Federal COVID-19 Insurance Decisions Ignore State Law

By Carl Salisbury
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Law360 (April 6, 2021, 4:12 PM EDT) --
Carl Salisbury
Carl Salisbury
Hundreds of lawsuits are pending in state and federal courts nationwide in which policyholders seek business interruption insurance coverage as a result of COVID-19 lockdowns. Decisions on motions to dismiss and for summary judgment are coming out of those courts nearly every day, changing the landscape.

Nonetheless, a clear pattern has emerged, and it shows that federal courts are dismissing the cases at a far higher rate than state courts. The pattern strongly suggests that federal courts are ignoring state law.

As every law student knows, when a federal court's jurisdiction is based upon diversity of citizenship, the Erie doctrine — from the U.S. Supreme Court's 1938 decision in Erie R.R. Co. v. Tompkins — requires the court to apply the substantive law of the state in which the court sits.

Insurance coverage is uniquely a creature of state law. One would expect, then, that state and federal court decisions on substantive coverage issues would be fairly consistent on motions to dismiss COVID-19 business interruption cases. But they are far from it.

The University of Pennsylvania maintains a handy tracking site for COVID-19-related coverage cases, broken down between state and federal courts and sorted by the outcomes of motions to dismiss or for summary judgment.[2]

The site reveals that state courts have dismissed COVID-19 coverage cases 51.8% of the time. Federal courts, however, have dismissed them at the remarkable rate of 92.5%. It is not clear, at first, what accounts for this discrepancy. A closer look suggests that federal courts are not applying state law faithfully, as the Erie doctrine requires.

There are reasons that the raw numbers might be misleading. There may be very little overlap, for instance, between state courts that have denied motions to dismiss and federal courts in those same states that have granted them. Fortunately, the site provides a complete list of the cases, making it is possible to drill down into the numbers, jurisdiction by jurisdiction.

Lockdown-related coverage cases have been decided in 22 jurisdictions.

In the following places, state courts have denied insurance company motions to dismiss while federal courts located in those same states have granted such motions: California, Florida, New Jersey, North Carolina, Pennsylvania, Ohio and Texas. We'll call these the dissonant jurisdictions.

The seven dissonant jurisdictions account for 209 of the 329 total decisions reached in COVID-19 lockdown cases to date. Thus, the dissonant jurisdictions account for 63% of the total decisions. Stated differently, a substantial majority of the federal court decisions in these cases, thus far, are inconsistent with decisions reached by the state courts in those same jurisdictions.

The decisions in the seven dissonant jurisdictions are remarkable in several ways.

For example, in all of the dissonant jurisdictions, federal courts repeatedly granted insurance companies' motions to dismiss after one or more state courts in the same jurisdiction had denied the same kinds of motions.

In North Carolina, three federal district courts granted insurance company motions to dismiss after a North Carolina state court had not only denied a carrier's motion to dismiss, but had granted summary judgment on all of the coverage issues in favor of the policyholder. Federal courts in Ohio also continued to grant carriers' motions to dismiss after a state court had granted summary judgment in favor of coverage.

Of course, a number of variables can explain why similar cases get resolved inconsistently by different courts. Variations in policy language is one explanation.

The fact is, however, the overwhelming majority of commercial property policies sold in the U.S. are standard form contracts drafted by the Insurance Services Office. They contain either identical or similar coverage language that has been interpreted by state courts in each jurisdiction. The variations in coverage language cannot fully explain differences as striking as those that have emerged.

Whether or not a policy contains a virus exclusion may also account for divergent results. Of the 268 total cases decided by state and federal courts to date, 111 of them did not involve virus exclusions. Nevertheless, in 80 of those cases, the federal courts still granted motions to dismiss in favor of carriers.

More interestingly, still, in California, Florida, New Jersey, Pennsylvania and Texas, federal courts granted motions to dismiss in cases where the policies contained virus exclusions after state courts in those same jurisdictions denied motions involving policies that contained the exclusion. Except in the state of Ohio, whether a policy contained a virus exclusion did not account for any of the inconsistent decisions in the dissonant jurisdictions.

While some of the difference might theoretically be explained by the quality of legal representation, a review of the decisions, themselves, suggests otherwise.

On Aug. 13, 2020, the Superior Court of New Jersey, Bergen County, decided a motion to dismiss in Optical Services USA v. Franklin Mutual Insurance Co.[3] Significantly, the policyholder alleged that its property had not been contaminated by the coronavirus.

In denying the carrier's motion, the court relied on language from the Superior Court of New Jersey, Appellate Division's 2009 decision in Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co.:

Since the term "physical" can mean more than material alteration or damage, it is incumbent on the insurer to clearly and specifically rule out coverage in the circumstances where it was not to be provided.

Conversely, more than seven months after the Optical Services decision, the U.S. District Court for the District of New Jersey granted an insurer's motion to dismiss in Manhattan Partners LLC v. American Guaranty and Liability Insurance Co.,[4] a case involving loss of access to hotels and restaurants resulting from government lockdown orders.

Relying on the U.S. District Court for the Eastern District of Pennsylvania's 2020 decision in Brian Handle DMD PC v. Allstate Insurance Co., the Manhattan Partners court held:

Each of the coverage provisions Plaintiffs rely on specifically requires "direct physical loss of or damage to property" to trigger coverage. Here, Plaintiffs have not alleged any facts that support a showing that their properties were physically damaged.

Not only is this inconsistent with the prior Optical Services decision, it conflates the phrases "loss of" and "damage to," contrary to numerous New Jersey state court decisions.

Also, in New Jersey, unless an exclusion in coverage contains an anti-concurrent causation clause, it will not apply to losses resulting from concurrent or sequential events if either the first or the last event in the chain of causation is a covered cause.

Taking the standard form virus exclusion (which does not contain an anti-concurrent causation clause) as an example, the first cause in the chain of an insured's losses in these cases is the virus. The last cause, however, is the government-ordered shutdowns, which the policies do not exclude. In New Jersey, the virus exclusion will not apply in these circumstances.

New Jersey also applies a doctrine known as regulatory estoppel,  whereby insurance industry representations to state regulators at the time of approval of a new policy provision must be consistent with insurers' later positions in deciding coverage claims.

There is evidence that the industry made representations to insurance regulators about the virus exclusion that are inconsistent with the position carriers now take in determining COVID-19 lockdown claims.

In a July 2006 submission that sought approval of the then-new virus exclusion, the industry told state regulators that the exclusion would apply to actual contamination from a virus. Yet, carriers are now telling policyholders and courts that the exclusion applies, whether or not covered property has been contaminated with the coronavirus.

In New Jersey district court cases, policyholder counsel typically raise these issues when opposing carriers' motions to dismiss, but the federal courts are either ignoring state court authority in favor of contrary federal court decisions or distinguishing it in ways that are inconsistent with state law.

New Jersey law requires interpretation of coverage provisions liberally, to protect policyholders to the full extent that any fair interpretation of the policy will allow. Conversely, courts must construe exclusions in coverage narrowly and strictly against the insurer. The New Jersey federal decisions in these cases often flip these rules, applying the coverage-granting language narrowly and exclusions expansively.

In short, the decisions are unfaithful to the Erie doctrine. The bad news for policyholders is that they often find themselves in disputes with carriers that have headquarters in another jurisdiction. Accordingly, any case a policyholder files in state court is sure to get removed to federal court.

Several federal courts, however, have granted policyholders' motions to remand these cases to state court where the complaint asserts only a declaratory judgment claim because exercising jurisdiction over purely state-law disputes is discretionary.[1]

The upshot of all of this is that (1) unless the federal courts begin to conform their decisions more closely to substantive state insurance law, or (2) until state appeals courts begin deciding COVID-19 lockdown coverage cases, insurers will want to have these cases pending in federal court and policyholders will want to preserve a state court forum.



Carl Salisbury is an attorney at Bramnick Law.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Erie R.R. Co. v. Tompkins , 304 U.S. 64 (1938).

[2] https://cclt.law.upenn.edu/judicial-rulings/.

[3] Optical Services USA v. Franklin Mutual Insurance Co. , BER-L-3682-20.

[4] Manhattan Partners LLC v. American Guaranty and Liability Insurance Co., 2:20-cv-14342.

[5] See, e.g., Dianoia's Eatery, LLC v. Motorists Mut. Ins. Co ., 2020 WL 5051459 (W.D. Pa Aug. 27, 2020); Mattdogg, Inc. v. Philadelphia Indem. Ins. Co ., 2020 WL 6111038 (D.N.J. Oct. 16, 2020).

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