Insurance companies and policyholders seeking to determine whether business interruption coverage extends to coronavirus-related shutdowns are asking the courts for early declaratory judgments, a tactic more commonly used in other types of coverage fights.
Early declaratory judgment lawsuits are typically filed by insurers looking to determine whether they are expected to provide liability coverage when a policyholder gets into an accident or faces some other type of third-party claim.
A declaratory judgment ruling serves as a sort of instruction in the insurance context, with a judge stating that an insurer either has no duty to cover a claim or is required to do so, with any actual discussion of the amount of money to be paid out to be decided between the parties.
Declaratory judgment suits are now popping up in business interruption policy disputes triggered by the coronavirus and the mandatory closure of non-essential businesses by state and local governments.
Oceana Grill, a prominent New Orleans restaurant, sued Lloyd’s of London in a Louisiana state court on March 17, just days after orders capping gatherings at 250 people in the state came into effect. On March 25, famed chef Thomas Keller and his restaurant The French Laundry sued The Hartford seeking a similar declaratory judgment in state court in Napa County, California.
Hundreds of lawsuits have already been filed nationwide by businesses large and small challenging an insurer’s decision not to cover the costs of a coronavirus-related closing. The Oceana Grill and French Laundry suits are different because rather than challenging a coverage decision that was already made, the restaurants are seeking any early order from a judge that their claims should be covered.
Beyond the boundaries of any individual case, policyholder attorneys hope to win early declaratory judgment that could sway other courts, said Scott Seaman, the co-chair of Hinshaw & Culbertson LLP’s global insurance practice.
“It’s understandable that policyholder lawyers would want to get decisions from courts they think are more favorable and pass those out and use them as persuasive authority,” he said.
Both restaurants argue that the orders from state and local leaders in Louisiana and California forced them to shut down, and that civil authority provisions in their policies mean that coronavirus losses should be covered by their business interruption policies, said John W. Houghtaling II of Gauthier, Murphy & Houghtaling LLP, who represents the restaurants.
“We’re basically asking the court to say one document triggers the other,” Houghtaling told Bloomberg Law.
If the strategy works and he wins coverage for the two restaurants, Houghtaling said he plans to try to present the orders to judges around the country.
“We expect that it would have binding effect in the district, but persuasive effect throughout the country,” he said.
It’s unclear how persuasive the decisions will be, however.
“Courts in one state do not set binding precedent for courts in other states, and trial courts don’t set precedent for anybody, other than parties to that case,” said G. Andrew Lundberg, the former head of Latham & Watkins LLP’s insurance recovery practice group.
Any effect a declaratory judgment order would have in other courts “varies greatly,” said Lundberg, now a managing director at litigation finance firm Burford Capital.
Insurance companies are also getting in on the business interruption declaratory judgment act.
Travelers Casualty Insurance Co. of America filed its own lawsuit against Geragos & Geragos P.C., a law firm that has been representing California businesses in business interruption coverage suits, in the U.S. District Court for the Central District of California on April 20.
The lawsuit is seeking a declaration that a business interruption policy the law firm took out does not cover virus-related losses.
The Geragos firm has said it welcomes the fight, while representatives for Travelers did not respond to a request for comment.
The Travelers lawsuit is the more usual direction for these types of cases to move, with insurers seeking a court’s determination that they are off the hook for specific claims, Seaman said.
A win in the Geragos case could provide Travelers with both an affirmative declaration that it is not on the hook for specific policies, and some ammunition in what is expected to be a tsunami of business interruption cases. Just how powerful that ammunition will be is unclear, he said.
“A favorable outcome for a policyholder or insurer in one case does not guarantee a favorable outcome in another,” Seaman said.