North Carolina Court Finds Coverage for Restaurants’ COVID-19 Business Income Losses

A trial level court in North Carolina recently found coverage under first-party property insurance policies for the insured restaurants’ COVID-19-related business income losses.  In North State Deli, LLC et al. v. Cincinnati Ins. Co., et al., Case No. 20-CVS-02569 in the General Court of Justice, Superior Court Division, County of Durham, Judge Orlando F. Hudson, Jr. granted partial summary judgment to the plaintiff-insureds, finding that plaintiffs’ business income losses resulting from the governmental shutdown of its business constituted a “loss” to property, sufficient to trigger coverage under the Cincinnati policies.  Although similarly situation insureds will undoubtedly rely on this decision in support of their claims for coverage, it is important to note that the North State Deli decision relies heavily on the specific policy language at issue, and that the policies in question did not contain a virus exclusion.  Accordingly, a deeper analysis is required before determining the impact of this ruling. 

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Posted in Business Interuption, Causes of Loss, Coverage, Direct Physical Loss or Damage, Order of Civil Authority

Ensuing Loss Clause Does Not Create Coverage for “Collapse” Inseparable from Damage Caused by Excluded Perils

            In Jowite Limited Partnership v. Federal Insurance Company, the United States District Court for the District of Maryland issued a rare opinion addressing whether “collapse” is a covered “ensuing loss” under an all-risks insurance policy without a specific collapse coverage.  Case No. 1:18-cv-02413-DLB (D. Md. August 17, 2020).  In a win for insurers, the Court held that, under Maryland law, the ensuing loss exception to a construction defect exclusion did not apply to reinstate coverage where the purported “collapse” was to the defective property itself, regardless of whether the “collapse” was characterized as merely the damage caused by construction defects or a separate and distinct peril.

            The insured, Jowite Limited Partnership (“Jowite”), owned an apartment complex constructed in the 1980s.  Id. at 2.  At various times between 1999 and 2017, the complex’s “Building 300” was inspected by construction professionals and discovered to be sinking.  Id. at 2-3.  The sinking resulted in significant structural damage to the building, including cracked interior walls and façade, rotted support beams, and a failed cement footer.  One engineer deemed Building 300 uninhabitable.  Jowite’s experts ultimately determined that Building 300’s improperly designed and constructed foundation and footers caused the loss.  Id. at 3, 6.

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Posted in Causes of Loss, Collapse, Coverage, Mold, Water

Trouble Brewing: Florida Federal Court Dismisses Beer Distributor’s Claim for COVID-19 Losses

Insurance claims arising out of COVID-19-related commercial losses have been hotly contested, and lawsuits have been filed across the country by policyholders seeking coverage for lost business income.  These claims typically raise similar coverage questions – whether the spread of a virus could constitute “direct physical loss,” whether civil authority coverage is triggered, and whether virus exclusions preclude coverage.  In Harvest Moon Distributors, LLC v. Southern-Owners Insurance Company, Case no. 6:20-cv-1026-Orl-40DCI, Judge Paul Byron of the U.S. District Court for the Middle District of Florida recently granted an insurer’s motion to dismiss in a different type of COVID-19 claim, relating to spoliation of product after a contract fell through. 

The insured, Harvest Moon Distributors, LLC (“Harvest Moon”), is a wine and beer distributor.  Harvest Moon entered into a contract with Disney to provide beer for sale in Disney parks.  After obtaining the beer to distribute to Disney, and before the product was shipped, Disney voluntarily closed its parks due to the COVID-19 pandemic.  As a result, Disney refused to accept the beer or compensate Harvest Moon.  The beer subsequently spoiled while Disney remained closed.

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Posted in Coverage, Direct Physical Loss or Damage

Eleventh Circuit Confirms Cleaning is not Direct Physical Loss

The Eleventh Circuit has provided some clarity to Florida businesses and their insurers dealing with COVID-19 claims. In Mama Jo’s Inc., d.b.a. Berries v. Sparta Ins. Co., No. 18-12887 (11th Cir. March 18, 2020), the Court held that a restaurant’s lost income and extra cleaning costs due to nearby roadwork did not trigger coverage because it did not involve direct physical loss or damage.

In the underlying case pending in the Southern District of Florida, Mama Jo’s, Inc. v. Sparta Ins. Co., 17-CV-23362-KMM, 2018 WL 3412974, at *9 (S.D. Fla. June 11, 2018), the Court considered whether there was a direct physical loss when construction debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops. The Court held unequivocally that “cleaning is not considered direct physical loss.”  Id. The Court stated: “A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.’”  Id. Because the insured’s claim did not involve any direct physical loss, the district court granted summary judgment to the insurer.

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Posted in Coverage, Direct Physical Loss or Damage

JPML Will Not Allow Centralization of MDL Covid-19 Lawsuits

On April 20, 2020, two policyholders involved in Covid-19 class action suits filed the first motion with the Judicial Panel on Multidistrict Litigation (MDL) asking for the transfer and coordination or consolidation of two class actions suits filed in the U.S. District Court for the Eastern District of Pennsylvania with nine so-called “related actions” filed in federal courts in Illinois, Florida, New York, Wisconsin, Ohio, California, Oregon, and Texas and “subsequent tag-along actions.”[1] Others followed suit in attempting to transfer, coordinate, and/or consolidate actions into several MDLs. There are currently more than 100 insurance companies named as defendants in the cases proposed for transfer.

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Posted in Business Interuption, Direct Physical Loss or Damage

New Hurricane Harvey Opinion Provides a Roadmap to Defeating Common Policyholder Attorney Tactics

Policyholders attorneys often try to skip the threshold steps of bringing their client’s claim within coverage and allocating between covered and non-covered causes of loss.  Instead, the policyholder attorney would have the insurer first disprove coverage, or at least first justify its coverage position.  These tactics unfold in a familiar way.

The policyholder attorney will engage a consultant to write up an Xactimate estimate.  Or, perhaps a public adjuster already wrote up the estimate and then brought the claim to the attorney.  Everything that is wrong with the structure will go into the estimate.  Every water-stained ceiling tile, bent AC condenser fin, and dent on the siding will go into the estimate regardless of causation.  The bigger estimate, the better to create more leverage.  Then the policyholder attorney will simply ride that estimate all the way through the case.  To save money, the policyholder attorney will often not retain an engineer to give causation opinions regarding the damage.  Or, the policyholder attorney may retain an engineer to provide a stock report that is heavy on magic words but short on competent causation opinions.  A common issue is trying to overcome a policy’s limitation requiring a storm-created opening.  The policyholder attorney will also try to poke holes in the insurer’s investigation of the claim to muddle the issue of causation. 

Judge Sim Lake recently examined a case with some of these characteristics in Papa Yolk’s Grill, Inc. v. AmGUARD Ins. Co., 2020 U.S. Dist. LEXIS 66672 (S.D. Tex. April 15, 2020).

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Posted in Catastrophes, Coverage, Hurricane

Correlation or Causation for Coronavirus-Related Business Income Losses

In the wake of the Coronavirus (COVID-19) pandemic, countless businesses have reduced or closed operations—some permanently. Flights have been canceled, hotels and restaurants have closed, and employees have been told to stay home. Naturally, businesses will seek to offset their financial losses during this period. Some businesses may file insurance claims under their Business Income coverage.

Common Business Income (and Extra Expense) Coverage Forms might state: “We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration’. The ‘suspension’ must be caused by direct physical loss of or damage to [covered] property ….” There has been much discussion of what constitutes “physical loss” and of policy exclusions relevant to viral pandemics. In this article, we will focus on the causation required for business income coverage. In other words, if a policyholder establishes direct physical loss to covered property because of COVID-19, and the insurance policy at issue contains no exclusions that preclude coverage, the policyholder must still demonstrate its business income losses were caused by the physical loss.

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Posted in Hurricane Ike, Uncategorized

Coronavirus: Is There Coverage Under Property Insurance Policies?

Coronavirus (“COVID-19”) has disrupted events, supply chains, sales, and entire industries.  As a result, businesses are going to look to their property insurers to recuperate lost business income, as well as expenses related to cleaning, sanitizing and decontamination.  The first lawsuit alleging a business interruption loss was filed yesterday in Louisiana, and there are most likely others that will be filed in the coming days and weeks.

Almost all property policies require direct, physical loss or damage to property to trigger coverage.  Whether claims related to COVID-19 can meet this threshold requirement largely depends on whether the case law in a given jurisdiction construes the phrase “direct physical loss or damage” narrowly or broadly.  In addition, an analysis of the specific language of a given policy will be critical. 

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Posted in Coverage

New York Ruling Could Significantly Impact Disclosure of Communications Between Insurer and Counsel

A recent decision from one of New York’s trial courts of general jurisdiction could have a chilling effect on written communications between an insurer and its retained counsel during a claim investigation.  In Otsuka America, Inc. v. Crum & Forster Specialty Insurance Co., 2019 WL 4131024, Judge Andrea Masley of the Supreme Court of the State of New York, New York County, ruled that several communications between Crum & Forster (CF) and its attorney (including the attorney’s coverage opinion letter), were not privileged and must be produced.  The Court found that CF retained counsel, in part, to provide an opinion on whether the insured’s claim was covered.  Determining whether a claim is covered is part of the regular business of an insurance company, according to the Court.  As such, the communications between CF were deemed discoverable.

Otsuka America’s wholly-owned subsidiary, Pharmavite LLC, is a manufacturer of dietary supplements.  In June of 2016, Pharmavite recalled certain of its products, and submitted a claim to its insurer, CF, as a result.  CF retained counsel to assist during the claim investigation and, ultimately, in February of 2017, CF denied coverage.  Otsuka and Pharmavite filed suit against CF for breach of contract and a declaratory judgment.  Read more ›

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Posted in Bad Faith, Discovery, Investigation, Loss Adjustment, Privilege, U.S. Legal System

New Texas Laws Take Aim at Common Practice in Storm-Related Repairs

Texas policyholders can no longer cut deals with storm repair contractors to pocket their deductibles for storm repairs.  The Texas Legislature has amended the Texas Insurance Code and Texas Business & Commerce Code, targeting construction companies that offer “free roofs” and “waived deductibles” as enticements to policyholders.  Previously, for example, contractors would reach an agreement to perform work for a policyholder, but waive or absorb the portion of the repair cost equal to the deductible.  This waiver or absorption could occur through numerous paperwork tricks.  Now, the policyholder must pay its deductible, otherwise the insurer can refuse to pay certain claims and the contractor can be charged with a crime.  Read more ›

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Posted in Deductible, Flood, Hurricane, Waiver
About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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