The COVID-19 pandemic and related shutdowns have opened up uncharted territory for insurance organizations and claims professionals. Beyond policy language, insurers must deal with timeliness, access, new workers’ compensation exposures, facility and workplace risks, and more. A panel of insurance claims professionals will examine the legal and logistical issues confronting the claims sector, how insurers are responding, and developments shaping the post-COVID-19 era.
Charles E. (“C.J.”) Haddick, Jr.; Shareholder; Dickie, McCamey & Chilcote, P.C.
Frank A. Zacherl; Partner; Shutts & Bowen LLP
Randolph (“Randy”) Brause; Attorney; Leitner Tort DeFazio & Brause, P.C.
Bryan G. Baumann; Shareholder; Knox McLaughlin Gornall & Sennett, P.C.
For registration, contact John Czuba, Managing Editor – Best’s Insurance Professional Resources, at John.Czuba@ambest.com.
In this month’s episode of Bests’ Insurance Law Podcast, John Czuba and I discuss COVID-19 and Business Interruption Coverage, along with early trends seen in the first wave of insurance coverage litigation involving COVID-19 claims. You can listen to the podcast via the link below:
With effects of the Coronavirus pandemic already gripping the globe, and the resulting economic and business impacts of the virus, a follow – on epidemic of insurance litigation over whether COVID-related losses are insurable, covered events is certain to follow. The first case, in fact, has already been filed.
In Cajun Conti LLC v. Certain Underwriters at Lloyd’s London, filed in the Civil District Court for the Parish of Orleans, Louisiana last week, a New Orleans restaurant seeks a declaratory judgment against Lloyd’s of London and the state of Louisiana that Lloyd’s owes business interruption coverage under an “all-risks” business insurance policy it issued to the restaurant for COVID-related business losses.
In the case, the insureds claim that there are no applicable exclusions in the policy relating to quarantine or pandemic, and therefore the all-risks policy written by Lloyd’s is answerable for the insured’s likely but as yet unproven losses caused by government-imposed shut downs or limitations in the operations of businesses, including limits on the number of persons permitted at a gathering.
Business Interruption Coverage
A key early legal issue which looms in that case is whether the virus or its consequences constitute a “direct physical loss,” which is a prerequisite for coverage under the standard and most Business Interruption coverage endorsements. And while it is far from certain how the Court will rule at this point, the filing does portend what is sure to be an onslaught of coverage disputes in terms of both first party and third party claims, as well as special events coverage.
In the recently filed Louisiana case, the insured restaurant claims that the closing of its property was caused by direct physical loss caused by the virus. This is likely to be the key battleground in the flood of business interruption claims which looms just beyond the horizon, i.e,, whether COVID-19 closures and limitations constitute insurable events arising out of “direct physical loss.”
In preparation for what is to come, insurers should scan their business policies for not just the precise terms of their Business Interruption endorsements, but also for potentially applicable exclusions such as exclusions for infectious disease, outbreaks, microorganisms and other epidemics. This is an available ISO exclusion. However, even if such exclusions appear in the policies in question, it is also possible that state legislatures, and even Congress may at some point attempt to override and limit the applicability of such exclusions for COVID-19. That is yet another battleground.
Third-Party Claims: More Questions Than Answers
In addition to first party claims relating to business interruption, third party liability claims for illness and injury caused by businesses which fail to adequately safeguard against COVID-19 contamination are likely to blossom. Insureds will undoubtedly tender such claims made against them to their general liability insurers for defense and indemnity. In turn, this will obligate insurers to undertake thorough policy and claims reviews, including examination of possible exclusions and limitations of coverage.
For example, are claims of mental or emotional distress for COVID-19 illness, apart from physical injury, covered by the definition of “bodily injury” in CGL policies? Does such a claim involve an “occurrence” as defined in the policy if the insured was already on notice of the need for precaution? If so, how many occurrences have been triggered, or is it a single occurrence pursuant to continuous trigger provisions of the occurrence definition of the policy? Or, stated another way, what did the insured know, and when did they know it, and does this knowledge mean the loss in question was not a fortuitous event which liability insurance is intended to address?
Going yet further, will CGL pollution, fungi, and bacterial exclusions provide a basis to deny defense and indemnity outright, or require defense under a reservation of rights? Did the insureds timely provide notice of any such claims, or take any action in violation of the policies terms and conditions, including the duties in the event of a loss?
Given the high stakes, the use of best practices in thorough claims investigation will be a must in handling these types of claims.
Mass Cancellation of Public Events
While less common than business or CGL insurance, policies insuring against the cancellation of public events such as sporting events, concerts, and shows will also be implicated by the COVID-19 outbreak.
Careful examination of the coverage triggers and conditions and exclusions in such policies will be necessary, as will be a fact-intensive, case by case claims evaluation. Some policies will contain communicable disease endorsements addressable to COVID-19 losses, but some may contain exclusions, and some very recent policy issuances may even contain specific COVID-19 outbreak exclusions. Decisions of local government and law enforcement entities which may have required event cancellation will have to be examined, as these declarations may implicate coverage under event cancellation insurance.
COVID-19 insurance coverage claims are in their infancy, but they are sure to multiply. Insurers must make careful examination of the applicable policy language, and undertake painstaking claims evaluations, in order to comply with their duties of good faith and other statutory and regulatory obligations when processing COVID-19 claims.
To access our firm’s knowledge base of technical and legal research on COVID-19 insurance coverage claims, or for copies of the Louisiana COVID-19 suit discussed in this post, reach me at email@example.com or 717-731-4800.
Pittsburgh, Jan. 23– The Pennsylvania Supreme Court has ruled that a household exclusion in an auto insurance policy was unenforceable because it impermissibly took stacked UM/UIM benefits away from the insured in violation of the Pa. Motor Vehicle Financial Responsibility Law (Pa.M.V.F.R.L.).
In Gallagher v. Geico Indem. Co., the Pa. Supreme Court reversed both trial court and the Pa. Superior Court’s grant of Summary Judgment to Geico, in a case where Geico sought to disallow $200,000 in stacked UM/UIM benefits in an automobile policy covering two vehicles owned by the insured, Gallagher. Gallagher also had a separate motorcycle policy with UM/UIM limits of $50,000.00, also issued by Geico.
Gallagher was injured in an August 12, 2012 motorcycle accident, and was paid by both the tortfeasor, and by Geico in the amount of $50,000.00 which was the UM/UIM limit under the motorcycle policy. Gallagher sought the additional $200,000.00 in stacked UM/UIM coverage under the auto policy, but Geico denied that claim on the grounds that the auto policy contained a household vehicle exclusion, which provided:
“This coverage does not apply to bodily injury while occupying or from being struck by a vehicle owned or leased by you or a relative that is not insured for Underinsured Motorists Coverage under this policy.”
Gallagher filed suit against Geico, claiming that Geico placed Gallagher’s motorcycle and automobiles on separate policies, and that he paid for the stacked UM/UIM benefits under his auto policy.
Geico won summary judgment in the Westmoreland County Court of Common Pleas based on the exclusion, and the Superior Court affirmed. On appeal to the state Supreme Court, however, the court, per Justice Baer, reversed in a 5-2 ruling, holding that the household exclusion violated section 1738(b) of the Pa.M.V.F.R.L., which requires that stacked UM/UIM benefits be waived in writing. Justice Baer wrote that Gallagher did not waive stacking under his auto policy, and that he was entitled to those benefits, thereby barring application of the household vehicle exclusion. Of the exclusion, Justice Baer wrote:
“This policy provision, buried in an amendment, is inconsistent with the unambiguous requirements Section 1738 of theMVFRL under the facts of this case insomuch as it acts as a de facto waiver of stacked UIM coverage provided for in the MVFRL, despite the indisputable reality that Gallagher did not sign the statutorily-prescribed UIM coverage waiver form. Instead, Gallagher decided to purchase stacked UM/UIM coverage under both of his policies, and he paid GEICO premiums commensurate with that decision. He simply never chose to waive formally stacking as is plainly required by the MVFRL.”
The Court therefore reversed and remanded the Superior Court ruling, sending the case back to the trial court for further proceedings.
Justice Wecht filed a dissenting opinion, in which he criticized the majority for conflating the stacking waiver provisions of section 1738 with the entirely separate question operation of a policy exclusion, arguing that nothing in the Pa.M.V.F.R.L. precluded the valid operation of the household vehicle exclusion. Justice Wecht also warned against the dangerous implication of the majority ruling, and the use of section 1738 to invalidate all UM/UIM exclusions, essentially allowing a waiver provision to trump the terms and conditions of the policy language.
Finally, Justice Wecht wrote that the majority decision violated earlier state Supreme Court precedent in Erie Exchange v. Baker, 601 Pa. 355, 972 A.2d 507, in which the Court made a clear distinction between the primacy of the nature, scope, and extent of UM/UIM coverage as set down in an insurance policy (and its limitations and exclusions), and the secondary consideration of whether coverage, if not otherwise limited or excluded, should be stacked, unstacked or waived.
PITTSBURGH, Oct. 11– A federal judge has ruled that State Auto Insurance Company was entitled to summary judgment on breach of contract and bad faith claims arising out of a water loss because the insureds violated a continuous occupation provision contained in their homeowners policy.
In Gerow v. State Auto, U.S. District Judge Kim Gibson found that State Auto was not liable to pay the water loss claim, and it could also therefore not be liable for acting in bad faith toward the insured plaintiffs in the case. The case was originally filed in Pa. state court but removed to the U.S. District Court for the Western District of Pa.
On January 16, 2016, the Gerows suffered a pipe burst water loss at the insured premises, insured by State Auto. State Auto denied the claim, however, pursuant to an investigation which determined that the house in question was not occupied at the time of the loss, in violation of the terms of subject homeowners policy which required continuous occupancy. After State Auto denied the claim, the insureds filed breach of contract and bad faith claims against the insurer. After the case was removed to federal court, the parties filed cross motions for summary judgment as to both claims.
Judge Gibson found that the insureds did not meet the continuous residency condition of the policy, and that State Auto had not waived the provision. He therefore granted summary judgment on the coverage claim to State Auto.
The insureds argued they could still maintain a bad faith action against the insurer however, claiming that State Auto erroneously advised them to seek water remediation and then denied coverage, and failed to inform them that they were not complying with the residency requirement.
Judge Gibson dismissed these arguments, however, after employing the traditional Pennsylvania two part bad faith test — whether the insurer’s position lacked a reasonable basis, and whether it knew or recklessly disregarded the lack of basis. Judge Gibson wrote that State Auto:
“clearly had a reasonable basis for denying coverage for the Subject Loss: the Policy required Plaintiffs to reside at the Subject Property, and Defendant concluded, after an investigation, that Plaintiffs did not reside there, a conclusion with which this Court agrees…[Therefore, State Auto] could not have known or recklessly disregarded a lack of reasonable basis.”
Judge Gibson also relied in part on a prior Western District ruling which precluded a bad faith claim from proceeding when a lack of coverage was found.
PHILADELPHIA, Aug. 9 – A bad faith action against an individual claims adjuster has been dismissed by a U.S. District Court Judge, who found that the joinder of the adjuster in a coverage and bad faith action arising out of a UM/UIM claim was done fraudulently to defeat federal removal jurisdiction.
In Reto v. Liberty Mutual Insurance, U.S. District Judge Timothy Savage denied Retos’ motion to remand the Retos’ case to state court after Liberty Mutual removed the case, contending that the joinder of Liberty Mutual adjuster Stephania DeRosa was fraudulent for the purposes of destroying federal diversity jurisdiction.
Judge Savage noted that Liberty met its burden in opposing the motion for remand:
“[the]removing party has a heavy burden of persuading a court that joinder is fraudulent….[however] the claims against [the claim representative] are wholly insubstantial and frivolous…there is no basis to support a contract [against the claims handler, and] only the principal [Liberty Mutual] may be held liable.”
Judge Savage ruled that the claim representative was only an agent, without a stand-alone contract with the insured. Finally, the Court held that the Pa. Bad Faith Statute did not apply to claims representatives, but rather only to insurers. Accordingly, Judge Savage dismissed Ms. DeRosa as a defendant, and denied the Retos’ motion to remand the case to state court.
Reto v. Liberty Mutual Insurance, U. S. District Court Eastern District of Pennsylvania, CIVIL ACTION NO. 18-2483, 2018 U.S. Dist. LEXIS 133336 (E.D. Pa. Aug., 8, 2018) (Savage, J.)
PHILADELPHIA, JUNE 6 – The Third Circuit U.S. Court of Appeals has recently affirmed a ruling in favor of Selective Way Insurance Company, holding that Selective does not have a duty to defend or indemnify an insured contractor for claims of faulty workmanship arising out of a ondominium construction project.
In Lenick Construction, Inc. v Selective Way Insurance Company, Lenick was impleaded as a third-party defendant in litigation as the general contractor, Westrum, for defects at the Villas at Packer Park Condominium project. Lenick notified Selective after it was joined, seeking defense and indemnity and, while denying the request for indemnity, Selective agreed to defend Lenick in the case under a reservation of rights.
Lenick sued Selective in the Philadelphia Court of Common Pleas, seeking a declaratory judgment obligating Selective to provide defense and indemnity from Selective , after which Selective removed the action to federal court. Thereafter, the parties filed cross motions for summary judgment.
In affirming the US District Court’s conclusion that the allegations against Lenick were not covered by the CGL policy issued to Lenick by Selective, the Third Circuit relied upon Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888, 896-97 (Pa. 2006)and held that the claims in the Joinder Complaint against Lenick did not allege a fortuitous “occurrence” such that the claim would be covered. In the Opinion written by Chief Judge Hardiman, the Court held that a fair reading of the Complaint against Lenick was that Lenick was guilty of faulty workmanship.
While Lenick contended that some of the damage to its work occurred as a result of the faulty workmanship of other contractors such that an occurrence could be found, the Court disagreed, referring again to the underlying complaint against Lenick which alleged Lenick’s faulty workmanship, not that Lenick’s work was damaged by the faulty workmanship of others. Summary judgment in favor of Selective was therefore affirmed.
TRENTON, June 8 – The State Senate of New Jersey has passed a Bill which will, if passed by the General Assembly and signed by the Governor, impact bad faith litigation in the Garden State. On June 7, 2018, the New Jersey State Senate passed New Jersey Senate Bill 2144, the New Jersey Insurance Fair Conduct Act (IFCA). The statue provides for remedies and damages against insurers who commit “an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy” or a violation of New Jersey’s Unfair Claims Settlement Practices Act (UCSPA). The UCSPA catalogs more than ten different forms of insurer misconduct.
In its current form, the statute is unclear as to whether or not it adheres to the New Jersey Supreme Court’s common law standard of bad faith conduct which holds that mere negligence is not bad faith and the refusal to settle a debatable claim does not constitute bad faith. Under Supreme Court precedent, a bad faith Plaintiff must successfully show that there are no debatable reasons for the denial of insurance benefits.
The bill passed by the State Senate proposes treble damages and attorney fees as well as cost recovery as part of the remedies. The Bill also provides for actual damages and the above-mentioned remedies “upon establishing” prohibited conduct, although it is silent as to the requisite burden of proof, e.g. preponderance of the evidence, clear and convincing proof. The Bill has been referred to the State General Assemblies Banking & Commerce Committee.
In its unanimous opinion in Rancosky v. Washington National Insurance Company, 170 A.3d 364 (Pa. 2017), the Pennsylvania Supreme Court confirmed the elements of an insurance bad faith action under Pennsylvania’s bad faith statute. The Court stated: “we adopt the two-part test articulated by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994), which provides that, in order to recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis. Additionally, we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” Id. at 23-24. Additionally, the Court noted that mere negligence is insufficient for a finding of bad faith under §8371. Id. at 18.
The Rancosky opinion did not change the pursuit, or the defense, of insurance bad faith claims, so much as it confirmed a body of intermediate appellate case law that had developed over the last 24 years. Most practitioners and courts had applied the Terletshy test since its publication in 1994. With Rancosky now firmly establishing what is required to prove bad faith, experts used by the parties in insurance bad faith litigation will need to tailor their reports to that standard.
Experts, of course, are not required by statute or case law in Pennsylvania insurance bad faith cases. Experts are employed by the parties at the discretion of the trial judge. Experts are to provide opinion on the reasonableness of the insurer’s conduct to assist the judge or jury in determining if the insurer acted in bad faith. Experts are to opine on the reasonableness of the insurer’s conduct, not on whether they believe the insurer acted in bad faith. That decision is reserved for the trier of fact. Most courts permit expert testimony to assist in assessing the reasonableness of the involved insurer’s conduct.
Post-Rancosky, what does an expert need to assess the reasonableness of the insurer’s conduct? In other words, what do litigators need to provide an expert in order for him or her to prepare an informed, credible report, one that will stand up to summary judgment motion and trial cross-examination? This article will address these questions. My observations are based on my 15 years and over 50 expert reports in insurance bad faith cases, mostly as an expert for the defense. A second planned article will address what counsel can expect in an insurance bad faith expert report.
What Does the Expert Need to Evaluate An Insurance Bad Faith Claim?
Let’s make the answer simple: SEND ALL NON-PRIVILEGED FILE MATERIAL TO ME and let me review them and decide what is important to my review of the insurer’s conduct. And please don’t try to influence my opinion by sending only the documents that support your client’s position, or only the “pertinent” documents that you believe are determinative of the insurer’s conduct.
Another reason to send it all to me is to avoid surprise and embarrassment at trial. I don’t want to ever have to say I have not seen a document from the file. I won’t appear surprised at trial, and I won’t have to embarrass counsel by pointing out that counsel never provided me with the document.
Finally, do not send an unredacted claim file. I don’t want to rely on documents in my report that were not produced to opposing counsel. To do so is to risk the credibility of my report, or at least result in an order from the court requiring production of the documents in question and me having to perhaps amend my report.
What Do I Expect To See In The Claim File?
What is typically contained in a claim file will depend on the type of claim involved. For example, a property damage claim will not contain medical reports and records. An auto personal injury liability claim file will not contain a fire cause and origin report. Having said that, we can generalize what most claim files should contain, as follows:
Insurance policy: The applicable insurance policy and declaration page for the date of loss.
Correspondence: All correspondence, including letters, e-mail and texts by and between anyone involved in the claim.
Court related documents: Pleadings, motions, discovery and opinions from the bad faith action and pertinent documents from the underlying tort suit if there was one.
Log entries: Pennsylvania insurance regulations require insurers to maintain records of their claim handling activity sufficient to permit the Insurance Department to assess what was done on a given claim. Typically, this is done by insurers through a “claim log”, either manual or more likely today by computer entry. These notes are often invaluable in assessing the insurer’s conduct in a bad faith case. It is the place where claims adjusters can sort out their thinking on a claim and explain their actions, or fail to do so.
Claim specific records: For example, medical records in injury cases and damage assessments and insurer has allegedly failed to adhere to its own internal claims handling procedures) the insurer’s claims handling manual and “best claims practices” should be provided to me.
Not all claim files will contain all these items.
Some counsel will go in the other direction, and want to send me everything, even their “work product”, such as their summary of the case, their theory of the case, a chronology they prepared for the case, their summary of medical records in the case, etc. I do not want that information; I want to review the file on my own, prepare my own chronology, summarize the issues in my own way, and form my own understanding of the case.
I am being paid to reach my own conclusions about the insurer’s conduct, not “parrot” counsel’s view of the case. To do otherwise – that is, to provide me your work product – can make for a very uncomfortable cross-examination for me, and an effective challenge to the credibility of the defense for you.
David Cole is owner of David Cole Consulting, Inc. and he may contacted at 844-744-5600 or firstname.lastname@example.org. For more information about Mr. Cole and his litigation support services, please see his website at www.colelitigationconsulting.com
A.M. Best has published the most recent episode of its Updates In Insurance Coverage and Bad Faithpodcast earlier today, in which I discuss some recent developments in insurance coverage and bad faith law with the show’s host, John Czuba. You can listen to the episode via the link below.