COVID-19: Developments in Class Action Litigation Surrounding Business Interruption Insurance Coverage
Currently, one of the most prominent areas for class action litigation related to the COVID-19 pandemic is disputes about whether commercial insurance policies cover business interruption losses. Hundreds of businesses have sued a large number of insurance companies arguing that their insurance policies should cover any losses incurred as a result of state and local closure orders during the pandemic. There have already been over 1,000 of these actions filed nationwide, more than half of which have been filed as class actions.
Plaintiff businesses have argued that the terms of their “all-risk” insurance policies, including terms related to Business Income coverage and Civil Authority coverage, cover losses from closures required by state and local pandemic orders. Plaintiffs have asserted causes of action for breach of contract, unjust enrichment, and declaratory judgment under state/federal law. In response, insurers have disputed these allegations, arguing that the insurance policies at issue only cover losses incurred as a result of direct physical damage to property, such as from an earthquake or hurricane, and not losses resulting from business disruptions due to a health emergency. Insurers have also noted that some policies contain explicit exclusions for losses resulting from a virus, indicating that general commercial property insurance terms were not intended to cover the losses claimed.
The Judicial Panel On Multidistrict Litigation Declines To Consolidate Similar Actions
Plaintiffs filed two petitions to the Judicial Panel on Multidistrict Litigation to consolidate the hundreds of business interruption cases pending in federal courts. One petition asked the JPML to consolidate all of the present and future business interruption cases into the Northern District of Illinois, whereas the second petition sought centralization in the Eastern District of Pennsylvania.
Following argument on July 30, 2020, the seven-member JPML ruled on August 12, 2020, denying both petitions. See MDL No. 2942. The JPML noted that there were 263 known related actions in 48 districts, and plaintiffs in more than 175 actions responded to the petitions, supporting centralization in the proposed districts or proposing alternatives, including other districts for nationwide consolidation or consolidation on a state-by-state, insurer-by-insurer, or regional basis.
Defendants also responded and uniformly opposed centralization. The JPML ultimately concluded that industrywide national centralization would not serve the convenience of the parties and witnesses or further the just and efficient conduct of this litigation. Noting that there was “no common defendant in these actions,” the JPML determined there was “little potential for common discovery across the litigation,” which would “involve different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states. These differences,” the JPML observed, “will overwhelm any common factual questions.”
The hundreds of individual cases will now proceed before the courts in which each of the complaints were filed. Even though the JPML denied consolidation on a nationwide basis, cases may be formally consolidated if they were filed within the same federal district and they may be informally coordinated among the parties and the involved judges. There are many options to increase efficiency available that may minimize the potential for duplicative discovery and inconsistent pretrial rulings, especially on an insurer-by-insurer basis. It is likely that, as a next step in many of these cases, the parties may propose such measures or the assigned judges may urge the parties to propose efficient procedures.
Early and Different Decisions On Dispositive Motions
There are currently at least 18 motions to dismiss pending in these actions. In the complaints at issue, some plaintiffs have argued that the presence of the virus on the property, requiring that surfaces be sanitized, constitutes direct physical harm, while other plaintiffs have argued that the forced closure itself is sufficient by directly affecting use of the property. This key difference has resulted in divergent outcomes in early dispositive motion practice.
In cases where plaintiffs argued the forced closure of business operations was sufficient to support a claim without a showing of property damage, early decisions have favored the insurer defendants. A court in Michigan has sided with the insurers, holding that some physical damage to property was required for coverage under the policy. See Gavrilides Management Co. v. Michigan Insurance Co. (Mich. Circ. Ct. 2020). Similarly, a court in D.C. granted summary judgment to an insurer, holding that there must be some direct damage to the property itself and that loss of use as a result of government shutdown orders was not sufficient for coverage. See Rose’s 1, LLC v. Erie Insurance Exchange, No. 2020 CA 002424 (D.C. Super. Ct. 2020). Neither of the complaints in those cases alleged any direct physical loss or damage to the property.
On the other hand, some plaintiffs have asserted that the presence of the COVID-19 virus on their property or other identified dangerous conditions can constitute physical loss or damage to commercial property. One federal court has denied a motion to dismiss on this basis, holding that the insurer wrongfully refused to cover a group of hair salons’ and restaurants’ losses during COVID-19 shutdowns because the businesses adequately alleged they suffered a covered “direct physical loss.” The ruling was the first in which a court allowed a policyholder’s COVID-19 coverage suit to proceed following a motion to dismiss. Studio 417 Inc. et al. v. The Cincinnati Insurance Co., No. 6:20-cv-03127 (W.D. Mo. 2020).
There have been only a handful of decisions on dispositive motions among the hundreds of cases filed to date. These early decisions are notable, but are no guarantee of how other courts may rule on similar claims in the future, and it will be important to continue monitoring how courts across the country assess each individual case in the coming months.
Class Certification Issues In Business Disruption Insurance Actions
Plaintiffs will need to meet the standards for class certification under Federal Rule 23 or its state law equivalent in order to maintain their claims as class actions. A court may only certify a class if plaintiffs can show, among other things, that there are common issues applicable to the entire class and that their own claims are typical to other class members’ claims. Plaintiffs thus far have argued that the core issue common to all of the claims is whether the phrase “direct physical loss or damage” or similar language in insurance contracts covers losses caused by the pandemic. In response, defendant insurers may raise individualized issues, including, but not limited to, the following:
- Lead plaintiffs’ claims may be based on their own individual contracts with their insurers, which may have differing language, terms, and exclusions as compared to other insurance contracts executed by other putative class members.
- Some lead plaintiff claims may require extrinsic evidence, such as representations that were made to them individually by the insurance company, whereas other putative class members may not need to present such evidence.
- The relevant various state, municipal, and county orders that required business closures or interrupted business activities may have significant differences, including their duration and to which businesses each applied.
- State laws concerning insurance contracts can vary greatly from state to state.
- Lead plaintiffs may have to assert individualized evidence of causation and their own losses during the pandemic, which has the potential to overwhelm any common issues shared with the putative class.
The above list of potential class certification issues is non-exhaustive and highlights how fact-intensive the analysis in each case may be. Because these cases are in their early stages and the factual record in each case has yet to be developed, additional issues and arguments are likely to arise.
Potential Legislative Developments
Business disruption insurance has also been a focus of legislators, with several states, including Massachusetts and New York, considering legislation that would require insurers to cover business interruption losses related to COVID-19, regardless of any exclusions or physical loss requirements in the policy. Proposed legislation would apply to small businesses that had policies in March, with reimbursement opportunities being offered to insurers by each state. New Jersey proposed similar legislation in March, but the bill was subsequently removed from debate in order to allow insurers to propose their own plans. Legislative proposals across the country will be another important area to monitor as the cases that could be potentially impacted by new laws continue to move forward.