicitly defined it as such in its policies.
West Bend further argued that the policies’ violation of statutes exclusion applied to prohibit coverage. That exclusion indicated that coverage did not apply to “*** ’personal injury’ *** arising directly or indirectly out of any act or omission that violates or is alleged to violate:
- The Telephone Consumer Protection Act (TCPA) ***
- The CAN-SPAM ACT of 2003 ***
- Any statute, ordinance or regulation *** that prohibits or limits the sending, transmitting, communicating or distribution of material or information.”
According to West Bend, the underlying lawsuit alleged a violation of BIPA, a statute it characterized as prohibiting or limiting the sending of material or information, namely an individual’s biometric information or identifier. Section 14/15(d) of BIPA expressly provides that “[n]o private entity in possession of a biometric identifier or biometric information may disclose, redisclose, or otherwise disseminate a person’s or a customer’s biometric identifier or biometric information” unless at least one of four conditions is met.
In rejecting this argument, the court cited the full title of the policies’ exclusion, “Violation of Statutes That Govern E-Mails, Fax, Phone Calls or Other Method of Sending Material or Information,” as evidence that the exclusion applied only to statutes that govern certain methods of communication, not to statutes that limit the sending or sharing of information. The text of the exclusion also expressly referred to certain statutes – TCPA and CAN-SPAM – that regulate certain methods of communication. Based upon the exclusion’s title and specific references to TCPA and CAN-SPAM, the court reasoned that the final, “catchall” provision of the exclusion was meant to encompass any state or local statutes, rules, or ordinances that, like the TCPA and CAN-SPAM, regulated methods of communication. Based upon this interpretation of the exclusion, the court determined that it did not apply to bar coverage for the underlying lawsuit. According to the court, BIPA does not regulate methods of communication, but rather, regulates the collection, use, safeguarding, handling, storage, retention, and destruction of biometric identifiers and information. 740 ILCS 14/5(g).
Because the court found that the underlying complaint allegations triggered West Bend’s duty to defend Krishna, it did not examine whether West Bend owed coverage under an endorsement contained in one of the policies titled “Illinois Data Compromise Coverage.” Krishna, however, relied upon the endorsement to argue that it was entitled to damages under Section 155 of the Illinois Insurance Code. The endorsement provided “Additional Coverage” for “personal data compromise” under certain conditions. The policy defined “personal data compromise” to include disposal or abandonment of personally identifiable information or personally sensitive information without appropriate safeguards such as shredding or destruction, provided that the failure to use appropriate safeguards was accidental and not reckless or deliberate.
Under Section 155, an insured may collect attorneys’ fees and costs where an insurer creates a vexatious and unreasonable delay in settling a claim. Where a bona fide coverage dispute exists, sanctions under Section 155 are inappropriate. Krishna argued that the underlying complaint alleged a personal data compromise by disposal of the plaintiff’s personally identifying or personally sensitive information to a third-party without appropriate safeguards. Krishna claimed that appropriate safeguards would have entailed following the data protection requirements of BIPA and that negligent failure to take note of changes in the law was “accidental.” The court concluded that a bona fide coverage dispute existed and, therefore, Krishna was not entitled to Section 155 damages. The court reasoned that Krishna’s argument for coverage hinged on an interpretation of “disposal” as including Krishna’s deliberate sharing of the underlying plaintiff’s information, an interpretation that “safeguards such as shedding or destruction” included following new legal requirements contained in BIPA, and the term “accidental” meant failure to remain informed of changes in the law (i.e., the enactment of BIPA).
As lawsuits continued to be filed under BIPA, courts likely will see an increasing number of insurance coverage disputes concerning the duty to defend and indemnify in BIPA lawsuits. For example, American Family Mutual Insurance Company recently filed a declaratory judgment action in the District Court for the Northern District of Illinois, seeking a declaration that it does not owe a duty to defend certain companies named in an underlying BIPA lawsuit. That case involves some of the arguments raised in the West Bend case, including whether a violation of state statutes exclusion applies, but American Family also raises arguments not addressed in West Bend. The case is American Family Mut. Ins. Co. SI v. Amore Enterprises, Inc., No. 1:20-cv-01659. If courts continue to rule that insurers have a duty to defend companies named in BIPA lawsuits, as in West Bend, the already significant number of BIPA filings is likely to increase as well.
Missouri Supreme Court Affirms Prospective Only Application of Amendments to Sect. 537.065 RSMo Providing for Notice to the Insurer and Intervention as a RightAugust 28, 2019 | Lisa Larkin
The Missouri Supreme Court recently held that amendments to RSMo. § 537.065 requiring a valid § 537.065 contract and written notice to insurers for an opportunity to defend did not apply retroactively to a case where the plaintiff and tortfeasor executed the § 537.065 contract before the effective date of the amended statute. The dissent argued that the amended statute should apply retroactively despite the timing of § 537.065 contract in this case because the amended statute was not a new enactment, but rather a continuation of the existing law.
In Desai v. Seneca Specialty Insurance Co., 2019 WL 2588572, No. SC 97361 (June 25, 2019), Seneca sought to intervene in a lawsuit filed by Neil and Heta Desai against Seneca’s insured, Garcia Empire, LLC. In October 2014, Neil Desai suffered a personal injury while being escorted from a Garcia Empire establishment. The Desais filed suit in May 2016, and Garcia advised Seneca of the suit. Garcia rejected Seneca’s offer to defend Garcia subject to a full and complete reservation of rights regarding coverage. In November 2016, the Desais and Garcia entered into a contract under § 537.065 wherein the Desais agreed to limit recovery of any judgment against Garcia to Garcia’s insurance coverage.
The parties tried the case on August 17, 2017, and the court entered judgment in favor of the Desais and against Garcia on October 2, 2017. Within 30 days of the entry of judgment, Seneca filed a motion to intervene as a matter of right, arguing it was entitled to receive notice of the § 537.065 contract between Garcia and the Desais and to intervene as a matter of right in the lawsuit based on the August 28, 2017, amendments to § 537.065. Seneca argued the rights afforded to insurers under the amended statute should apply to it and its efforts to intervene in the lawsuit.
The trial court denied Seneca’s motion to intervene, holding the legislature did not expressly provide for retroactive application of the August 2017 amendments to § 537.065 to cases where the parties executed the § 537.065 contract before the amendments. As discussed in our previous blog post found here, the Court of Appeals for the Western District of Missouri affirmed.
The Missouri Supreme Court began its analysis by looking to the language of the 2017 amendments. The amended statute permitted the same type of contract where the plaintiff agrees that, in the event of a judgment against the tortfeasor, the plaintiff will collect money solely from the tortfeasor’s insurer or other specified assets, rather than directly from the tortfeasor. The amended statute, however, included two notable additional requirements. First, it provided that before creation of such a contract between the plaintiff and a tortfeasor, the insurer must be given the opportunity to defend the tortfeasor without reservation and refuse to do so. Second, the amended statute provided that before a judgement may be entered against a tortfeasor after such tortfeasor “has entered into a contract under this section” (emphasis added), the insurer must be provided with written notice of the contract and be given the opportunity to intervene as a matter of right.
The key issue before the Supreme Court in terms of whether the amended statute applied in this case was to determine the meaning of “under this section.” First, the court looked to the relevant differences between the former and amended statutes. Then, it looked to whether the amended statute was merely a continuation of the former statute. This was because any change to the law that could be said to be a continuation of the prior law would not be a new enactment and could be applied retroactively to § 537.065 contract executed before the amendments.
The court found that the amended statute and the former statute both permitted the same type of contracts. Because the amended statute contained the two additional requirements noted above, i.e., that a valid § 537.065 contract exists, and that the insurer be given written notice of the execution of the contract and the opportunity to intervene before a judgment is entered, “under this section” cannot refer to the statute’s prior version. The Desais and Garcia could not have “entered into a contract” pursuant to a prerequisite and requirements that were not yet law. Thus, because the Desais and Garcia executed their contract under the provisions and requirements of the former statute, the amended statute was an inapplicable new enactment. It is important to note that the Supreme Court did not question the validity of the amended statute to any case where the § 537.065 contract was entered into after August 28, 2017 (the effective date of the amendments).
The dissent argued that the 2017 amendments simply added a condition precedent to the entry of judgment after a tortfeasor has entered into a § 537.065 contract and did not affect the substantive terms of any contract entered into under that section. It argued that “under this section” referred to both the amended and prior versions of the statute because the revisions simply gave an insurer the right to written notice and an opportunity to intervene. The revisions did not purport to give an insurer an automatic right to set aside a judgment entered or any other rights beyond what any intervenor would have.
As was the case with the Western District’s prior opinion in this case, this Supreme Court opinion provides an excellent road map for the court’s likely approach to the issue of retroactive vs. prospective application of statutory amendments of not only this statute, but others under Missouri law.
* Kelly M. “Koki” Sabatés, Summer Law Clerk, assisted in the research and drafting of this post. Sabatés is a 3L student at the University of Missouri-Columbia.
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