COVID Coverage Questions Linger As Challenges Wind Down

This article was published by Law360.

Nationwide efforts to recover insurance payouts for COVID-19 pandemic losses met a series of setbacks in recent weeks, largely bringing major litigation to a close even as questions linger over key coverage issues that could have lasting effects.

From state supreme courts to federal appellate courts, judges have overwhelmingly rejected policyholders' arguments that the virus itself or government pandemic orders triggered coverage under property policies, an overarching result which experts for insurers and insureds caution still leaves certain jurisdictions and issues unresolved.

October has already seen the sun set on high-profile challenges on the East and West coasts.

On Oct. 2, two California restaurant operators dropped their Ninth Circuit challenge to California Supreme Court precedent setting a high bar for virus coverage. And just this week, the Third Circuit declined to revisit its decision to shut down consolidated suits from New Jersey and Pennsylvania businesses.

"Even though there's still claims out there, there is a sense for a lot of folks that we've kind of answered the questions — or courts have answered the questions for us — and it's time to move beyond COVID," policyholder attorney Colin Watson of Covington & Burling LLP told Law360.

For all the certainty that's developed about how broad swaths of the country will deal with outstanding COVID cases, experts noted that select jurisdictions still haven't had their final say and that policy developments will continue to challenge insurers and insureds alike.

Court Rulings Cement "Uphill Battle" on COVID Claims

To say that insurers have largely succeeded in upholding their COVID-19 loss compensation coverage denials in court would be an understatement.

The top courts in Delaware, Connecticut, Iowa, Louisiana, Massachusetts, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Washington, Wisconsin, New Jersey, New York, Pennsylvania, California and Maryland as well as a superior court in the District of Columbia have all sided with insurers. The Vermont Supreme Court's September 2022 decision to revive a shipbuilder's coverage suit stands alone.

"A large number of the cases where policyholders have come out on the losing end have involved the question of whether the COVID virus constitutes 'physical loss or damage,'" David Shargel of Bracewell LP, who represents policyholders, told Law360. "That's an uphill battle because it typically doesn't."

Peri Alkas, who represents insurers for Phelps Dunbar LLP, said the string of losses is the result of policyholders seeking to recoup their pandemic losses through their insurance despite the plain and unambiguous language of their policies, which would not extend losses for a virus that didn't directly damage property.

"Just being prevented from using the property in the manner intended is not going to be sufficient to turn to coverage, which is what it has always been," she said, adding that loss-of-use because of government shutdown orders was an economic loss rather than a covered expense.

Even cases that survived major decisions have been felled by exhaustive legal costs piling up well into the second year after the World Health Organization ended its designation of COVID-19 as a public health emergency of international concern. That has culled the remaining pool of litigants seeking coverage.

"The ones that are still going, it's just because there is so much money at stake — it's worth it for them to keep trying," Alkas said.

Jurisdictions, Coverage Issues Remain Unresolved

Though many courts have had their say, the fight lives on in some jurisdictions.

In Texas' Baylor College of Medicine v. Underwriters et al., a Harris County court freed some insurers from a dispute based on their "pollutant and contaminate" exclusions, while denying an exit to other insurers with contamination or microorganism exclusions.

Following a $45 million jury award in favor of Baylor, the second group of insurers is asking the state's 14th Court of Appeals to find that the university failed to present evidence of physical loss or property damage, leaning on a decision from the state's Fifth Court of Appeals for support.

"I think we're all very anxious to see how the Texas appellate court is going to rule on this, and if it goes to the Supreme Court, how the Supreme Court will rule," Alkas said.

Likewise, alternate policy language poses a more difficult challenge for insurers than the standard property policies, which courts have largely dismissed early into proceedings.

"There are still cases where the policy language is different than some of the earlier cases and therefore merits a different look than some of the more standard-form policies," Sherilyn Pastor of McCarter & English's insurance recovery group told Law360.

Covington's Watson said that insurers have largely paid out claims under policies that offer communicable disease coverage, which generally provides coverage for business interruption from and expenses for a disease, like cleanup costs.

He added that while most of these policies are sublimited, some have no aggregate sublimit; if a policyholder owns multiple properties or has multiple occurrences, "there are real dollars at stake, which makes it hard for the insurance company to pay the claim or come to a resolution."

The impact of the COVID decisions is also reverberating in other areas of the law.

"The concept of physical loss or damage comes up in other contexts, so court decisions in the COVID context could potentially affect that," Pastor said.

A Massachusetts federal court ruled in August that AMAG Pharmaceuticals could not obtain coverage for losses from mold particles dispersed through an air leak. To back up its reasoning, the court pointed to a state court ruling that found COVID's presence on property didn't constitute physical loss or damage if it could be removed by a simple cleaning.

COVID case law may not prove to be an easy weapon for insurers to wield in other battles.

In May, New York's Supreme Court rejected the argument from a group of Lloyd's of London syndicates that their policy language around "physical loss and/or damage" was sufficiently similar to COVID policies to deny coverage to jewelry retailer Tiffany and its vendor for the loss of precious metals.

Policyholders Put on Notice for Future Risks

For policyholders, future solutions may involve a deep probe of the past.

Pastor noted that insurers appeared strategic and aligned in their arguments and in presenting COVID coverage cases that they wanted courts to consider first, while early claimants were represented by capable plaintiff-side attorneys who didn't do as much insurance coverage work.

"I think some of the early decisions reflected an imbalance in terms of defendants/insurers who are aligned and plaintiffs/policyholder-side counsel who did not have the same coordination in terms of their efforts and longstanding experience in the area," she said.

Watson cautioned that insurers may try to replicate that pattern to nip claims on emerging risks in the bud.

"I think the insurance industry is going to feel like they got a lot out of their effort to quickly, on the pleadings, get resolution of these cases and to do it around the country, and create that wave of anti-coverage momentum," he added.

Part of avoiding similar outcomes may lie in more careful underwriting, Shargel said, advising policyholders to enlist experienced risk managers or outside counsel to carefully review renewals and policy language, such as coverage for events arising out of diseases like government mandates.

He also said that an upshot of the COVID cases has been the development of parametric coverage, which provides quick payouts to policyholders if certain metrics are met, like infection rates in a predefined area or emergency declarations from local or state authorities.

"The outcome has been that policyholders have worked with carriers to develop policy language that could provide for coverage should there be a future pandemic," he said.

Daniel Healy of Brown Rudnick said that he believed many COVID claims were successfully resolved out of court, while policyholders who provided incomplete or premature explanations and support for their claims faced difficult, protracted or frustrating claims processes.

"There are some lessons learned here in terms of policyholders, perhaps naively, just telling their insurance companies what they might have understood to be going on, without having really investigated the issue and found out the facts," he told Law360.

Still, for all the lessons that persist from policyholders' mostly failed efforts to recover from their policies, perhaps the most lasting one will be a greater suspicion of relying on policies in the wake of calamity.

Healy told Law360 that it was frustrating that so many courts used insuring clauses in seemingly all-risk policies to deny coverage for COVID claims, and advised policyholders to make sure their policies truly covered all risks without exclusions.

"There's a reason policyholders are buying insurance: It's for that event that they can't plan around and mitigate and avoid," he said.

--Additional reporting by Jennifer Mandato, Hope Patti, Elizabeth Daley and P.J. D'Annunzio. Editing by Nick Petruncio.