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Written By: David Newman
Editor in Chief, American Journal of Trial Advocacy
Beginning in March 2020, many small businesses across the country struggled to stay afloat after state and local governments began implementing lockdowns and restrictions on businesses in response to the COVID-19 pandemic.[1] These lockdowns and restrictions caused more than 1.4 million small businesses to shut-down or temporarily close in the 2nd quarter of 2020.[2] For the businesses that did survive, many experienced significant cash losses from the involuntary shut-downs. As a result, many businesses began filing claims for business interruption coverage under their property or casualty insurance policies.[3]
I. Business Interruption Coverage amidst the Pandemic
Business interruption coverage is insurance coverage to help pay for business expenses and replace lost income as the result of a covered event, such as a fire.[4] Business interruption coverage is not a standalone insurance policy, but is often included in a business’s property or casualty insurance policy.[5] Coverage is typically triggered by an event that physically damages the business’s property, which causes the business to close while repairs to the property are made.[6] However, ever since the SARS virus outbreak of 2003, insurance carriers began including virus exclusions in their policies which would not provide coverage for losses due to global viral pandemics. The rationale being that global viral pandemics, such as the SARS and the COVID-19 pandemics, affect a large number of policyholders all at the same time because of how viruses can spread throughout a population, and insurance carriers could not afford to cover all the claims that would arise out of such an event.[7] Nearly all property insurance policies issued after 2006 include a virus exclusion.[8]
So as business began to file claims for losses due to COVID-19, the insurance carriers responded by denying coverage for COVID-19 related losses.[9] The insurance carriers reasons for denying coverage were because: (1) almost all of the policies included a virus exclusion, and (2) even if the policy did not have a virus exclusion, if the policy required physical damage or loss to the property, then coronavirus losses still would not be covered because the coronavirus does not cause actual physical damage to the property itself.[10] Though the policies included a virus exclusion, insurance carriers still have a duty to evaluate each claim by “investigat[ing] claims in a timely manner, [paying] claims that are owed, or provide a reasonable explanation of the reasons for denial of a claim.”[11] As claims were being denied by insurance carriers, many businesses brought suits in federal courts across the country against their insurance carriers. As the number of suits against insurance carriers in federal courts mounted, many plaintiffs sought to consolidate cases into multidistrict litigations (MDL) under 28 U.S.C. § 1407.[12]
II. Early Ruling on MDL Consolidation
The federal cases against insurance carriers involve numerous different plaintiffs as well as numerous different insurance carriers across the country. On August 12, 2020, the Judicial Panel on Multidistrict Litigation (JPML) ruled on two motions for consolidation of cases into an MDL, one where plaintiffs across several district courts sought consolidation in the Eastern District of Pennsylvania and a similar motion where plaintiffs across several district courts sought consolidation into the Northern District of Illinois.[13] The JPML denied the plaintiffs’ motions to consolidate the cases into an MDL because the JPML determined that there were no common defendants in the cases presented and the cases involved several different insurance carriers in several different industries.[14] The cases also involved various different insurance policies with “different coverages, conditions, exclusions, and policy language . . . .”[15] Because of these factual differences among the different defendants, the JPML found there was little likelihood for shared discovery among the cases.[16] And further, the JPML found consolidation would lead to efficiency problems for the transferee court, rather than make the litigation more efficient with consolidation because the transferee court would have to manage hundreds of plaintiffs, as well as hundreds of defendants.[17] However, in denying the motions, the JPML left open the door for insurer specific MDLs against the four insurance carriers with the most federal cases against them: Lloyd’s of London, Cincinnati Insurance Company, The Hartford Insurance, and Society Insurance.[18]
III. Recent JPML rulings on Insurer-Specific MDLs
Following the denial of the initial motions for consolidation, the JPML ordered Lloyd’s of London, Cincinnati Insurance Company, The Hartford Insurance, and Society Insurance to file briefs as to why these cases should not be centralized.[19] Later, Travelers Insurance was included amongst these four insurance carriers for the JPML’s consideration of consolidation for cases against them.[20] On October 2, 2020, in four separate motions, the JPML denied consolidation of the cases against Travelers Insurance, Lloyd’s of London, Cincinnati Insurance Company, and The Hartford Insurance.[21] The JPML found it would be more efficient to not consolidate these cases because the pending cases would be delayed in the amount of time it would take to organize the cases for consolidation, rather than having the individual district courts rule on these cases.[22]
The JPML did, however, grant the order for consolidation of the cases against Society Insurance.[23] Society Insurance is a regional insurance carrier only operating in six states: Illinois, Indiana, Iowa, Minnesota, Tennessee, and Wisconsin.[24] The JPML found there were factual commonalities among the allegations against Society and that consolidation of the cases would benefit from shared discovery.[25] And since the cases against Society only involved a group of six nearby states, this meant that a single judge could efficiently hand the cases through consolidation. Even though the cases would involve six different state insurance laws, a judge could streamline the process by “establishing state-specific tracks and selecting certain already-briefed motions in individual cases as bellwether motions . . . .”[26]
The cases involving the other insurance carriers, besides Society Insurance, however will have to be resolved in their respective district courts. Along with the litigation against insurance carriers, there are also several pieces of legislation in both federal and state courts attempting to force insurance carriers to cover losses under business interruption insurance for claims related to COVID-19. Many of the bills currently reside in congressional committees and have not yet been brought to a vote. It’s unlikely though that there will be a resolution to any of the litigation regarding business interruption coverage in the near future. With the uncertainty of how the pending litigation and legislation will play out, the effect on the insurance market, for both insurance carriers and for policyholders, may be felt for much longer than the pandemic is around.
[1]Josh Gershman, A Guide to State Coronavirus Reopenings and Lockdowns, The Wall Street Journal (May 20, 2020), https://www.wsj.com/articles/a-state-by-state-guide-to-coronavirus-lockdowns-11584749351.
[2]Ruth Simon, Covid-19 Shuttered More Than 1 Million Small Businesses. Here Is How Five Survived., The Wall Street Journal (Aug. 1, 2020), https://www.wsj.com/articles/covid-19-shuttered-more-than-1-million-small-businesses-here-is-how-five-survived-11596254424.
[3]See Stephanie Zimmerman, Coronavirus pandemic prompts wave of ‘business interruption’ lawsuits by restaurants, ABA Journal (May 26, 2020, 9:09 AM), https://www.abajournal.com/web/article/coronavirus-pandemic-prompts-wave-of-business-interruption-lawsuits-by-restaurants.
[4]Julie Kagan, Business Interruption Insurance, Investopedia (July 9, 2020), https://www.investopedia.com/terms/b/business-interruption-insurance.asp.
[5]Id.
[6]What is Business Interruption Insurance?, Allstate, https://www.allstate.com/tr/business-insurance/business-interruption-coverage.aspx (last updated Nov. 2019).
[7]COVID-19 Business Interruption Insurance Lawsuits: The Ultimate Guide, Expert Institute, https://www.expertinstitute.com/litigation-guides/covid-19-business-interruption-insurance/ (last visited Nov. 8, 2020).
[8]Id.
[9]Id.
[10]Gavin Souter, Travelers hits back with COVID-19 claims denial suit, Business Insurance (April 20, 2020), https://www.businessinsurance.com/article/20200420/NEWS06/912334135/Travelers-sues-Geragos-over-coronavirus-insurance-coverage-business-interruption.
[11]Cheri Trites-Versluis, COVID-19, business interruption and bad faith litigation, PropertyCasualty360 (April 14, 2020), https://www.propertycasualty360.com/2020/04/14/covid-19-business-interruption-and-bad-faith-litigation/.
[12]28 U.S.C. § 1407(a) (2018) (“When civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings.”).
[13]Order Denying Transfer and Directing Issuance of Show Cause Orders at 1, In re: COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2942 (J.P.M.L. Aug. 12, 2020).
[14]Id. at 2.
[15]Id.
[16]Id.
[17]Order Denying Transfer and Directing Issuance of Show Cause Orders, supra note 36, at 3.
[18]Id. at 3-4 (“Such an MDL would be limited to a single insurer or group of related insurers and thus would not entail the managerial problems of an industry-wide MDL involving more than a hundred insurers.”).
[19]Id. at 4.
[20]Andrew G. Simpson, Judges Nix Consolidating COVID Business Interruption Suits Against Big Insurers, Insurance Journal (Oct. 4, 2020), https://www.insurancejournal.com/news/national/2020/10/04/585092.htm.
[21]Id.
[22]Order Denying Transfer at 3, In re: Travelers COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2965 (J.P.M.L. Oct. 2, 2020).
[23]Transfer Order at 4, In re: Society Insurance Company COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2964 (J.P.M.L. Oct. 2, 2020).
[24]Id. at 2.
[25]Id.
[26]Id. at 3.
American Journal of Trial Advocacy 