California has been a hotbed of litigation regarding COVID-19 business interruption claims. The vast majority of the trial courts have held in favor of insurers and against businesses. Now, the California Court of Appeal has weighed in. In a published decision, The Inns by the Sea v. California Mutual Insurance Company (November 15, 2021, Case No. D079036), the Fourth Appellate District held that a hotel’s business income loss resulting from the COVID-19 pandemic was not covered.
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In 2019, the Supreme Court of Texas issued a pair of decisions that allowed policyholders to prosecute claims under the Texas Prompt Payment of Claims Act (“TPPCA”) even after the insurers paid appraisal awards. The decisions were a modification of law and so post-appraisal litigation has and continues to evolve. One such example is a recent decision from District Judge Tipton of the Southern District of Texas in White v. Allstate Vehicle and Property Insurance Company, which has provided a potential road map for insurers looking to curb post-appraisal demands and litigation after the payment of an appraisal award.[1]
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In March 2020, Mudpie Inc.—a San Francisco children’s store—ceased operations when California Governor Gavin Newsom ordered all “non-essential” businesses to close due to the COVID-19 pandemic. Because of the shut-down, Mudpie sought coverage for loss of “business income” and “extra expense” under a commercial property policy issued by Travelers Casualty Insurance Company of America (“Travelers”). The Travelers policy provided coverage during the “period of restoration” for loss of business income due to the necessary suspension of the insured’s operations caused by “direct physical loss of or damage to the [insured’s] property.”
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An insurer has won the first jury trial on coverage for Covid-19 business interruption losses after a federal jury in the Western District of Missouri issued a verdict in favor of The Cincinnati Insurance Company in K.C. Hopps Ltd. v. Cincinnati Insurance Co., Case No. 4:20-cv-437 (W.D. Mo. 2021). In K.C. Hopps, the insured, K.C. Hopps Ltd. (“Hopps”), owned and operated bars, restaurants, catering services, and event spaces in the Kansas City metropolitan area. In response to the Covid-19 pandemic, civil authorities in Missouri and Kansas issued stay-at-home orders in March of 2020. In accordance with the orders, Hopps’ operations were limited to delivery, drive-through, and carry-out services. Hopps submitted a claim to its insurer, Cincinnati Insurance Company, for coverage under its commercial property policy for “Business Interruption due to COVID-19,” and Cincinnati denied the claim. Hopps then filed suit against Cincinnati, seeking coverage under the policy’s Business Income, Extra Expense, Civil Authority, and Ingress and Egress coverage provisions.
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In the continuing saga of what can and cannot be appraised in a property insurance appraisal, the Tenth Circuit, in contrast to many other courts, has ruled appraisers can determine coverage issues.
In Bonbeck Parker, LLC v. Travelers Indem. Co. of Am., 2021 U.S. App. LEXIS 29607 (10th Cir. October 1, 2021), a hailstorm damaged three buildings covered under a commercial property insurance policy. A dispute between the insured and insurer arose over whether the hailstorm caused all of the damage claimed. The insurer paid some of the claimed damage, but denied coverage for other claimed damage, asserting that it was caused by non-covered causes such as wear and tear. The insured invoked appraisal.
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A district court in Montana recently applied an anti-concurrent clause in a property insurance policy to preclude coverage based on an earth movement exclusion. In Ward v. Safeco Ins. Co. of Amer., No. 1:19-CV-0133-SPW, 2021 WL 3492294 (D. Mont. Aug. 9, 2021), the insured’s tenant reported that water was leaking from a main pipe serving the insured’s property, and the leak caused some soft spots to form in the floor of the kitchen. The insurer and agent’s subsequent inquiries led to the understanding that a leak under a slab affected the soil, which caused the house to settle, which then caused damage to the house.
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On September 27, 2021, Judge Jose Martinez of the U.S. District Court for the Southern District of Florida granted summary judgment in favor of Scottsdale Insurance Company in LMP Holdings Inc. v. Scottsdale Ins. Co., case no. 20-24099. The case arose out of a Hurricane Irma claim reported more than two years after the storm.
The insured, LMP Holdings, Inc., owned a commercial property located in Miami. The insured claimed the property sustained damage from Hurricane Irma, which struck South Florida on September 10, 2017. The insured’s handyman and one of the insured’s officers inspected the property the day after the storm. The handyman noticed punctures on the roof, which he patched, and a panel from one of the air conditioner units on the roof that had come off. The insured’s officer noticed extensive water damage in the storage room and some water damage in the office reception area.
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In a timely reaffirmation of the Fifth Circuit’s 2007 ruling in Leonard v. Nationwide Mut. Ins. Co., a Louisiana federal court recently upheld the application of an insurance policy’s Anti-Concurrent Causation Clause (“ACC”) in precluding coverage for property damage caused by a combination of storm winds and flooding. In Chad Little, et al. v. Aegis Security Insurance Co., Case No. 2:21-CV-00997 (W.D.La. July 9, 2021), the Western District of Louisiana granted defendant-insurer’s motion for summary judgment holding that the defendant-insurer proved that both a covered peril (storm winds) and an excluded peril (flooding) contributed to the losses claimed by the plaintiffs-insureds, and that as a result of the application of the policy’s ACC, all coverage was precluded.
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In the second federal appellate ruling on Covid-19 business losses, the Eleventh Circuit has joined the Eighth Circuit in holding that they do not trigger coverage because they do not involve “physical loss” or “physical damage” to property. In Gilreath Family & Cosmetic Dentistry Inc. v. Cincinnati Insurance Co., No. 21-11046, Slip. Op. (11th Cir. Aug. 31, 2021), the insured dentistry practice canceled routine and elective dental procedures at the beginning of the Covid-19 pandemic in response to state orders and CDC recommendations. Because these procedures made up the bulk of its business, the insured lost a substantial portion of its usual income. To recover that lost income, the insured filed a claim for business interruption coverage with its insurer.
The policy at issue provided “Business Income” and “Extra Expense” coverage for income lost “due to the necessary ‘suspension’” of the insured’s operations and for extra expenses it sustained during that suspension, but only if the suspension and expenses resulted from “direct ‘loss’ to property” at the insured premises, and only if that “loss” resulted from a “Covered Cause of Loss.” The policy defined “Covered Cause of Loss” as a “direct ‘loss’” not excluded or limited under the policy, and “loss” as “accidental physical loss or accidental physical damage.” The policy also provided “Civil Authority” coverage for business losses and extra expenses sustained as a result of a civil authority order prohibiting access to the insured’s practice when physical damage occurs to property in the area immediately surrounding the insured’s premises.
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The Court of Appeals of Georgia recently held that an insurer’s reliance on the report of an independent consultant creates a presumption that it did not act in bad faith in denying coverage. In Montgomery v. Travelers Home and Marine Ins. Co., 859 S.E.2d 130 (Ga. Ct. App. 2021), the insured made a claim under her homeowners insurance policy for water damage to her basement that she asserted had been caused by a ruptured garden hose. The insurer’s claims adjuster inspected the property two days later and saw damage that appeared to be from ground water rather than the ruptured hose. The adjuster sought input from his supervisor, who suggested that he hire an independent engineer to determine the cause of the water damage.
The insurer retained a structural engineer, who inspected the property and observed conditions on several basement walls that indicated moisture had seeped into the basement from the ground outside over a period of time. Based on his observations, the engineer opined that the water damage resulted from the migration of groundwater through breaches in the concrete masonry unit block foundation walls and slab-on-grade, not from the broken garden hose. The engineer issued a written report to the insurer detailing his findings. Based on the engineer’s report, the insurer denied the claim because ground and surface water was not a covered peril under the policy.
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