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On The Case

Latest COVID-19 insurance coverage loss shows narrowing path for policyholders

(Reuters) - What a difference an ocean makes.

On Tuesday, the U.K.’s High Court of Justice handed down its decision in a proceeding to determine whether hundreds of thousands of British businesses are entitled to insurance coverage for losses they incurred during COVID-19 shutdowns. The court’s ruling was not a complete victory for either insurers or policyholders, as my Reuters colleagues reported from London. But the Financial Conduct Authority, which brought the test case for policyholders against eight insurers, said in a statement that the decision “substantially found in favour of the arguments we presented on the majority of the key issues.” Reuters described policyholders as “jubilant” over the decision, which will affect billions of dollars in insurance claims.

In the U.S., meanwhile, where litigation against insurers is proceeding in piecemeal fashion after the Judicial Panel on Multidistrict Litigation declined last month to create a single, nationwide case, policyholders just lost another decision. U.S. District Judge Jon Tigar of San Francisco dismissed a prospective COVID-19 coverage class action against Travelers, ruling that the San Francisco clothing and home accessory store Mudpie was not entitled to insurance for losses it experienced because the store was shut down by California’s COVID-19 stay-at-home order.

Of course, insurance policy language and case law are different in the U.S. and the U.K. But the difference in fortune between policyholders in the two countries seems particularly stark at the moment. Judge Tigar’s ruling is the latest bad news for U.S. policyholders, who, as I’ve reported, have not fared very well in these early days of COVID-19 insurance litigation in state and federal court.

There are exceptions, to be sure. In August, U.S. District Judge Stephen Bough of Kansas City refused to dismiss two policyholder class actions against Cincinnati Insurance by businesses that alleged they experienced direct physical losses because the coronavirus had infected their premises. And New Jersey Superior Court Judge Michael Beukas last month denied Franklin Mutual’s motion to dismiss a coverage claim by Optical Services, holding the eyeglass business deserved a chance to establish that it was covered for losses during COVID-19 shutdowns. With the JPML now considering whether to create several insurer-specific consolidated proceedings – oral arguments on potential MDLs against Cincinnati, Travelers, Lloyds, The Hartford and Society are scheduled for Sept. 24 – policyholders may yet change the course of the litigation.

But Judge Tigar’s ruling, from a well-regarded judge in a case brought by smart plaintiffs lawyers, shows why that won’t be easy – especially in cases in which plaintiffs’ insurance policies contain an exclusion for losses due to viruses.

Mudpie’s lawyers at Gibbs Law Group and Cohen Milstein Sellers & Toll said in an email statement that the ruling was disappointing. “Still, it bears remembering that the insurance industry maintains there is no possibility for coverage under any circumstances, and Judge Tigar appears to have rejected that view, even though he did not find coverage under Mudpie’s facts,” the statement said. “That issue needs to be fully litigated and we hope to do so through an amendment (to the complaint), or on appeal or in other cases. The stakes are too high for small businesses not to press ahead.”

Travelers declined to provide a statement on the Mudpie ruling.

Crucially, Mudpie’s complaint did not claim that the store had suffered losses because the coronavirus was present on its premises, in contrast to the plaintiffs in the policyholder cases before Judge Bough in Kansas City. The store alleged instead that it experienced a “direct physical loss of” property because the store was inaccessible as a result of the city’s COVID-19 order.

I suspect that Mudpie’s lawyers framed the store’s case that way, instead of alleging that the coronavirus had caused physical damage to the property, because Mudpie’s insurance policy contains a virus exclusion. As Travelers’ lawyers at Robinson & Cole and Bullivant Houser Bailey wrote in the insurer’s dismissal motion, the virus exclusion precludes insurance coverage under business interruption and civil authority provisions “for any ‘loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.’” Travelers argued that a government shutdown to prevent COVID-19 could not trigger Mudpie’s property damage coverage because Mudpie’s store did not experience physical loss or alteration. And even if the virus did cause such damage, the insurer said, the policy’s virus exclusion would let Travelers off the hook. (Travelers declined to provide a statement on the Mudpie ruling.)

Mudpie responded that in 2018’s Total Intermodal v. Travelers (2018 WL 3829767), a California federal district judge interpreted nearly identical Travelers property damage language to cover a claim for property that was made unavailable. “There is no good reason to depart from Total Intermodal’s sensible reading of the phrase ‘loss of,’” the Mudpie brief said. “That phrase encompasses Mudpie’s allegations that the government closure orders made its property unavailable to be occupied or operated, and therefore unfit for retail sales … which constitutes a direct physical loss of Mudpie’s insured property.”

In Monday’s ruling, Judge Tigar agreed that a policyholder need not show damage or physical alteration to trigger coverage under a provision for a “direct physical loss of” property. (The Total Intermodal case involved a claim for cargo that could not be recovered when it was mistakenly shipped to China.) But the judge said other provisions in the Travelers policy indicate that coverage is only triggered when a “physical force” has prompted government shutdown orders. Mudpie alleged that California’s stay-at-home order was intended to prevent the spread of COVID-19, Judge Tigar said -- and prevention is not a physical force. So Mudpie, he said, had failed to establish a direct physical loss of its property.

Judge Tigar said he would have reached a different conclusion if Mudpie – like the plaintiffs in the Kansas City cases before Judge Bough – had alleged COVID-19 was present in the store. The coronavirus, he said, could be construed as a physical force.

But if Mudpie had attempted to allege that its shutdown was the result of a COVID-19 infestation, I suspect it would have had a tough time getting past its policy’s virus exclusion. (Judge Tigar did not rule on the scope of the exclusion because he found coverage was not triggered in the first place. Notably, the policies at issue in the cases before Judge Bough in Kansas City did not include virus clauses.)

The Mudpie ruling, in other words, is a Catch-22 for policyholders with virus exclusions in their policies. Without alleging the presence of the virus, they can’t claim property damage. But if they allege the virus was present on their premises, they run into policy exclusions.

Judge Tigar is the third federal judge in California to dismiss a COVID-19 insurance suit in the past few weeks, following U.S. District Judge Stephen Wilson of Los Angeles in 10E, LLC v. Travelers (2020 WL 5359653) and U.S. District Judge Cathy Ann Bencivengo of San Diego in Pappy’s Barber Shops v. Farmers (2020 WL 5500221). None of the cases was dismissed with prejudice, but none of the judges held out much prospect that policyholders would be able to amend their complaints to survive.

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