Analysis

Insurance Cases To Watch In The 2nd Half Of 2020

By Jeff Sistrunk
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Law360 (July 6, 2020, 6:13 PM EDT) -- Trial courts around the country will have their hands full this year unraveling hundreds of lawsuits over insurance coverage for financial losses during the COVID-19 pandemic, while state high courts are primed to address thorny issues like whether U.S. Securities and Exchange Commission disgorgement payments are insurable.

Here, Law360 looks at the top insurance cases to watch in the second half of 2020.

COVID-19 Business Interruption Coverage Litigation

As the coronavirus pandemic has swept across the country and forced the full or partial closure of innumerable businesses, state and federal courts have been inundated with hundreds of suits by companies seeking to compel their insurers to cover their financial losses.

The deluge of suits includes individual claims filed by businesses ranging from mom-and-pop restaurants to large corporations like the operator of Las Vegas' Treasure Island casino, as well as complaints seeking to represent nationwide classes and state-based subclasses of companies that bought business interruption coverage from particular insurers.

Although the COVID-19 coverage fights are just starting to heat up, several key battle lines have emerged. Perhaps the fiercest debate among insurance lawyers surrounds business interruption policies' standard requirement that a policyholder's financial losses stem from "direct physical loss or damage to" its property. Similarly, coverage for closures due to "civil authority" — or government — orders also typically hinges on the existence of direct physical loss or damage to property within a certain distance of the policyholder's.

In the early going, insurers have gained traction with their position that coverage is unavailable for policyholders' losses tied to COVID-19 stay-at-home orders because the novel coronavirus has not caused direct physical loss of or damage to property.

On that basis, a New York federal judge on May 14 denied a culture magazine's bid for a preliminary injunction forcing Sentinel Insurance Co. Ltd. to pay for its coronavirus-related losses. And on July 1, a Michigan state judge issued a bench ruling finding that Michigan Insurance Co. is not obligated to cover a restaurant owner's losses on multiple grounds, including the lack of tangible damage to the restaurateur's properties.

However, Hunton Andrews Kurth LLP partner Syed Ahmad, who represents policyholders, noted that state law varies on what facts may satisfy the direct physical loss or damage requirement.

"Many courts have recognized that the loss or damage requirement is satisfied by loss of use of property and circumstances making property uninhabitable or unfit for its intended use," he said. "Some states have more case law on this than others. But the focus should be on the science related to COVID-19 and how it can impact property, notwithstanding the hype from some quarters."

Another critical issue that has arisen in COVID-19 coverage disputes is the applicability of a standard exclusion for losses due to viruses. While insurers are arguing that the virus exclusion clearly encompasses the novel coronavirus, policyholders have asserted numerous grounds as to why the exclusion is inapplicable. In one case, a Pennsylvania restaurant has posited that, under the doctrine of "regulatory estoppel," the exclusion is void because the insurance industry misrepresented to state regulators that the clause would not significantly narrow coverage.

"The insurers have the burden to prove that an exclusion bars coverage," Ahmad said. "The so-called virus exclusions are no different. Given the reasonable expectations of policyholders, disputes about causation for the losses at issue, regulatory estoppel, among other arguments, it is too early to tell how these issues will play out in litigation."

On the class action front, questions remain as to whether policyholders will be able to meet the thresholds for certification under Rule 23 of the Federal Rules of Civil Procedure. Troutman Pepper partner Samrah Mahmoud, whose practice includes insurance coverage and class action defense work, said coverage cases "are not ideal for a class action because of the individualized issues they can raise."

For instance, Mahmoud said, policyholders seeking certification under Rule 23(a) may have trouble meeting the requirements of commonality, or legal or factual questions common to the class members, and typicality, or class representatives' claims being typical of the class as a whole. In addition, policyholders angling to satisfy Rule 23(b)(3)'s requirements for class treatment "will probably have predominance issues, with common questions not predominating," according to Mahmoud.

It also remains to be seen whether COVID-19 cases in federal courts will proceed individually or on some type of coordinated basis. When it convenes at the end of July, the Judicial Panel on Multidistrict Litigation is scheduled to consider two competing petitions seeking to centralize federal suits in a multidistrict litigation. One petition seeks centralization in the Northern District of Illinois, while the other is pushing for the Eastern District of Pennsylvania. A number of federal judges have stayed the COVID-19 coverage cases on their dockets pending a decision by the JPML.

Backed by several dozen policyholder plaintiffs, the MDL petitioners have touted the potential benefits of centralization, including streamlined discovery. But the proposals have also drawn strong opposition from both the insurance industry and some policyholder plaintiffs.

"Even though you may have standard policy language, there may still be variations from insurer to insurer, and you have companies in many different industries seeking coverage," said Stroock & Stroock & Lavan LLP special counsel Julie Nevins. "You also have policyholders that actually negotiate coverage and may not use standard forms."

$140M Bear Stearns Dispute in NY

In a case that could have wide-ranging implications for policyholders in the financial services industry, New York's highest court is primed to decide whether J.P. Morgan Securities Inc. is entitled to insurance coverage for a $140 million chunk of a settlement that predecessor Bear Stearns paid to the U.S. Securities and Exchange Commission.

In March, the New York Court of Appeals granted J.P. Morgan's motion for leave to appeal a 2018 Appellate Division, First Department, decision absolving Bear Stearns' primary and excess insurers from any obligation to cover the sum, which Bear Stearns paid to the SEC as part of a settlement over market timing and late trading claims. J.P. Morgan acquired Bear Stearns in 2008.

The September 2018 ruling by the intermediate appellate court upended Judge Charles Ramos' August 2017 order directing the insurers to cover the $140 million payment, plus an additional $146 million in other costs and interest. The judge accepted J.P. Morgan's position that the $140 million sum represented improper profits acquired by Bear Stearns' third-party hedge fund customers, not Bear Stearns itself.

However, a four-judge First Department panel said Judge Ramos' order cannot stand in light of the U.S. Supreme Court's 2017 decision in Kokesh v. SEC , which found that SEC-ordered disgorgement is a penalty. The high court's ruling is fatal to J.P. Morgan's case because Bear Stearns' policies exclude "fines or penalties imposed by law" from their definition of covered loss, the court said.

In an opening brief filed with the New York Court of Appeals last month, J.P. Morgan argued the appellate panel misapplied Kokesh, as that case decided only the narrow issue of what statute of limitations should apply to SEC disgorgement claims. Under the Empire State's insurance law, J.P. Morgan contended, a "dual-purpose remedy" with both punitive and compensatory elements, like the disgorgement payment here, can be insured.

The insurers opposed J.P. Morgan's appeal motion on several grounds. For one, they argued J.P. Morgan's position that the $140 million represented Bear Stearns customers' illegal gains was based on "rank hearsay." Moreover, the carriers contended the Appellate Division ruling was based on sound principles of New York insurance law, informed by the reasoning in Kokesh.

J.P. Morgan's bid for a reversal garnered the support of the Securities Industry and Financial Markets Association. The trade group asserted in an amicus brief that the First Department ruling, if allowed to stand, would "create significant uncertainty in insurance law, frustrate the reasonable expectations of SIFMA members regarding coverage under their existing policies, and impede SIFMA members' ability to obtain insurance to manage business risk."

But Hinshaw & Culbertson LLP partner Scott Seaman, who represents insurers, said that the First Department's ruling is "entirely correct" because, although Kokesh was "not a state law determination on coverage, the U.S. Supreme Court's characterization of the disgorgement remedy is legally sound and represents the most authoritative view on the issue."

The insurers' response brief on the merits is due on July 30.

The case is J.P. Morgan Securities Inc. et al. v. Vigilant Insurance Co. et al., case number APL-2020-00044, in the Court of Appeals of the State of New York.

D&O Claims for Del. Appraisal Actions

In another closely watched case, the Delaware Supreme Court is primed to rule on whether an appraisal action is a covered "securities claim" under directors and officers insurance as it reviews an order allowing Solera Holdings Inc. to pursue $39 million in coverage for costs it incurred in a stockholder challenge to its buyout by Vista Equity Partners.

The Delaware justices are slated to hear oral arguments Sept. 16 in an interlocutory appeal filed by Solera's excess directors-and-officers insurers, including Chubb Ltd. units Federal Insurance Co. and Ace American Insurance Co. The insurers are looking to upend Delaware Superior Court Judge Abigail LeGrow's July 2019 opinion denying their bid for summary judgment.

Solera is looking to force the carriers to cover its costs to defend the stockholders' appraisal action, as well as interest charged on the judgment entered against the company in that case. The insurance dispute involves an issue of national first impression: whether an appraisal action is a covered securities claim under a D&O policy.

The excess insurers had argued that an appraisal action — which provides a company's stockholders an avenue to challenge a deal price — is not a securities claim, which is defined in the policies as a claim made against Solera for "any actual or alleged violation of any federal, state or local statute, regulation or rule or common law regulating securities." More specifically, they asserted that a violation "must involve wrongdoing" and that appraisal actions don't have to allege any wrongdoing by a company.

However, Solera countered that a suit doesn't have to allege wrongdoing to constitute a securities claim under the policies. In her opinion, Judge LeGrow agreed, saying the term "violation" can encompass an appraisal action's accusation that a company breached its legal obligation to provide stockholders fair value for their shares in certain types of transactions.

In addition to her first-of-its-kind ruling that an appraisal action qualifies as a securities claim, Judge LeGrow also rendered a novel decision on a provision in Solera's policy requiring it to obtain its insurers' consent before incurring any defense costs. In a first for a Delaware court, the judge held that, before the excess insurers can deny coverage for Solera's defense costs on the basis that the company breached the consent provision, they must show they were "prejudiced" — for instance, by being deprived of the ability to participate in Solera's defense of the appraisal action.

Hunton's Ahmad said the ultimate impact of the Delaware Supreme Court's ruling on the core issue of whether an appraisal action triggers D&O coverage will depend on the scope of the justices' reasoning. Some of the potential grounds for the state high court to find coverage are "broad and can be far-reaching," while others may be narrower, he said.

"For instance, the trial court properly consulted dictionary definitions to evaluate how to interpret a 'violation' under the policy. If the parties wanted to utilize a different meaning, they were free to do so," Ahmad said. "Some of the other arguments are based on the extensive record of alleged wrongdoing, and that may not translate as broadly to other appraisal actions where the records will differ."

The Delaware justices' decision on the prejudice question could also be instructive for insurance lawyers, Ahmad said.

"Under general contract law in most states, prejudice is commonly required to avoid forfeiture of coverage from a breach of a policy condition," he said. "The parties can of course negotiate around this default rule. The court can further clarify this area of the law and put this issue to bed, at least for disputes governed by Delaware law."

The case is In Re Solera Insurance Coverage Appeals, case numbers 413,2019 and 418,2019, in the Supreme Court of the State of Delaware.

Damages Against State-Backed Fla. Insurer

In a coverage dispute involving Florida's state-backed insurer of last resort, the Sunshine State's high court is set to clarify whether a policyholder alleging breach of its insurance contract but not bad faith is entitled to recover damages that fall outside the policy but were caused by the insurer's failure to fulfill its obligations.

The Florida Supreme Court will hear oral arguments on Sept. 8 in Citizens Property Insurance Corp.'s appeal of a Fifth District Court of Appeal decision permitting apartment complex owners to pursue payment of lost rents from the insurer following damage from Hurricane Frances in 2004.

In its May 2019 opinion, the Fifth District said a trial court was misguided in granting the insurer summary judgment on allegations that its procrastination in adjusting and paying the multimillion-dollar coverage claim delayed repairs and caused a loss in rental income for the complex's ownership entities — Manor House LLC, Ocean View LLC and Merritt LLC.

While the complex's policy did not provide coverage for lost rent, the lower court ignored the "more general proposition" that the injured party in a breach of contract suit is entitled to damages that would put it in the same position it would have been in if a breach hadn't occurred, the panel said.

The Florida Supreme Court had previously found in the case of Citizens v. Perdido Sun that the state Legislature gave Citizens immunity from bad faith claims when it created the corporation as the state's insurer of last resort.

Manor House is asserting that payments for the lost rents are contract-based "consequential damages," not damages for bad faith. Citizens, however, has countered that the property owner is essentially trying to do an end-run around Perdido Sun.

Seaman of Hinshaw & Culbertson said he hopes the Florida high court will "reject the invitation to transmogrify what may not even be bad faith damages into breach of contract damages."

"It would be improper and improvident as it would make first-party claims more difficult to resolve," Seaman said.

On the other hand, Reed Smith LLP partner Hugh Lumpkin, who represents policyholders, pointed out that the Florida Supreme Court has permitted the recovery of consequential damages outside the insurance context for more than a century. A rule barring such damages in insurance coverage cases could protect "insurers who do not perform under the contract from the consequences of breach," he said.

With respect to Citizens specifically, Lumpkin added that, after the Perdido Sun decision came down, "the incentive for Citizens to do the right thing — and quickly — rapidly vanished."

"As a result, litigating with Citizens can be a daunting experience," he said. "As it stands, the only consequence of Citizens failing to do quickly what it should do is having to pay prejudgment interest. That, to me, does not make sense, and that is why the Florida Supreme Court should permit recovery of consequential damages against Citizens."

The case is Citizens Property Insurance Corp. v. Manor House LLC, case number SC19-1394, in the Supreme Court of Florida.

Scope of the 'Stowers Doctrine'

The Texas Supreme Court may reshape the contours of a legal doctrine governing insurers' settlement obligations when it rules on an insurer's bid to escape claims it owes a client $100,000 for negligently negotiating down a settlement in an auto accident suit.

The Texas justices are scheduled to hear oral arguments Sept. 17 on whether the Lone Star State's "Stowers doctrine" permits policyholder Cassandra Longoria to proceed with her efforts to force Farmers Texas County Mutual Insurance Co. to cover $100,000 she paid out of pocket to help resolve the underlying accident suit. The Stowers doctrine requires insurers to act fairly when considering settlement offers within the limits of their policies and holds insurers liable if, after they reject a fair settlement, a jury returns a verdict in excess of the policy limits.

Longoria claims Farmers negligently refused to accept the crash victim's $350,000 settlement offer and instead countered with $250,000. According to court documents, Longoria and her counsel, independent of Farmers and out of a fear the case would head to trial, decided to offer the $100,000 difference in the settlement amounts to the crash victim to end the suit. The crash victim accepted, and now Longoria is seeking reimbursement from Farmers.

But Farmers has contended it doesn't owe Longoria anything because her claimed loss was based on the hypothetical possibility of a judgment exceeding the policy limits at trial. The insurance company told the Texas Supreme Court that the Stowers doctrine only applies once there is a final judgment and tangible damages against the insured.

Pillsbury Winthrop Shaw Pittman LLP partner Tamara Bruno, who represents policyholders, said the case highlights the logistical challenges of the Stowers doctrine. In order to benefit from the doctrine, policyholders have to open themselves up to a potential excess judgment, she noted.

However, Bruno continued, it is possible the Texas justices will extend the rationale for the doctrine to cases like Longoria's.

"The idea behind Stowers is that if an insurer could have and should have protected its insured from liability in excess of limits, and its failure to do so exposed the policyholder to an excess judgment, it should be responsible for those damages. That type of logic would also seem to apply here," she said. "The policyholder is saying the insurer could have, and should have, protected her from liability in excess of limits, and because she took action to protect herself, the insurer should now be responsible for that."

The case is In re Farmers Texas County Mutual Insurance Co., case number 19-0701, in the Supreme Court of Texas.

--Editing by Aaron Pelc and Jill Coffey.

For a reprint of this article, please contact reprints@law360.com.

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