A recent ruling from the U.S. District Court for the Eastern District of Michigan has provided more guidance in predicting how COVID-19 related losses and litigation will be handled.
In Turek Enterprises, Inc., d/b/a Alcona Chiropractic v. State Farm Mut. Auto. Ins. Co., et al, the Court ruled that State Farm Mutual Automobile Insurance Co. did not have to cover a chiropractic office’s losses alleged from government-ordered closures due to COVID-19. The Court held that the insured failed to allege physical loss and that the virus exclusion bars coverage.
This class action lawsuit seeking business interruption coverage was denied because the entire case focused on the definition of “direct physical loss;” however, did not demonstrate any “tangible damage to covered property” that was required as a condition precedent to coverage.
The chiropractor sued State Farm in June alleging the insurer wrongfully applied a virus exclusion to deny coverage. The insured argued the virus exclusion did not relate to the claimed losses, which were solely caused by government-closure orders. To support its position, the insured also argued COVID-19 was not present on its property, negating the “virus” related exclusion.
In Judge Ludington’s Order, the Court noted that even if the chiropractor alleged that the government-mandated closures were the cause of loss, “closure orders” were in response to curbing the spread of COVID-19 and the virus that causes it. Accordingly, the chiropractor’s business losses were barred by the policy’s virus exclusion. The chiropractor’s position disregarded “the anti-concurrent causation clause, which extend[ed] the virus exclusion to all losses where a virus is part of the causal chain.”
Plaintiff argued the exclusion applied only to decontamination costs and State Farm misrepresented that provision of the policy. In reviewing the applicable policy, Judge Ludington found that “[b]y its terms, the policy does not limit the virus exclusion to contamination, and plaintiff has failed to show that the virus exclusion is ambiguous.” Furthermore, “[e]ven if defendants misrepresented the purpose and extent of the virus exclusion in 2006, the plain, unambiguous meaning of the virus exclusion today negates coverage.”
In another creative argument, Plaintiff argued it had experienced “tangible” damage because the business was suspended by government closure orders; therefore, the business necessarily incurred ongoing “passive depreciation,” instead of a direct physical loss. The “passive depreciation” damage argued that all business equipment was continuing to lose value based on age and non-use. The Court rebuffed this argument by reasoning “[t]he plain meaning of direct physical loss to covered property requires that there be a loss to covered property, and not just any loss.”Ultimately, counsel and the plaintiff’s bar are both becoming more creative looking for special policy terms which ambiguity could open the door to such an argument as pleaded in this matter. Carriers should be addressing each claim and litigated coverage file on the individual claim’s separate and distinct terms, facts and application. No two COVID-19 claims are the same, and each coverage issue must be individually reviewed in order to fairly and accurately determine coverage and its application.
The U.S. Judicial Panel on Multidistrict Litigation initially ruled centralization was not appropriate for businesses seeking business interruption insurance coverage because of varying policy language. See our post here. At that time, more than 450 cases were pending in Federal Courts—now there are over 700.
While the JPML rejected total centralization, in the same ruling the Panel suggested that the creation of smaller “single-insurer” MDLs could be efficient to centralize those actions. Cases argued against one insurer or insurance group were “more likely to involve insurance policies utilizing the same language, endorsements, and exclusions” that would make sharing common discovery and pretrial motion proceedings more efficient.
Policyholders followed the JPML’s suggestion, as there were 300 lawsuits against The Hartford, Cincinnati Insurance Co., Society Insurance Co., Travelers and various underwriters at Lloyd’s of London that sought centralization into single carrier MDLs. The JPML had to decide whether to create five separate “single-insurer” MDLS to centralize all of the COVID-19 coverage actions against these specific carriers. On October 2, the JPML ruled that centralization was appropriate for cases against Society Insurance Co., but declined to centralize actions against The Hartford, Cincinnati Insurance Co., Travelers, and Lloyd’s of London.
Opponents of Centralization Argued Varying Policy Language and State Law Made MDL Inappropriate.
The insurers argued to the JPML, as they had previously ruled, that the varying policy language would be inappropriate for centralization. More specifically, the insurers argued that business interruption policy language can vary even among the policies issued by the same insurance company.
Additionally, Lloyd’s underwriters argued that the phrase “single-insurer MDL” was a misnomer as they are not the same insurer, but rather forty separate insurance carriers selling various policies to business through the Lloyd’s marketplace.
Policyholders opposing centralization echoed the insurer’s arguments about the policy language and focused their arguments on the differences among states’ laws interpreting the prerequisites for business interruption coverage. For example, the requirement that a business interruption loss stem from a “direct physical loss of or damage to” its property. A group of Chicago-area businesses argued that decisions in Illinois (and some other states) do not require a tangible alteration or damage to a property to be considered direct physical loss.
Proponents of Centralization Argued COVID-19 Pandemic Itself Triggering their Losses Gave Rise to Common Factual Issues.
The policyholders supporting centralization argued that the cases filed against the same or related insurers would give rise to numerous common and overlapping factual questions because they all related to the COVID-19 pandemic. Furthermore, the language of the policy was a standard form used by the respective insurer.
For example, a Florida restaurant argued that Lloyd’s underwriters commonly provided business interruption coverage on standard forms that are approved by the Insurance Services Office; therefore, they shared many common terms and a single court could determine “in one stroke” if the COVID-19 pandemic triggered standard terms in the policies, including the direct physical loss or damage requirement.
The Florida restaurant also addressed the issue of any uncommon questions, e.g., whether or not state and/or municipal civil authority orders prohibited access to covered property. They argued the questions “may turn to some extent on common issues, and the resolution of all common and uncommon questions by one judge will allow the just and expeditious resolution of all actions to the overall benefit of the parties.”
Another group of policyholders added that “the sheer volume of similar cases across the country implicating common issues” made centralization appropriate. They argued that an insurer “consistently utilizes a small subset of template policy forms” and has “uniformly denied” business interruption claims. Furthermore, “[w]hether an insurance policy provides coverage cannot be separated from the factual predicate that gives rise to coverage in the first place. Here, the related actions all share the same or similar triggering events: the losses of business income occasioned by COVID19 and/or related stay-at-home orders.”
The JPML’s Most Important Factor for Centralization was the Geographic Scope of Action
What set Society’s policies apart from the other insurers, were the “defined geographical scope of these actions” implicating the insurance laws of only six states. Judge Chang stated that any potential differences among the cases could be resolved with a number of pretrial techniques including state-specific tracks or a bellwether process.
The JPML emphasized that centralization involving Hartford, Cincinnati, and Travelers would not promote efficient resolution because of the sheer number and geographic scope of the cases. Especially when many of the policyholder plaintiffs “are on the brink of bankruptcy as a result of business lost due to the COVID-19 pandemic and the government closure orders.”
For Lloyd’s underwriters, the JPML said that centralization was not appropriate because it was not a single insurance company but rather a group of several dozen distinct insurers with varying policies. “The inclusion of non-standard and non-common forms and policy language would hinder the ability of the transferee court to organize the litigation and quickly reach the common factual and legal questions,” the JPML wrote.
Nevertheless, the JPML encouraged the insurers to engage in “informal cooperation and coordination” to be efficient and avoid duplication.
Once again, we see creative arguments utilized successfully to support centralization. Regardless of whether or not an insurer uses standard forms, each claim is unique, and insurers must continue to approach all COVID-19 interruption claims, in addition to all claims, thoroughly and cautiously.
Western District of Texas provides insureds with "out" to skirt federal jurisdiction in COVID-19 business interruption coverage casesOctober 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, 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.
 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.
About Insurance Law Blog
The BSCR Insurance Blog examines topics and developments of interest to insurance carriers, with a particular focus on Missouri and Kansas law. Learn more about the editor, Angela M. Higgins, and our Insurance practice.
The Insurance Law Blog is made available by Baker Sterchi Cowden & Rice LLC for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. Your use of this blog site alone creates no attorney client relationship between you and the firm.
Do not include confidential information in comments or other feedback or messages related to the Insurance Law Blog, as these are neither confidential nor secure methods of communicating with attorneys. The Insurance Law Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.