Courts across the country have overwhelmingly rejected insureds’ arguments they are entitled to COVID-19-related business interruption coverage. However, insurers cannot rest easy yet; a single case finding coverage for a policyholder could potentially open the floodgates to billions of dollars in Nuclear Verdicts®, and the courts have left the door open for policyholders.
Creative Artists Agency, LLC v. Affiliated FM Insurance Company
A California federal judge recently dismissed a COVID-19 coverage suit filed by Creative Artist Agency (“CAA”) preventing yet another potential nuclear verdict against the insurance industry.[i] In his July 27, 2022, opinion, U.S. District Court Judge André Birotte Jr. held that “other than conclusory and speculative allegations, [CAA’s] [c]omplaint lacks the required specificity and does not allege any physical loss or damage that would trigger coverage under the provision at issue in the [p]olicy.”[ii] In dismissing the case, Judge Birotte rejected CAA’s argument that the meaning of “physical loss or damage” is ambiguous because it is not defined in the policy, and noted it is well established under California law that “[i]n order for there to be ‘direct physical loss of or damage to’ property, there must be a ‘physical alteration’ to the property.”[iii] Judge Birotte specifically held neither “detrimental economic impact” nor “loss of use” qualify as “physical loss or damage.”[iv] Judge Birotte also found coverage was precluded under the policy’s contamination exclusion, which, “clearly and unequivocally exempts loss of damage “due to the actual or suspected presence of any . . . pathogen or pathogenic organism, bacteria, virus, [or] disease causing or illness causing agent . . . .”[v]
Current Precedent Favors the Insurance Industry
Judge Birotte’s ruling is not an outlier. Nationwide, insurers have been extremely successful in defeating COVID-19 coverage suits, stopping a significant number early in the litigation. According to the University of Pennsylvania Covid Coverage Litigation Tracker, nearly 92% of motions to dismiss brought by insurers have been granted, at least in part, with just under 85% being granted in full, with prejudice.[vi] Overall, that means more than 30% of the 2,342 COVID-19 coverage suits brought by policyholders have been dismissed with prejudice at the pleading stage.[vii] In addition, insurers have had 68 motions for summary judgment granted in full, and 13 granted in part, whereas policyholders have only had 13 motions for summary judgment granted in part, and none granted in full. It is safe to say that, up to this point, insurers have been remarkably successful in defeating policyholders’ COVID-19 coverage suits.
Despite the overwhelmingly positive results that insurers have enjoyed to date, there are cases that have left the door open for policyholders, including both state and federal cases out of California. Six months prior to Judge Birotte’s opinion, another judge for the Central District of California issued an order denying an insurer’s motion for judgment on the pleadings. In his July 27, 2022, opinion, U.S. District Court Judge, John A. Kronstadt, noted that “[d]istrict courts in the Ninth Circuit have reached different outcomes as to whether the presence of COVID-19 can cause physical loss or damage to an insured property,” and opined that “[t]he position that the presence of COVID-19 is a physical intrusion that affects the integrity of a property is the more persuasive one . . . .”[viii]
And, in a footnote to his own opinion, after discussing three cases holding allegations regarding the presence of the COVID-19 virus were insufficient to establish “direct physical loss,” Judge Birotte acknowledged he “is aware of the recent decision by the Court of Appeal for the Second District of California, Marina Pac. Hotel & Suites, LLC v. Fireman’s Fund Ins. Co. . . . which reaches a conclusion that is ‘at odds with almost all (but not all) decisions’ considering these issues . . . .”[ix] In Marina, the Second District Court of Appeals overturned the trial court’s dismissal of a COVID-19 coverage case, holding the term “direct physical loss or damage” is a crucial yet undefined term in the subject policy, subject to interpretation, and because plaintiffs’ alleged “direct physical loss or damage,” the claim was adequately pled.[x]
State Courts Could Turn the Tide
It is well established that state law, not federal law, normally governs disputed issues of contract interpretation.[xi] And while insurers’ success in COVID-19 coverage litigation overall is noteworthy, policyholders are faring much better in state court than they are in federal court. 79% of the motions to dismiss that have been granted were in federal court whereas 62% of the motions that were denied were in state court.[xii] It should also be noted: state high courts have ruled both ways, some holding COVID-19 losses cannot constitute “physical loss or damage”, and some holding COVID-19 losses can potentially constitute “physical loss or damage” though the requirements were not met in the cases in front of them.
As the chair of Jones Day’s insurance recovery group, Ty Childress says, “[i]t’s a tale of two courts,” and some federal court decisions could start to “unravel depending on what higher state courts do.”[xiii] If Mr. Childress is right, and the tide turns in favor of policyholders, the insurance industry could see billions of dollars in Nuclear Verdicts® handed down.[xiv]
Insurers have been very successful defending COVID-19 coverage cases nationwide, especially in federal court. Much of their success stems from courts finding the presence of the COVID-19 virus does not constitute “physical loss or damage” to property. However, a minority of courts, including courts in California, have left the door open for policyholders finding COVID-19 can or potentially can constitute “physical loss or damage.” Insurers need to monitor the ongoing COVID-19 coverage litigation, especially in state courts which (1) generally control contract interpretation, and (2) where policyholders have had greater success. A state high court decision holding that the COVID-19 virus constitutes “physical loss or damage” to property could set the stage for billions of dollars in Nuclear Verdicts® against insurers.
[i] Creative Artists Agency, LLC v. Affiliated FM Insurance Company (C.D. Cal., July 27, 2022, No. 221CV08314ABGJSX) 2022 WL 3097371.
[ii] Id. at *6.
[iii] Id. at *5 (collecting cases).
[iv] Id. at *5.
[v] Id. at *7 (emphasis in original).
[viii] Live Nation Entertainment, Inc. v. Factory Mutual Insurance Company (C.D. Cal., Feb. 3, 2022, No. LACV2100862JAKKSX) 2022 WL 390712, at *7.
[ix] Creative Artists, 2022 WL 3097371 at *5, fn. 3.
[x] Marina Pac. Hotel & Suites, LLC v. Fireman’s Fund Ins. Co. (2022) 81 Cal.App.5th 96, 108-109; see also Sheila Baker, CA Insurers Watch Out: COVID-19 Business Interruptions Are Changing, Aug. 5, 2022, available at https://www.tysonmendes.com/ca-insurers-watch-out-covid-19-business-interruptions-are-changing-the-tide/
[xi] Green Tree, 539 U.S. at p. 450 (plur. opn. of Breyer, J.); accord, id. at p. 454 (conc. opn. of Stevens, J.) [applying state law]; id. at pp. 457-458 (dis. opn. of Rehnquist, C.J.) [agreeing that “[t]he interpretation of private contracts is ordinarily a question of state law.”].
[xiii] Winston Cho, Hollywood’s COVID-19 Claims: So Far, Insurers Have the Upper Hand in Court, May 9, 2022, available at, https://www.hollywoodreporter.com/business/business-news/hollywoods-covid-19-claims-so-far-insurers-have-the-upper-hand-in-court-1235142261/
[xiv] See e.g., Oakland Athletics Baseball Company et al. v. AIG Specialty Insurance Company et al., (Cal. Sup. Ct., October 16, 2020, No. RG20079003) 2020 WL 7422179 (Original Complaint of all 30 MLB Teams, the baseball commissioner, and 3 media companies against AIG and other insurers, seeking coverage for alleged losses in the billions.)