By Max Dorfman, Research Writer, Insurance Information Institute
A new and risky legal precedent could be set as the coronavirus pandemic continues to roil the U.S. economy. A growing number of policyholders say that insurers are acting in bad faith when they deny claims for losses sustained during shutdowns.
While business income interruption coverage typically covers physical damage to a property, some businesses believe the potential presence of the virus on their property or in their community is equivalent to physical damage.
Business income interruption exclusions for pandemics date back to the 2002-2003 SARS epidemic, when insurers realized that the risk of such a massive health crisis would be impossible to credibly quantify, and thus impossible to absorb.
In several recent articles, some plaintiffs’ attorneys have accused insurers of acting in bad faith by issuing quick denials without properly investigating their claims. “Quite frankly, the prevailing law on the insurance policies is that coverage is supposed to be interpreted broadly and exclusions are supposed to be interpreted narrowly,” said William Shernoff, a founding partner of California-based Shernoff Bidart Echeverria LLP, which specializes in representing policyholders in claims against insurance company denials. Shernoff also stated that any inconsistency in a policy means it’s ambiguous and would result in a decision favoring the plaintiffs.
Michael Menapace, an insurance lawyer and a Triple-I non-resident scholar, disagrees. “They’re trying to recast what the damage is from the policy trigger of “direct physical loss of or damage to property” to a broader concept of “loss of use,” which term does not appear in most policies. They’re also going to claim that somehow the entire insurance industry tricked policyholders by sneaking in the virus exclusion. There is a tension between the plain meaning rule [what the exclusion literally states], and the doctrine of reasonable expectations [the way someone who is not trained in the law would interpret them].” He continued, “When an insurance company denies a claim, they may get the decision wrong – but it doesn’t mean they denied it in bad faith.” Menapace adds that the virus exclusion has not been tested in the courts on any large scale since its adoption in 2006. “There’s so little case law on virus exclusions during pandemics, I have a hard time believing insurers are acting in bad faith.”
There are many reasons for the insurance industry not to act in bad faith under these circumstances. An insurer that is deemed to have acted in bad faith can be liable for damages that are greater than the policy limits, including but not limited to interest, emotional distress, consequential economic losses, attorneys’ fees and punitive damages.
Menapace also makes the point that business income interruption claims from a pandemic would rapidly deplete insurers’ reserves and surplus that are needed for covered losses such as those from hurricanes and other perils. “We can insure certain events because there is a spreading of risk,” saidMenapace. “If everyone has the same loss at the same time, like from a pandemic, we lose the fundamental aspect of insurance, which is risk spreading.”
Much depends on how the courts interpret the exclusions. “Insurers said they were not going to cover damage due to pandemics. There is going to be new law created. It depends whether the courts will read the plain meaning of the exclusion, or if they’ll interpret some of the creative arguments of the plaintiffs.” If these contracts will retroactively favor the insured, Menapace added, it could force insurers to stop covering business income interruption in any scenario, as the costs would simply be too great. And that would be truly bad for policyholders and insurers alike.
Each year the American Tort Reform Association (ATRA) publishes a list of “Judicial Hellholes” — places where ATRA says laws and court procedures are applied in an “unfair and unbalanced” way in civil cases, usually to the disadvantage of defendants.
Since the issue of social inflation has been trending in recent months, it’s no surprise that the mention of ATRA’s report in our Daily newsletter garnered an unprecedented number of clicks.
Florida — a former number one Judicial Hellhole — doesn’t even make the cut this year.
“Florida took great strides toward improving its legal climate in 2019,” ATRA says “Although there is much work to be done, the election of Governor Ron DeSantis (R) has heralded a sea change in Florida’s legal landscape, beginning with the appointment of several new Florida Supreme Court justices. This new court is deferential to legislative efforts to stop lawsuit abuse and poised to correct the course set by the prior activist court.”
DeSantis in 2019 also signed into law a measure aimed at curbing assignment of benefits (AOB) litigation in the state. AOB is a standard insurance practice and an efficient, customer-friendly way to settle claims. As a convenience, a policyholder lets a third party – say, an auto glass repair company – directly bill the insurer. In Florida, however, legislative wrinkles have spawned a state of affairs in which legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.
The measure DeSantis signed puts new requirements on contractors and lets insurers offer policies with limited AOB rights, or none at all. But it excludes auto glass repairs. The number of auto glass AOB lawsuits statewide in 2013 was over 3,800; by 2017, that number had grown to more than 20,000.
This year, the Philadelphia Court of Common Pleas took over the top spot for 2019. It is one of the preferred jurisdictions for asbestos litigation and home to an $8 billion product liability verdict. California, New York City, Louisiana, and St. Louis all rank in the top five.
Some of the trends noted in the ATRA report include:
the trial bar’s push to use public nuisance law to shift costs associated with public crises to businesses;
lead paint and climate change litigation;
the opioid and vaping crisis; and
new rights of action against employers.
Three Illinois counties – Cook, Madison, and St. Clair – made the list. Antonio M. Romanucci, president of the Illinois Trial Lawyers Association, called the ATRA report misleading. “The deceptively titled ‘Hellholes’ report is part of [ATRA’s] ongoing campaign to deny access to the court system that our tax dollars fund,” Romanucci told Illinois Radio Network. “ATRA’s annual publicity stunt demeans the U.S. Constitution and attacks citizens’ Seventh Amendment right to trial by jury.”
Romanucci said the number of civil lawsuits filed in Illinois has been declining since 2010 and was down 47 percent. And medical malpractice cases have dropped 32 percent since 2003.
I once took an Uber in Fairfield, Ohio. As we sat at a light, the driver pointed to an empty big box storefront.
“What’s that building look like?” he asked. I said it looked like an empty big box storefront.
“That’s right. You know where it went?” I said no, confused. He pointed down the street a few hundred yards away to a brand-new big box store.
“There it is. You know why they moved down the street? Taxes. Lower sales tax across the county line.”
I was reminded of that story of fiscal competition at its finest when reading about Apple’s recent decision to close two of its stores in the Dallas suburbs.
Or more accurately, as Ars Technica reported, Apple’s decision to close two stores within the federal court jurisdiction of the Eastern District of Texas. Rumor has it that Apple’s move could be in response to intellectual property litigation. Per Ars Technica:
The Eastern District is known for its extremely patent-friendly judges, and so for decades patent plaintiffs have set up shop there and sued defendants located all over the country. Prior to 2017, the law allowed a plaintiff based in the Eastern District of Texas to sue defendants there if defendants had even tenuous connections to the district. And, of course, a company of Apple’s size has business ties to every part of the country.
These plaintiffs are often called “patent trolls,” which the Electronic Frontier Foundation defines as companies or individuals that cheaply purchase patents (often “overbroad and vague” patents, at that) and then threaten expensive litigation against companies allegedly in violation of said patents:
These letters threaten legal action unless the alleged infringer agrees to pay a licensing fee, which can often range to the tens of thousands or even hundreds of thousands of dollars.
Many who receive infringement letters will choose to pay the licensing fee, even if they believe the patent is bogus or their product did not infringe. That’s because patent litigation is extremely expensive — often millions of dollars per suit — and can take years of court battles. It’s faster and easier for companies to settle.
The Eastern District has been a favorite venue for this kind of litigation – even after the Supreme Court sought to rein in so-called “venue shopping” in a 2017 decision. Ars Technica explains:
[U]nder the Supreme Court’s 2017 TC Heartland decision, a defendant can only be sued in a district where it “resides”—meaning where it was incorporated—or “has a regular and established place of business.”
Apple’s two stores in the Eastern District would likely count as “regular and established places of business” for patent-law purposes. So under the new rules, continuing to operate the stores makes it easier for patent plaintiffs to sue Apple in the Eastern District.
Apple has not confirmed that its move is related to patent-troll litigation. But, tellingly, the company is replacing its two shuttered stores with a new store…directly across the border of the Eastern District. Sometimes, the best offense is a good defense.
Insurance claims are happening more often and they’re getting a lot more expensive – fast. The consequences are alarming. Premiums are rising for consumers and businesses. Coverage is getting scarce for some risks. Some insurers are increasingly concerned about how to keep liability insurance sustainable into the future.
But why are bigger claims happening more often? And what can the insurance industry do about it?
Advisen Ltd. held its inaugural “Big Nasty Claims Conference” on September 20 to explore these and other questions, featuring expert insight from across the insurance value chain: defense counsels, brokers, claims and insurance professionals, and risk managers.
Plaintiff’s attorney litigation strategies have evolved – and are paying off big
You’ve seen the headlines. $4.69 billion verdict for women alleging that talc baby powder caused ovarian cancer. $101 million verdict for a driver allegedly injured after his car was struck by a truck. The list could go on for what seems like forever.
And if it feels like these are unprecedented numbers happening at unprecedented rates, that’s because they are. There’s been a remarkable uptick in punitive damages from claims that went to trial, noted Jonathan Drummond, Head of Casualty – North America at Willis Towers Watson.
John Manning, keynote speaker at the conference and partner at Manning Gross & Massenburg LLP, made the case that some of this uptick is because of new plaintiff’s attorney litigation tactics. Using the so-called “reptile strategy” (based on this 2009 book), plaintiff’s attorneys have been successfully creating massive risks from what used to be fairly straightforward claims.
The reptile strategy involves appealing to what is known as the reptile brain — the part of the brain said to favor safety and survival over logic. What this often means in the courtroom is a subtle distortion of legal standards and burdens of proof. Manning argued that this allows plaintiff’s attorneys to essentially re-define “negligence” in the jurors’ minds to mean the failure of a company to be absolutely perfect and absolutely safe (a far cry from the actual legal standard).
Naturally, this standard of perfection is impossible to uphold. But the reptile strategy’s use of emotional appeal to waive away the need for actual causation can influence the jury to demand compliance with the impossible – and hence multi-million or billion-dollar verdicts against companies whose products might have posed only the slightest possible risk of danger, if at all.
This is particularly true in what Christopher Morrison, Senior Vice President at Swiss Re, called “high sympathy, high damages” claims with low liability – that is, claims where liability is pretty straightforward. He explained that these are the cases where the plaintiff’s attorneys are willing to take risks to move the needle away from traditional legal standards because, to win a big settlement, liability needs to be proven beyond the scope of the actual facts of the case.
The consequences of this strategy are impacting traditional legal standards themselves. Manning said that, in his view, the reptile strategy is “the number one factor in moving the line of demarcation of burden of proof for negligence and causation analysis.” “There’s a lot more ‘next asbestos’ if they [the plaintiffs’ bar] don’t have to prove medical causation at the trial,” he added, referencing the recent ruling regarding Monsanto’s Roundup weed killer.
Same old claims, new massive losses
These massive verdicts coming out of claims litigation are having a trickle-down effect. Claims settlement costs are also increasing, absent any trial – because huge verdicts mean a new “floor” for what a plaintiff’s attorney will demand in settlements. As Mia Finsness, Managing Director of Casualty Claims at Markel Corporation, noted, “one runaway verdict can drive the whole discussion on what settlements look like – you get massive settlements before you get to trial because plaintiff’s attorneys will just say they want huge money and that sets a floor.”
“Loss costs in casualty have always been increasing,” said Andy Barberis, Executive Vice President of Commercial Claims at AIG, “but over the last five to 10 years the increase has been exponential.” There doesn’t seem to exist a cap on where loss costs could end, he added, and these recent trends are of significant concern for the future sustainability of the insurance industry.
And not all verdicts need to be massive to have an effect. It was a running theme throughout the panels that claims that once cost $1 or $2 million to settle are now going for much more. “Things that used to be routine, we’re seeing a doubling or quadrupling of the verdicts,” said Kevin A. Maloney, Senior Vice President at Allied World. Over time, these individual increases can add up to big losses.
One panel was asked if “litigation financing” might have something to do with increasingly aggressive claims settlement on the part of the plaintiffs’ bar. (Litigation financing is when third-parties fund a plaintiff’s lawsuit in exchange for a portion of a settlement.) The short answer: a lack of transparency about when litigation is being financed by outside parties makes it hard to know if this is a widespread phenomenon. “Transparency is a real issue regarding funding. It’s hard to know they [financiers] even exist because right now there are few requirements for disclosure,” Finsness said.
Several lawyers said they had only incidentally found out third-parties were funding litigation, such as when a plaintiff’s attorney was very aggressively pursuing a high settlement and admitted to being funded.
Tort reform is unlikely, so strong legal defenses are crucial
Could tort reform help rein in aggressive litigation and massive verdicts? The mood at the conference was that the prospect for enactment of any meaningful tort reform is becoming an ever more unrealizable reality.
Instead, strong legal defenses that recognize and counter reptile strategies and other plaintiff’s attorney tactics are crucial.
For one, the conference experts stressed unity among parties to a defense; that is, making sure everyone is on the same page to preclude a plaintiff’s attorney from “driving a wedge” between the defense. Communicate “early and often” was also stressed– insureds, brokers, risk managers, and counsel need to share information and coordinate defense strategy as early as possible.
In other words, be more strategic. Plaintiff’s counsel on the other side of the fence, observed William Passannante, an attorney with Anderson Kill P.C., “will pool resources and share information and contact each other to form a united front,” especially when there’s potential for a big settlement. “I don’t know if I see the same willingness among defense counsels,” he added.
Finsness agreed, arguing that effective defense counsel and coordinated strategy are crucial components of satisfactory claim settlement.
Emerging risks might completely change the litigation landscape
Panel members were asked what they think could be the “next asbestos” to hit the insurance industry:
Talc-related litigation – the potential population of plaintiffs dwarfs that of the asbestos population.
The opioid crisis continues to increase litigation and claims exposure for many books of business.
Concussion litigation, especially with the increased attention on long-term brain injuries suffered by football players.
Climate change litigation, particularly the recent cases seeking to hold individual companies liable for alleged climate change-related damages.
Exposure “leakage,” in which old issues crop up in new contexts. Finsness noted that PFOA (chemicals used in a number of products) contamination could potentially become a product liability issue.
Premises security. Will venues become liable for shootings or other acts of violence on their premises?
The upshot being: claims are happening more often, are getting more expensive – and may be cropping up for new exposures that could haunt the insurance industry for decades to come.
Grammarians and legal eagles among you will want to read about how a punctuation mark known as the Oxford comma is the crucial factor in a class action involving overtime pay for truck drivers.
This is just one of the items covered in our Insurance Information Institute (I.I.I.) Daily newsletter today, a must-read publication for anyone in and around the insurance industry. (Sign up by emailing email@example.com).
Citing the New York Times, the I.I.I. Daily reports that on March 13 the U.S. Court of Appeals for the First Circuit handed down a lengthy court decision that is seen as a grammar lesson that could lead to an estimated $10 million loss for a dairy company in Portland, Maine.
The backstory: In 2014 three truck drivers filed a lawsuit seeking more than four years of overtime pay they alleged that Oakhurst Dairy had denied them unfairly. Under Maine law, workers have to be paid 1.5 times their normal rate for each hour worked in excess of 40 per week, with some exceptions.
Punctuation refresher: Grammarians are very polarized about whether a comma should be placed before the last of a series of items in a list, and some insist on what is referred to as the Oxford comma, one preceding the final item, while others habitually omit it. The absence of the comma can change meaning.
Comma in question: The state law involved in the case says that overtime rules do not apply to “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: 1) Agricultural produce; 2) Meat and fish products; and 3) Perishable foods.” The question before the court was whether the law intended to exempt distribution of the three categories or packing for their shipping or distribution.
The decision: The appeals court ruled in favor of the drivers, after finding that the absence of a comma after “shipment” led to uncertainty about whether the law exempts applies to delivery drivers who distribute perishable foods, although they do not pack them. The appeals court reversed a lower court decision that denied truckers overtime.
If you’re surprised at the $10 million difference a comma can make, consider how important it is to draft insurance contracts and policy language that use words and punctuation correctly. This Deepwater Horizon coverage dispute is a good example.