Goliath v. Goliath: Corporations Take On Insurers Over Pandemic Coverage

Any disaster, be it hurricane, tornado, or wildfire, means a surge of insurance claims by businesses. The nature of the global COVID-19 pandemic — not a short-term event but a crisis that may take years to resolve — has turned the surge into a tsunami.

“We have not seen this many hundred-million-dollar lawsuits in a long time,” said Mark E. Miller, co-founder of the Washington, D.C.-based firm Miller Friel, PLLC, and a member of the Practising Law Institute’s faculty for insurance coverage, including its recent program, “The COVID-19 Pandemic Turns One: A Critical Time for Policyholders.”

Miller explained that the high number of lawsuits results from all-risk insurance policies that cover business interruption, lost income, and the money businesses have to expend to get themselves back to normal operations.

Two Waves

The first wave of suits, Miller said, came from traditional plaintiffs lawyers filing for small businesses like restaurants, retail shops, and hair salons, for example.  Most of the policies sold to these small businesses contained a standard-form virus or bacteria exclusion developed by the Insurance Services Office (ISO). According to an article Miller wrote for his firm’s “Insurance Recovery Blog,” used here by permission, many of these early lawsuits did not allege that the COVID-19 virus caused physical loss or damage to property, which would trigger the exclusion.  

“Instead, they argued that other causes, such as government closure orders, led to their losses,” the article said. Some of these lawsuits were successful, but many were not.

The second wave, which has yet to crest, involves suits brought by more sophisticated corporate entities. In many cases, according to Miller’s article, many corporations purchased policies that didn’t contain a virus exclusion at all.  

“In others, the exclusionary language was amended by state-specific endorsements deleting viruses from the exclusion, or the exclusion was drafted in such a way that it applied only to certain costs expended, and not business interruption losses themselves,” the article said. Therefore, many of the first-wave court rulings regarding policies with a standard ISO exclusions did not apply to this second wave.

And the wave is not puny. The COVID Coverage Litigation Tracker maintained by The University of Pennsylvania Carey Law School indicates that 1,980 business-interruption cases were outstanding nationwide as of July.

The litigation tracker also breaks down the coverage sought across cases. Claims for lost business income were the most common (1,787 cases in late August), followed by extra expenses (1,614 cases), and interruptions ordered by civil authorities (1,537 cases). Other types of coverage sought in these cases includes ingress and egress blockages, contamination, and labor issues. 

The Federal/State Divide

In cases that have had a ruling on a motion to dismiss, Miller said, “we’re seeing a great dichotomy between federal and state court.”

Data collected by the litigation tracker shows that in federal court, 84.5 percent of all cases have been fully dismissed with prejudice, whereas in state court the figure is 58.6 percent. In federal court, only 5.3 percent of motions to dismiss brought by insurers have been denied, but in state court, 31.3 percent of the motions were shot down.

With numbers like this, battles over which court gets to hear the case are bound to be fierce.

“The insurers want federal court and the policyholder companies want state court,” Miller explained. Most of the time the policyholders file in state court and the insurer files a motion to have it removed to federal court under diversity jurisdiction, which exists when the amount at issue exceeds $75,000 and no plaintiff is from the same state as any defendant.

If the case lands in federal court, in some cases, the policyholder company can file a motion to have it remanded back to state court.  

“Policyholders that have filed declaratory judgment actions, for example, should file a motion to remand the case to state court pursuant to the abstention doctrine,” Miller said. 

This doctrine allows a federal court to elect not to exercise jurisdiction even if there is diversity jurisdiction. The usual goal of abstention is to avoid needless conflict with a state court, according to Cornell Law School’s Legal Information Institute.

So why such a disparity between state and federal courts? Miller said that as far as he can tell, it is not the result of political leanings. However, insurance law is state law, and if such a case winds up in a federal court, it is obliged to follow state law under the Erie Doctrine, named for the landmark 1938 U.S. Supreme Court case Erie Railroad Co. v. Tompkins, which held that federal courts, when deciding a state issue, must follow its law, including judge-made common law.

Given this, the gap is perplexing and hard to tease out given the complexity of the situation. Miller noted that insurance companies have enlisted excellent advocates that claim the magnitude of the problem could force insurers into bankruptcy.

The widespread nature of a pandemic has put the issue on the U.S. Congress’s radar. In fact, in May of 2020, Politico reported that Rep. Carolyn Maloney (D-N.Y.) introduced legislation “that would encourage insurers to sell pandemic coverage in business interruption insurance policies by creating a federal backstop that would help pay for losses.” Maloney’s website indicates there has been no activity on the bill.

Law professors Erik Knutsen and Jeff Stempel — in an article that appeared on the COVID litigation tracker website in July — described a “surprising” argument that has often prevailed in federal court.

“Insurers have been winning not because of the ISO-drafted virus exclusions issued in the wake of the SARS epidemic of the early 2000s but by convincing (largely federal) trial judges that policyholder premises (air or surface) have not suffered ‘physical damage’ and that government-mandated prohibitions on use of policyholder property are not a ‘physical loss,’” the article said. 

Going Forward

Miller noted that the media tends to highlight federal cases because it is easier to access accurate data on federal courts than state courts. The reporting leaves the impression the insurance companies are winning.

“If you step back and look at state-court cases, policyholders are defeating motions to dismiss, even with standard form ISO exclusions,” he said. Miller added that cases in state court involving a policy with a virus exclusion are surviving a motion to dismiss about half the time, and about three-quarters of the time if there is no exclusion.

“A number of appeals are still being decided,” Miller said.  “In some cases, policyholders have filed summary judgement motions that have prevailed. This is a landscape that is greatly in flux.”

Although Miller thinks the traditional plaintiffs lawyers’ suits for small business have probably all been filed, many large corporations are still evaluating their policies and have yet to bump up against the statute of limitations. “I think the number of suits will continue to go up,” he said. 

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Elizabeth M. Bennett was a business reporter who moved into legal journalism when she covered the Delaware courts, a beat that inspired her to go to law school. After a few years as a practicing attorney in the Philadelphia region, she decamped to the Pacific Northwest and returned to freelance reporting and editing.