Business-owners seeking to battle insurers over pandemic-related business interruption coverage received ammunition and some clarity last week in a pair of rulings in New York and Louisiana state courts.
The state courts ruled that the New York Botanical Garden and the Oceana Grill, a New Orleans restaurant, didn’t have to have completely shut down to get coverage. The Louisiana Fourth Circuit Court of Appeal also held that the coronavirus can cause physical damage covered by businesses’ all-risk property insurance.
“The two decisions are not outliers and will provide precedential value, especially the Louisiana case,” said Peter Kochenburger, an insurance law professor at the University of Connecticut.
Federal courts haven’t been kind to policyholders as they’ve nearly always sided with insurers. But policyholders, especially the ones that are banking on state courts are likely to try to build on those wins. But with covid-coverage legal battles still expected to last years to come, state courts haven’t been as consistent in their Covid-coverage rulings when compared to federal courts.
“There’s still a tremendous amount of uncertainty. The insurance industry wants to paint a picture that there’s not,” said Daniel Schwarcz, a professor at University of Minnesota Law School. Every state is different in its insurance law interpretation, he said.
Without guidance from state high courts, federal courts are only making guesses about what state supreme courts would decide on insurance matters, and the Louisiana ruling proved them wrong, Schwarcz said
“State supreme courts really should have been the ones deciding this from the beginning. And federal courts should have been certifying this issue to state supreme courts,” but few have done that, Schwarcz said.
The two state cases are particularly notable because the Louisiana and New York courts similarly held that a mere slow-down and a partial suspension of revenues can also be covered. Most other courts have held businesses need to experience a total shutdown of operations in order to get coverage.
The Louisiana ruling “may be only the tip of the iceberg,” because “so many Covid insurance cases have been dismissed without discovery,” said Jeffrey Stempel, an insurance law professor at the University of Nevada, Las Vegas law school. The decision could be persuasive to the Louisiana high court if insurers appeal, he added.
The Louisiana case, in particular, may be precedential because it addressed the central question in many Covid-related insurance battles — whether the coronavirus causes property damage—according to Kochenburger.
The Louisiana decision is the first appellate ruling holding that insurance requirement for property damage is ambiguous. In insurance law, if a court finds the contract is open to more than one interpretation, it has to adopt the policyholder’s reading and rule for coverage.
“The big win for the policyholder in Louisiana was on ambiguity,” said Erin Webb, a Bloomberg Law analyst. “Once you open that door, states like Louisiana and many other states have these favorable rules that if the policy is ambiguous, you interpret in favor of the policyholder. “
The New York ruling could also benefit policyholders seeking civil authority coverage for losses incurred during pandemic lockdowns, said Scott Greenspan, a senior counsel at Pillsbury Winthrop Shaw Pittman LLP. Courts have ignored insurance policy definitions that business interruption also means slow-down of operation instead of a total shut down, he said.
Other courts have ruled that policyholders, such as restaurants, cannot get civil authority coverage for pandemic shutdowns because some of their employees still worked on-site to prepare other services such as food delivery and take-out during the lockdowns.
Litigation data still show policyholders face an uphill climb. Federal courts have tossed 96.4% of the 637 decided. State courts have dismissed 73.2% of the 201 they looked at so far, according to the University of Pennsylvania Law School’s data.
“It’d be too far to say these two rulings turn the tide” because of the vast number of holdings against policyholders, including in federal appellate courts, Webb said.
Most Covid insurance lawsuits don’t survive insurers’ motions to dismiss. Courts have largely adopted carriers’ argument that policyholders’ financial losses during the pandemic are not covered because they never experienced real property damage required by the policy. A virus on a surface does not cause damage the property because it can be easily cleaned by disinfectant, courts have found.
The Louisiana and New York rulings will have to live through appeals at state high courts if insures want to challenge the decisions. The New York ruling is also based on a niche pollution policy not at the center of the Covid insurance fight on property policies. On the whole, insurance is matter of state law, and other state courts don’t have to follow the two decisions.
Michael Savett, a partner at Clark & Fox who represents insurance companies in coverage disputes, downplayed the New York and Louisiana decisions.
“At this point, the table was already set,” Savett said. “Any policyholder-friendly decisions will not have a significant impact on the general landscape.”
Still, state supreme courts have not fully addressed the essential question of whether the coronavirus physically harms a property and if property damage requires a tangible structural change. Only three state high courts, in Massachusetts, Iowa, and Wisconsin, have ruled in Covid insurance cases, and all three sided with insurance companies.
If there is a state high court finding covid coverage for businesses, it would move the needle, Stempel said.
“If they can get one in Maryland, South Carolina, or Washington where cases are pending, this would be big news and would probably have a significant impact,” Stempel said.
The Louisiana decision will be binding on all federal courts deciding on Covid issues applying Louisiana law unless they find a valid reason not to adopt it, said Kochenburger from the University of Connecticut.
However, federal courts can try justifying their opposition by pointing to the large number of insurer-friendly rulings finding no coverage for businesses losses during pandemic, Kochenburger said.
The covid insurance fight “is a long game,” Kochenburger said.