Miller Friel attorney Tae Andrews was selected for inclusion in the Second Edition of Best Lawyers: Ones to Watch, for Insurance Law. Using peer-review methodology, the award recognizes lawyers for outstanding professional excellence in private practice. This is the second year in a row Tae has been named as one of Best Lawyers’ Ones to Watch.
Miller Friel attorney Tae Andrews recently published a Practice Note with Thomson Reuters Practical Law on Insurance Coverage for Biometric Data Privacy Claims. Tae’s Practice Note can be viewed here.
The Supreme Court of Illinois recently handed down a monumental decision in West Bend Mutual Insurance Co. v. Krishna Schaumburg Tan Inc. confirming that commercial general liability, or CGL, policies cover claims brought against policyholders for alleged violations of Illinois’ Biometric Information Privacy Act, or BIPA.
The ruling has widespread implications for other policyholders with similar coverage for personal and advertising liability and represents a critical victory under so-called silent cyber coverage, affirming that insuring policies do not have to include magic words to cover BIPA claims.
This article analyzes the effects of the court’s decision on the scope of coverage provided by commercial general liability policies and explores future, unresolved issues in the ongoing battles over insurance coverage for BIPA claims.
BIPA prohibits companies from collecting, using and disclosing a person’s biometric data without consent.
In Krishna Schaumburg, a customer filed suit against a tanning salon for BIPA violations. The customer alleged that the salon violated the statute by collecting, using, storing and disclosing her biometric information — her fingerprints — to a third-party vendor.
BIPA is an informed-consent statute that prohibits companies from collecting a person’s biometric information unless they: (1) first inform him or her that they are collecting or storing biometric information, in writing; and (2) inform the person of the specific purpose and length of term for which it is collecting the biometric information; and (3) receive a written release.
Biometric information includes retina or iris scans, fingerprints, voiceprints, and scans of hand and face geometry. Biometric data is biologically unique to an individual and thus presents long-term dangers if compromised, as the individual will remain at heightened risk for identity theft.
BIPA prohibits companies from disclosing biometric information to third parties unless: (1) the individual consents; (2) the disclosure completes a financial transaction requested or authorized by the individual; (3) state or federal law requires the disclosure; or (4) a valid warrant or subpoena requires the disclosure.
CGL policies cover claims for personal and advertising injury brought against the policyholder, including publication of material that violates a person’s right of privacy.
The tanning salon carried business owners’ liability insurance policies, also commonly known as CGL policies.
These policies provide liability insurance protecting the policyholder, the salon, from lawsuits brought by third parties, the customer, seeking damages for personal and advertising injury. In key part, the definition of advertising injury includes “oral or written publication of material that violates a person’s right of privacy.”
If a third-party lawsuit results in a settlement or judgment entered against the policyholder, the insurer must pay for the loss. CGL policies also impose a duty to defend, meaning the insurer must also provide defense counsel or pay defense costs if a third party brings a claim against the policyholder.
CGL policies provide standard-issue coverage, meaning most policies have identical or substantially similar language and provisions. Court rulings interpreting this standard-issue policy language can thus have wide-ranging implications for other policyholders.
After the tanning salon requested a defense, its insurer filed a declaratory judgment action, seeking a ruling that it did not have a duty to defend the salon against the customer’s BIPA claim.
The insurer made two main arguments: (1) that the customer’s BIPA claim did not allege personal and advertising injury — i.e., a publication of material that violated a person’s right of privacy; and (2) that a violation of statutes exclusion applied to bar coverage.
The Supreme Court of Illinois confirms that CGL policies cover BIPA claims under their personal and advertising injury coverage.
The Supreme Court of Illinois ruled against the insurer on both arguments, confirming the insurer’s duty to defend its policyholder against the customer’s BIPA claim.
Specifically, the court rejected the insurer’s argument that the term “publication” required the communication or distribution of the customer’s biometric data — her fingerprints — to the public at large in order to trigger covered personal and advertising injury, as opposed to a single vendor.
The court held that covered publication of material that violates a person’s right of privacy includes both communication to a single party and communication to the public at large, ruling in favor of the policyholder.
The court also holds that the violation of statutes exclusion does not apply to BIPA claims.
The court also held that a violation of statutes exclusion did not apply to bar coverage for the customer’s BIPA claim.
Many CGL policies contain this exclusion, which bars coverage for personal and advertising injury arising out of any action or omission that violates or is alleged to violate: (1) the Telephone Consumer Protection Act; (2) the Controlling the Assault of Nonsolicited Pornography And Marketing Act; or (3) any other statute that prohibits or limits the sending, transmitting, communicating or distribution of material or information.
The insurer tried to argue that the violation of statutes exclusion applied to the customer’s BIPA claim, but the court held that the exclusion only applies to statutes that regulate certain methods of sending material or information, like the above statutes.
Because BIPA does not regulate methods of communication, but instead governs the collection, use, safeguarding, handling, storage, retention and destruction of biometric information, the exclusion did not apply.
The court’s ruling stands as a landmark victory for policyholders under silent cyber coverage for biometric-data privacy claims.
Krishna Schaumburg thus stands as a landmark ruling: the first definitive decision confirming that CGL policies cover BIPA claims under their coverage for personal and advertising injury. The decision has wide-ranging consequences for other policyholders in similar coverage disputes, as insurers have already begun withdrawing arguments based on the court’s ruling.
The decision also marks a resounding victory for policyholders under so-called silent cyber or nonaffirmative cyber coverage. When policyholders request coverage for BIPA claims, their insurers often try to discourage them by claiming that they did not intend for CGL policies to cover BIPA claims.
But the insurers’ intent is irrelevant; all that matters is the language of the policy — and insurers rarely intend for their policies to cover anything. Krishna Schaumburg thus confirms that there are no magic words necessary for CGL policies to cover BIPA claims — instead, the language of the policy controls.
Insurers and their counsel have already begun grumbling about the decision, arguing that the court somehow expanded the meaning of “publication” of material that violates a person’s right of privacy sufficient to trigger personal and advertising injury.
But as the court pointed out, long-standing definitions of the word “publication” have interpreted the term to include disclosure of information to a single party — such as a vendor receiving fingerprints or other biometric data — as well as the public at large.
The court’s decision thus recognizes that insurance policies are contracts of adhesion, drafted only by the insurer and without the policyholder’s input, and thus applied longstanding rules of interpretation requiring courts to construe terms capable of more than one meaning in favor of the policyholder.
While the court resolved two critical issues in policyholders’ favor, other issues not in dispute in Krishna Schaumburg remain unresolved in other pending cases, including whether employment-related practices and disclosure of confidential or private information exclusions bar coverage for BIPA claims and whether insurers will begin adding BIPA exclusions to CGL policies upon renewal.
Future Battlegrounds in Insurance Coverage Disputes Over BIPA Claims
The Employment-Related Practices Exclusion
Post-Krishna Schaumburg, insurers have argued in several pending cases that an employment-related practices exclusion bars coverage for BIPA claims. The court did not decide whether this exclusion applied in Krishna Schaumburg because the BIPA plaintiff was a customer of the insured tanning salon — not an employee.
In many other insurance disputes over coverage for BIPA claims, the policyholders are employers facing BIPA claims brought by their employees. These employees often claim that their employers violated the statute by improperly collecting, storing, using and disclosing their biometric data by using timekeeping systems that scanned their fingerprints, as a method of having them clock into and out of their shifts.
When the employers seek defense coverage under their CGL policies, the insurers have denied coverage based on a new exclusion: the employment-related practices exclusion.
This exclusion typically states that the policy’s personal and advertising injury coverage does not apply to claims brought by a person arising out of any: (1) refusal to employ that person; (2) termination of that person’s employment; or (3) employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person.
The insurers claim that this exclusion bars coverage because the employers’ use of their employees’ fingerprints as a timekeeping system is an employment-related practice or policy.
However, the case law indicates that the exclusion only applies to claims arising out of an employee’s hiring, firing, or job performance, or an employer’s wrongful conduct related to such personnel decisions — i.e., “matters that directly concern the employment relationship itself.”
The exclusion does not apply to all matters that concern or relate to employees. By contrast, the fingerprint timekeeping system is only an administrative device, unrelated to the employees’ performance, and does not directly concern the employment relationship, indicating that the exclusion should not apply.
No court has yet ruled on whether the employment-related practices exclusion applies to bar coverage for BIPA claims, but currently pending cases have raised this issue, making it an unresolved issue to watch in the second half of 2021.
Disclosure of Confidential or Private Information Exclusion
After Krishna Schaumburg, insurers have also raised a second new coverage defense, arguing that an access or disclosure of confidential or personal information exclusion bars coverage for BIPA claims.
This exclusion states that coverage does not apply to personal and advertising injury arising out of any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.
The insurers claim that this exclusion should bar coverage because biometric information is confidential or personal information. But a brief reading of the exclusion and BIPA also indicates that this exclusion should not apply.
First, most of the examples of confidential or personal information are things that people create and can change, such as patents, trade secrets, processing methods and customer lists. By contrast, people do not create and cannot change their biometric information — instead, biometrics are biologically unique to the individual.
Second, BIPA explicitly states that biometric information is different from “other unique identifiers that are used to access finances or other sensitive information” — i.e., financial information and credit card information.
The statute also specifically states that biometric data does not include information collected, used or stored for health care treatment — i.e., health information. The exclusion thus should not apply.
Even so, you can expect insurers to continue arguing that the disclosure of confidential or private information exclusion bars coverage for BIPA claims, making this issue another key battleground in future BIPA coverage disputes.
Policyholders should beware of insurer attempts to add BIPA exclusions to CGL policies upon renewal.
Finally, insurers are already adding BIPA exclusions to CGL policies. This is a common insurer move — when a widespread event potentially implicates many of their policies, insurers try to add exclusions not only for that event, but for any similar ones in the future, such as adding a terrorism exclusion after 9/11 or a pandemic exclusion after the COVID-19 pandemic.
Adding these exclusions is part of insurer efforts to avoid paying for losses and slowly hollow out the coverage provided by their policies over time.
Policyholders should carefully review any such exclusions and beware of insurer attempts to similarly exclude coverage for any statutes similar to BIPA, as several states have now passed similar laws protecting biometric information — with more likely to follow suit in the future.
Policyholders should also negotiate reduced premiums or other concessions if their insurers add BIPA exclusions to their policies, as they would otherwise pay the same premiums, but receive less coverage — without any additional consideration. No matter what your insurer tries to tell you, CGL policies cover BIPA claims, as the Supreme Court of Illinois has now made clear.
This article was also published in Law360.
 W. Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., No. 2021 IL 125978, 2021 WL 2005464, at *1 (Ill. May 20, 2021).
 740 Ill. Comp. Stat. Ann. 14/15(b) (West 2021).
 740 Ill. Comp. Stat. Ann. 14/10 (West 2020).
 740 Ill. Comp. Stat. Ann. 14/5(c) (West 2021).
 740 Ill. Comp. Stat. Ann. 14/15(d) (West 2021).
 Krishna Schaumburg, 2021 WL 2005464, at *2.
 Id. at *3.
 Id. at *10.
 Id. at *6.
 Id. at *6-8.
 Id. at *8-9.
 Id. at *2-3.
 Id. at *10.
 Id. at *9-10.
 Id. at *10.
 E.g., Pl.’s Mot. for Leave to Cite New Authority & Withdraw Certain Prior Arguments, State Auto. Mut. Ins. Co. v. Tony’s Finer Foods Enters., Inc., No. 1:20-cv-06199 (N.D. Ill. May 20, 2021).
 Daphne Zhang, Ill. Justices Ring ‘Alarm Bell’ For Insurers on BIPA Coverage, Law360 (May 24, 2021), https://www.law360.com/articles/1387169/ill-justices-ring-alarm-bell-forinsurers-on-bipa-coverage.
 Krishna Schaumburg, 2021 WL 2005464, at *7.
 Id. at *7.
 Pl.’s Mem. of Law in Supp. of Its Mot. for Summ. J., State Auto. Mut. Ins. Co. v. Tony’s Finer Foods Enters., Inc., No. 1:20-cv-06199, § 2. A. (N.D. Ill. Jan. 28, 2021).
 Krishna Schaumburg, 2021 WL 2005464, at *1.
 E.g., Compl. for Declaratory J., Old Republic Union Ins. Co. v. McDonald’s USA, LLC, No. 2021CH02445, ¶¶ 3, 32-33, 35 (Ill. Cir. Ct. May 19, 2021).
 Id. at ¶ 82.
 Compl. for Declaratory J., Citizens Ins. Co. of Am. v. Nw. Pallet Servs., LLC, No. 1:21cv-02804, ¶ 38 (N.D. Ill. May 25, 2021).
 E.g., Compl. for Declaratory J., Old Republic Union Ins. Co. v. McDonald’s USA, LLC, No. 2021CH02445, ¶ 82 (Ill. Cir. Ct. May 19, 2021).
 E.g., Peterborough Oil Co. v. Great Am. Ins. Co., 397 F. Supp. 2d 230, 238-39 (D.
Mass. 2005); see also Am. All. Ins. Co. v. 1212 Rest. Grp., L.L.C., 794 N.E.2d 892, 897 (Ill. App. Ct. 2003) (holding that the exclusion did not apply to alleged defamatory statements because they did not all relate to the employee’s job performance); Am. Econ. Ins. Co. v. Haley Mansion, Inc., No. 3–12–0368, 2013 WL 1760600, at *5 (Ill. App. Ct. Apr. 23, 2013) (also holding that the exclusion did not apply to alleged defamatory remarks unrelated to a former employee’s work).
 Peterborough, 397 F. Supp. 2d at 239.
 Def.’s Mem. of Law Opposing Pl.’s Mot. for Summ. J., State Auto. Mut. Ins. Co. v. Tony’s Finer Foods Enters., Inc., No. 1:20-cv-06199, § II. B. (N.D. Ill. Mar. 8, 2021).
 Compl. for Declaratory J., Citizens Ins. Co. of Am. v. Nw. Pallet Servs., LLC, No. 1:21cv-02804, ¶ 53 (N.D. Ill. May 25, 2021).
 Compl. for Declaratory J., Citizens Ins. Co. of Am. v. Nw. Pallet Servs., LLC, No. 1:21cv-02804, ¶ 51 (N.D. Ill. May 25, 2021).
 Id. at ¶ 53.
 Id. at ¶ 51.
  740 Ill. Comp. Stat. Ann. 14/5(c) (West 2021).
 740 Ill. Comp. Stat. Ann. 14/5(c) (West 2021) (“Biometrics are unlike other unique identifiers that are used to access finances or other sensitive information.”).
 740 Ill. Comp. Stat. Ann. 14/10 (West 2021).
 Daphne Zhang, Ill. Justices Ring ‘Alarm Bell’ For Insurers on BIPA Coverage, Law360 (May 24, 2021), https://www.law360.com/articles/1387169/ill-justices-ring-alarm-bell-forinsurers-on-bipa-coverage.
 Michele Gorman, What GCs Need To Know About Va.’s New Data Privacy Law, Law360 Pulse (Mar. 16, 2021), https://www.law360.com/pulse/articles/1365370/what-gcs-need-toknow-about-va-s-new-data-privacy-law.
Who is Winning the Covid-19 Insurance Coverage Fight? It depends on where the lawsuits are being decided. In state court, policyholders are winning roughly one half to three quarters of all lawsuits filed. The one half number is for lawsuits containing virus exclusions, and the three quarters number is for lawsuits without a virus exclusions. Federal courts, however, are much more favorable to insurers. The result — insurance carriers are fighting to have federal courts decide Covid-19 cases. Statistics, however, do not explain everything. Policyholders need to look deeper into these statistics to understand why litigation strategy is perhaps more important than the merits of any given claim. But first, some context.
I. The Onslaught of Covid-19 insurance Coverage Lawsuits
Just over a year ago, the seemingly never-ending onslaught of lawsuits started. Soon as the pandemic hit, almost immediately, plaintiffs’ lawyers began filing suit. To date, over 1500 lawsuits seeking insurance coverage for Covid-19 related business losses have been filed.
These early lawsuits were not the kind of lawsuits that seasoned insurance lawyers were accustomed to. Historically, insurance coverage law revolved around large well-funded corporations fighting equally large or larger well-funded insurance companies. Not here. What we saw was a grassroots phenomenon, with small businesses like mom-and-pop restaurants, nail salons, barber shops, tanning salons, and the like, bringing lawsuits against insurers. For the first time in the history of insurance law, traditional plaintiff lawyers were making insurance coverage litigation and class action lawsuits “a thing” for small businesses who otherwise would never have been able to seek justice.
Many of these early lawsuits addressed policies containing a standard-form ISO VIRUS OR BACTERIA EXCLSION. Many of these early lawsuits did not allege that the virus causing Covid-19 caused physical loss or damage to property. Instead, they argued that other causes, such as government closure orders, led to their losses.
Cumulative Covid-19 Insurance Coverage Actions
As time went on, larger more sophisticated businesses reviewed their coverage and began filing lawsuits. Unlike coverage sold to many smaller businesses, much of this coverage addressed exclusionary language that was markedly different from that contained in the standard ISO form. In many cases, the policies at issue did not contain any form of virus exclusion. In others, the exclusionary language was amended by state specific endorsements deleting viruses from the exclusion, or the exclusion was drafted in such a way that it applied only to certain costs expended, and not business interruption losses themselves. Accordingly, many of the early rulings pertinent to policies with a standard ISO exclusions did not apply to claims brought by larger organizations.
II. Insurance Industry Response
Insurance carriers saw their exposure to Covid-19 claims from the start and conducted some very impressive public relations and lobbying to limit their liability.
Initially, many commercial insurance brokers advocated on behalf of the insurance companies. For example, a major multinational broker, AON, stated in one of its client advisory pieces
“[m]ost property policies, including ISO, specific insurer forms and most manuscript policies, do not cover a loss resulting from a virus.”
Similarly, Willis Towers Watson stated, that there was
“[v]ery limited, if any coverage.”
But not everyone fell in line. The Independent Insurance Agents & Brokers of America, an insurance broker trade association, was outraged at the approach the insurance industry had taken withCovid-19 claims, stating
“insurance carriers are directing their agencies to deny certain claims related to the COVID-19/coronavirus . . .some carriers have even put this directive in writing.”
Insurance company lawyers were next to come to the defense of their clients. Just four days after the WHO declared Covid-19 as a pandemic, insurance company lawyers began publishing articles arguing that coronavirus claims are excluded from coverage. See Coronavirus excluded for over 15 Years, According to Insurance Company Lawyers
Aggressive insurance company lobbying soon followed. States like New Jersey, Ohio, Massachusetts, and Pennsylvania all had pending legislative proposals requiring insurance companies to cover Covid-19 claims. With involvement of insurance company lobbyists, those laws appear to have been quickly defeated. Congress even wrote a letter to various industry trade associations, urging their member companies “to make financial losses related to COVID-19 . . . part of their commercial business interruption coverage for policyholders.” The insurance industry’s collective response: no thanks. This could, according to insurance company lawyers, bankrupt the industry. See Reuters Article Where Insurance Company Lawyers Argue it is Better for them if They Can Just Get Paid to Litigate Covid-19 Claims.
Instead, the insurance industry offered support for a new Federal Government program where taxpayers would pay for business losses and insurance companies would be paid to administer that new program. See Politico Article. The insurance companies argued – everyone is on board; taxpayers should shoulder the burden. They were supportive of legislation, so long as they did not have to pay for Covid-19 claims.
III. Kinds of Covid-19 lawsuits
With their significant resources and political connections, it was perhaps an easy lift for insurance companies to defeat proposed legislation. But litigation is a different story. To answer the question of who is winning the Covid-19 insurance coverage fight, it is first helpful to break down the different kinds of litigation bring brought in different courts. Although the language of each insurance policy needs to be independently analyzed, most Covid-19 cases fall into two distinct categories:
- Lawsuits over policies containing virus exclusions; and
- Lawsuits over policies not containing virus exclusions.
Covid-19 litigation raises novel coverage issues and insurance coverage that are determined by state law. It is also interesting to see how state courts decisions are different from federal court decisions.
1. Lawsuits Over Policies Containing Virus Exclusions
On the first category, policyholders are wining just over ten percent of all lawsuits, even when those lawsuits contain virus exclusions. At first glance, this number is deceivingly low. It helps to put this statistic into better context. For the most part, these are cases that contain the standard form ISO exclusion that excludes coverage for losses “directly or indirectly caused” by a virus.
Larger company policies typically do not contain the ISO exclusion that the courts so far have addressed. To date, courts have not opined on policies that have virus exclusions that have been subsequently deleted by state-specific endorsements. Nor have the courts addressed more prevalent contamination exclusions that carriers such as Chubb and XL have confirmed apply only to traditional pollution. For the most part, courts have not addressed exclusions that apply only to costs (hard expenditures), as opposed to loss (business interruption coverage).
One of the biggest issues courts have yet to address is the issue of causation with respect to virus exclusions. Courts almost universally recognize that there are at least four causes for policyholder loss:
- Covid-19 (the disease);
- The Pandemic;
- The virus; and
- Governmental closure orders.
Not every version of a virus exclusion approaches these causes the same way. For instance, a ruling on the standard ISO exclusion with broad “directly or indirectly caused” causation language has no bearing on an exclusion that applies only to losses “caused” by the virus. At most, only one of the four causes, the virus itself, would be excluded from coverage with the later language. For example, if the governmental closure orders caused the loss, coverage would be provided.
2. Lawsuits Over Policies Not Containing Virus Exclusions
Policyholders, on the other hand are winning roughly 30 percent of cases where the policies at issue do not contain a virus exclusion. Better odds for sure, but why so low? The answer, as explained in more detail below, is that federal courts appear to be creating their own law, rather than following state law.
3. State Court vs. Federal Court
The question of who is winning the Covid-19 insurance coverage fight is highly dependent on whether the claim is being decided in state versus federal court. Policyholders are wining roughly half of all cases filed in state court. This is despite the fact that most of the cases decided contain standard form ISO virus exclusions. And in most of the cases decided, for the same reason, the policyholder did not plead that the virus was the cause of the damage. If policyholders are winning half of these kinds of cases, that is good news.
The news gets even better, with policyholders winning roughly two thirds of cases decided in state court where no virus exclusion is present. The odds perhaps should be higher, but winning half to two thirds of all cases filed is a good start.
In federal court, the odds drop down significantly. Overall, policyholders win only about ten percent of the time in federal court, and just fourteen percent of the time in federal court when there is no virus exclusion. The following table indicates just how different the outcomes are between state and federal courts is in the context of Covid-19 claims.
Percentage of Policyholder Victories
|State Court||Federal Court|
|No Virus Exclusion||66%||14%|
Based on statistics alone, something is drastically off. Federal courts are not following state law. The question of whether federal courts have the authority to create state law is not a novel issue. Not only do federal courts have better things to do than decide state law insurance issues, but they are prohibited from creating new state law on issues of contract interpretation. SeeErie Railroad Co, v. Tompkins, 304 U.S. 63 (1938).
IV. Litigation Strategy
This explains why insurers are hell bent on having their disputes decided in federal Court. Federal courts are known to be generally more favorable to insurers than state courts, but the difference for Covid-19 cases is far beyond what any rational person would expect.
For many larger organizations, the insurers have taken the position that they should not deny claims outright. Rather, they are conducting mock investigations with no intent to pay any Covid-19 claims. The benefit of this strategy is that some policyholders commit unintentional errors by missing suit limitations or proof of loss deadlines set forth in the policies.
Policyholders in this situation can and likely should file declaratory judgment actions, not breach of contract actions. First, the insurer, in this situation, may technically not have breached the contract, at least not yet. So, a single declaratory judgment action is appropriate. Second, if there is diversity jurisdiction the insurer will remove the action to federal court where their odds are five to ten times better than if the action remained in state court. If the policyholder filed a declaratory judgment action only, the policyholder should then file a Brillhart Abstention motion. See Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942) (recognizing that federal courts should abstain from exercising jurisdiction over state insurance law cases). In fact, the proliferation of Covid-19 insurance coverage actions presenting similar questions of state law interpretation strongly suggests that federal abstention would be appropriate.
Insurers now claim unless we revisit 80 years of established law, they could suffer defeat. This is not a valid reason to reevaluate legal precedent.
* These statistics are for cases decided in state court. Victory is defined as defeating an insurers’ motion to dismiss or prevailing on summary judgment.
As several companies have learned the hard way over the past few months, many things can result from having a presence on social media — and a lot of them aren’t good for business.
Social media presents necessary but treacherous terrain for companies: Many brands must maintain an active presence to remain relevant and compete in the marketplace, but misuse, or even perceived misuse, presents hazards that can attract U.S. Securities and Exchange Commission investigations and shareholder lawsuits.
A recent lawsuit, filed against Tesla Inc. on March 11, showcases the legal perils that can follow missteps on social media.
In 2018, Tesla founder and CEO Elon Musk made headlines with a series of splashy tweets in which he mentioned plans to take the company private, target goals for Tesla’s upcoming production of electric cars and solar roofs, and his opinion that Tesla’s stock price was too high.
Three years later, the fallout continues, as a stockholder has filed a derivative action claiming that Musk’s tweets caused Tesla’s stock price to plummet and alleging that he and the board of directors breached fiduciary duties owed to the company.
The complaint also claims that Tesla canceled its directors and officers liability insurance policy — and Musk himself is personally indemnifying Tesla’s directors against liability arising from their service on the board.
For companies without billionaire CEOs willing and able to personally indemnify their directors, D&O insurance represents the only financial protection for securities lawsuits.
Derivative Securities Lawsuit Filed Against Tesla’s Directors for Breach of Fiduciary Duties
The events giving rise to the stockholder’s lawsuit go back to 2018, when Musk made a series of controversial tweets.
The stockholder alleges that Tesla uses Musk’s personal Twitter account to announce material information to the public about the company and its products and services, including forward-looking guidance regarding Tesla’s financial metrics and key nonfinancial information such as production forecasts, production achievements and new product releases.
The complaint goes on to allege that Musk tweeted that he was “considering taking Tesla private at$420” with “[f]unding secured.” However, by the close of trading the next day, Tesla’s stock price allegedly dropped because its board of directors issued a press release stating that it was investigating Musk’s tweet but did not confirm that funding had been secured for any going-private transaction.
The stockholder alleges that a few days later, Musk then doubled down on his claims by tweeting that
he was working with The Goldman Sachs Group Inc. and other financial advisers on the proposal to take Tesla private.
Media reports later contradicted Musk’s claims that he had retained financial advisers, which further caused Tesla’s stock price to drop. Two days later, the SEC allegedly subpoenaed Tesla regarding Musk’s tweets, causing the stock price to sink further.
The stockholder further alleges that Musk’s tweets were false and misleading, as neither he nor Tesla had lined up the financing necessary to take the company private. The complaint also claims that Musk’s tweets drew unwanted attention from the SEC, which filed a complaint charging Musk with securities fraud.
Two days later, Musk and Tesla entered into settlements requiring that Tesla implement mandatory procedures regarding the oversight of the company’s social media communications, including Twitter posts by Musk; Musk step down as Tesla’s chairman and be replaced by an independent one; and Musk and Tesla each pay a $20 million penalty.
Musk then allegedly continued to flout the SEC’s authority, tweeting that the $20 million fine was worth it. Despite’s Tesla’s implementation of a policy prohibiting executives from issuing written communications that contain information material to Tesla’s stockholders without prior approval, the stockholder claims that in 2019, Musk returned to Twitter and announced that “Tesla made 0 cars in 2011, but will make around 500k in 2019.”
The complaint alleges that Musk tweeted this information without prior approval, once again incurring the wrath of the SEC, which filed a motion for a show-cause order seeking to hold Musk in contempt for violating the settlement agreement.
This contempt motion allegedly resulted in a revised settlement agreement requiring Tesla to amend its policy and force Musk to get written preapproval before posting any information about Tesla’s production, sales or delivery numbers that the company had not previously published via preapproved written communication.
Yet within three months, Musk tweeted that Tesla would produce 1,000 solar roofs per week by the end of 2019, also allegedly without prior approval. Musk also tweeted that “Tesla stock is too high [in my opinion].” The stockholder alleges that this tweet caused Tesla’s stock price to drop nearly 10% in the following hours, destroying almost $14 billion in Tesla’s market capitalization.
The complaint brings causes of action against both Musk and Tesla’s board of directors for allegedly breaching their fiduciary duties of due care, good faith and loyalty. Specifically, the complaint alleges that Tesla’s board failed to appoint an independent general counsel who would rein in Musk, instead allowing him to install loyalists who failed to implement effective oversight.
The stockholder also claims that Tesla canceled its D&O policy for the 2019-20 year due to high
premiums (caused by Musk’s erratic behavior and the board’s failure to oversee his misconduct) and instead, Musk himself personally indemnifies Tesla’s directors for personal liability arising from their service on Tesla’s board.
While this arrangement may work for Tesla, companies without billionaire CEOs willing to personally indemnify their directors can nonetheless protect themselves from similar stock drop claims with D&O insurance policies.
D&O Policies Cover Stock Drop Lawsuits and Alleged Breaches of Fiduciary Duties
Public company D&O policies cover a wide range of claims brought against directors and officers, either directly to the individuals when the company does not indemnify them or directly to the company when it indemnifies those individuals, as well as securities lawsuits brought directly against a company itself.
Typical insuring agreements cover claims made during the policy period against the directors, officers and company for any wrongful act, normally defined as any actual or alleged act, error, omission, misleading statement, misstatement, neglect or breach of duty allegedly committed or attempted by any of the directors and officers or the company itself.
These D&O provisions cover stock drop derivative actions because shareholders’ allegations that a company’s directors and officers breached their fiduciary duties qualify as covered wrongful acts.
In addition, the definition of covered claims often includes securities claims, which cover derivative suits alleging one or more violations of laws, rules or regulations brought by security holders arising out of the purchase, sale or offer to purchase or sell securities of the insured company.
Side A coverage requires the insurer to pay for loss (including damages, settlements, judgments and defense costs) for which the corporation does not indemnify its directors and officers.
For example, under Delaware law — Tesla is incorporated in Delaware — a corporation cannot
indemnify, or hold harmless, its directors and officers for derivative actions that result in a judgment that they are liable to the corporation.
The reasoning is that a corporation’s indemnification of directors for judgments or settlements in a derivative suit would be circular, as the corporation would be essentially paying itself for injury caused to it by the same directors it was indemnifying. Side A coverage typically applies when a company is insolvent. Otherwise the corporation would indemnify the individual directors or officers.
Side B coverage addresses the situation where the company indemnifies the individual directors or officers. Delaware law also allows corporations to indemnify their directors and officers for expenses, including attorney fees, incurred in the defense against derivative actions, if the director or officer acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation.
Side C coverage provides coverage for the company itself, but for public companies is generally
limited to securities claims.
Securities claims are often defined to include claims alleging violations of any law, rule or regulation, whether statutory or common law, including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities, brought by any person or entity arising out of the purchase or sale of any securities of the insured organization, or a security holder with respect to his or her interest in the securities of such organization, in addition to derivative suits.
The value of Side C coverage is that it covers governmental investigations, and if a lawsuit is filed, defense of the claim. Covered claims include demands for alternative dispute resolution, such as mediation or arbitration; civil, criminal, administrative or regulatory lawsuits and proceedings; and derivative demands, among other things.
D&O policies can also cover investigations of a company’s directors and officers, which often begin before an actual lawsuit is filed and commence with informal requests for information and witness interviews, formal document requests, requests to toll or waive statutes of limitation, target letters, subpoenas, grand jury subpoenas, search warrants, administrative orders, civil investigative demands, or similar documents.
Insurers often try to deny coverage for these kinds of documents, but several decisions have held that they are covered claims sufficient to trigger D&O coverage.
While paying to indemnify Tesla’s board of directors may amount to no more than a drop in the
bucket for Musk, most companies do not have the same luxury of having a free-spending billionaire as CEO willing to personally cover the costs of litigation resulting from missteps on social media.
For example, in recent weeks, major companies such as Delta Air Lines Inc. and The Coca-Cola Co. have found themselves in hot water, and facing boycotts threatened on social media, after making controversial statements about Georgia’s new voting law.
In the current age of political polarization, for companies with an active presence on social media, the question is when, not if, the court of public opinion will eventually turn against them. Companies can prepare for the storm by double- and triple-checking to make sure their D&O policies limit their exposure in the event shareholders file derivative lawsuits against them in the fallout after social media gaffes.
This article was also published in Law360.
 Dave Simpson, Musk, Tesla Face Another Investor Suit Over ‘Erratic’ Tweets, Law360 (Mar. 12, 2021, 11:36 PM), https://www.law360.com/articles/1364501/musk-tesla-face-another-investor-suitover-erratic-tweets.
 V. Stockholder Derivative Compl., Gharrity v. Musk, No. 2021-0199, ¶ 90 (Del. Ch. Mar. 11,
 Id. at ¶¶ 96-97.
 Id. at ¶¶ 11, 116.
 Id. at ¶ 121.
 Id. at ¶ 122.
 Id. at ¶¶ 123-24.
 Id. at ¶ 125.
 Id. at ¶ 134.
 Id. at ¶ 151.
 Id. at ¶¶ 153-54.
 Id. at ¶ 160.
 Id. at ¶¶ 164, 170.
 Id. at ¶¶ 174-76.
 Id. at ¶¶ 184-85.
 Id. at ¶¶ 23, 187, 189.
 Id. at ¶ 198.
 Id. at ¶¶ 203-04.
 Id. at ¶¶ 309-11, 316-19.
 Id. at ¶¶ 212, 215, 243, 245.
 Id. at ¶ 90.
 Del. Code Ann. tit. 8, § 145(b) (West 2020).
 Arnold v. Soc’y for Sav. Bancorp, Inc ., 678 A.2d 533, 540 n.18 (Del. 1996).
 Del. Code Ann. tit. 8, § 145(b) (West 2020).  E.g., MBIA Inc. v. Fed. Ins. Co ., 652 F.3d 152, 159 (2d Cir. 2011); Polychron v. Crum & Forster Ins. Cos ., 916 F.2d 461, 463 (8th Cir. 1990); Minuteman Int’l, Inc. v. Great Am. Ins. Co ., No. 03 C 6067, 2004 WL 603482, at *7 (N.D. Ill. Mar. 22, 2004).
This March marks the unofficial one-year anniversary of the ongoing COVID-19 pandemic, which has caused widespread financial ruin to businesses across the United States. In their hour of greatest need, thousands of these companies turned to their commercial property insurers—only to receive across-the-board coverage denials. Some policyholders filed coverage lawsuits, but by taking advantage of pleading deficiencies, insurers managed to score some early wins, which they used to support their false narrative that property policies do not cover business income losses due to the presence of the virus.
As months passed, more seasoned attorneys joined the mix and began filing better-pleaded complaints, which reversed the trend: courts began denying insurers’ motions to dismiss and granting summary judgment in favor of policyholders. Contrary to insurers’ claims, the wars over insurance coverage for COVID-19 claims haven’t ended—they’ve only just begun. In 2021, policyholders will continue to see more victories in this hotly contested area of insurance law.
Commercial Property Policies Cover Business Income Loss Caused by “Physical Loss or Damage” to the Insured Premises.
Commercial property insurance policies typically provide coverage for “all risks” of “physical loss or damage” to the insured property. Critically for policyholders, commercial property policies also cover loss of business income. However, business income provisions typically require that “physical loss or damage” must cause the loss of business income. COVID-19 coverage disputes thus often present the threshold issue of whether the virus causes “physical loss or damage” to insured property.
Early COVID-19 Policyholders Failed to Properly Plead “Physical Loss or Damage” to Their Properties and Their Insurers Claimed Premature Victory.
When the pandemic began in earnest a year ago, many businesses felt the squeeze as government closure orders cut off their revenues. When these companies (many of them restaurants, hair salons, fitness centers, and other retail businesses) filed claims, their insurers told them they had no coverage. Plaintiffs’ law firms saw this as an opportunity to sign up COVID-19 policyholders and rushed to courthouses across the country to file lawsuits, often without regard to policy language.
In the early going, many policyholders failed to adequately plead “physical loss or damage” to their properties by neglecting to allege that the virus infected or contaminated their property. In these cases, insurers typically responded by moving to dismiss policyholders’ complaints on the ground that they failed to state a claim for which relief could be granted, under Federal Rule of Civil Procedure 12 or a state-court analogue. Specifically, these motions argued that the policyholders failed to plausibly plead “physical loss or damage” to their properties because they did not allege that the virus infected or contaminated their premises.
Predictable results followed, and insurers racked up a string of early wins. In the first reported COVID-19 coverage decision, Gavrilides Management Co. et al. v. Michigan Ins. Co., a Michigan state court granted the insurer’s motion for summary judgment. However, the policyholder (a restaurant) did not allege that its insured property had suffered “physical loss or damage” due to the presence of the virus. To make matters worse, the policyholder specifically stated that “at no time” did the virus enter either of its restaurant locations. As explained above, business income coverage provisions require “physical loss or damage” to cause the suspension of the policyholder’s operations. In this high-profile case, the policyholder in Gavrilides thus pled itself out of coverage.
Many other policyholders’ early pleadings suffered from similar defects, resulting in similar outcomes. As the losses mounted, insurers began to claim victory, putting out a false narrative that courts across the country had reached a “consensus” that commercial property policies do not cover COVID-19 losses. The insurance industry also began publishing think pieces pushing a similar story. The purpose of this narrative was clear: to discourage businesses from filing claims with their insurers. After all, insurers win 100% of the coverage lawsuits that policyholders do not file. Fortunately, more experienced attorneys with better-pled complaints were waiting in the wings to mount a comeback in the second half of 2020.
Better-Pled Policyholder Complaints Defeat Insurers’ Motions to Dismiss.
As the pandemic continued to rage, more sophisticated policyholders began to enter the fray. These subsequent litigants corrected the shortcomings of their predecessors by filing better-pleaded claims, including specific allegations that the virus contaminated and/or infected their properties. These better-pled complaints led to a corresponding rise in favorable outcomes, and policyholders began defeating insurers’ motions to dismiss. In addition to defeating insurer motions to dismiss, some policyholders also began to win summary judgment for COVID-19 claims outright.
Courts Interpret “Physical Loss” to Provide Coverage When Policyholders Can No Longer Use Their Property for Its Intended Purpose.
In addition to defeating insurer motions to dismiss, policyholders also began winning on the merits regarding the meaning of “physical loss or damage” in commercial property policies. Since the pandemic began, insurers have predictably taken the position that “physical loss or damage” only covers physical damage, meaning the policy language requires some form of tangible alteration of insured property. But the insurers’ reading of the policy language fails to give separate meaning to “physical loss,” impermissibly rendering the term meaningless.
Several decisions have now debunked this insurer argument, holding that the insurers’ decision to include both terms in the coverage provision indicates that “physical loss” must mean something different than “physical damage”—and property policies cover business income losses when insured property can no longer be used for its intended purpose. While many courts have held that this policy language is ambiguous (as it has more than one reasonable interpretation and therefore must be construed in policyholders’ favor), others have held that the policyholders’ view is the only reasonable interpretation. These decisions follow the longstanding rule that courts must interpret insurance policies in a way that gives all provisions meaning and renders none meaningless. Policyholders thus won several key victories in the second half of 2020, and this trend has continued into the early months of 2021.
Stay Tuned for More Policyholder-Friendly Decisions in 2021
In the early stages of COVID-19 coverage litigation, insurers capitalized on the pleading mistakes of unsophisticated businesses and inexperienced lawyers to score a series of easy wins and claim victory. However, as more sophisticated businesses with more experienced attorneys joined the fold and began filing better-pled complaints, the trend reversed: policyholders began defeating insurer motions to dismiss and winning summary judgment outright. Contrary to the insurers’ narrative, many courts are now correctly interpreting “physical loss or damage” in policyholders’ favor. Stay tuned as these cases progress to the appellate level in 2021. The COVID-19 coverage wars aren’t over—they’ve only just begun.
This article has been published in PLI Chronicle: Insights and Perspectives for the Legal Community
It may have taken 10 years and more than a million workers to build the 120-mile-long Suez Canal,1 but as the world recently learned it only takes 1 ship to block it. After nearly a week with the forced shut down of this critical artery to maritime commerce, hundreds of ships intending to traverse the Suez Canal lay waiting with cargo, some incurring considerable late fees for undelivered cargo.2 Still others abandoned this traditional short cut and made the long journey around the tip of Africa, adding weeks to their original journeys and incurring up to $26,000 a day in added fuel costs.3 The effect of this crisis is broad and deep, choking off the supply of fundamental items like microchips and oil and disrupting any company subscribing to the “just-in-time” inventory model.4 In assessing the potential fall out to supply chains and product cycles due to delayed cargo deliveries, companies should check to see if they have insurance coverage for losses due to the Suez Canal blockage. They might.
Marine Cargo Insurance Could Cover Cargo-Related Losses Due to the Suez Canal Blockage
One of the first places a company should look for insurance coverage for cargo-related losses due to the Suez Canal blockage is its Marine Cargo Insurance policies. The modern version of these policies dates back to the 1700s when Lloyd’s of London insured the shipping of myriad commercial ventures against losses.5 Today, there are various sub-lines of marine cargo insurance applicable to different types of perils, including so-called P&I insurance which covers third party liability for property damage and bodily injury. More generally, policies come in two flavors: limited peril policies following the traditional Lloyd’s model that cover losses due to the “seas, fires, assailing thieves, jettison, barratry, and other like perils, losses and misfortunes” and the increasingly common “all-risk” policies that, as their name suggests, cover “all fortuitous, physical damage or loss due to any external cause.”6 These policies call to mind two coverages that could apply to the Suez Canal blockage.
First, such policies could have endorsements extending coverage for lost sales resulting from goods that were damaged due to shipping delays. One common endorsement covers “loss in sales caused by a delay in the arrival of the goods insured . . . provided the delay is a direct result of a Free of Particular Average peril.” In marine insurance speak, this means that coverage will extend to loss of sales caused by the partial loss of/damage to cargo caused by a peril covered by the policy. One such peril applicable to the Suez Canal blockage is “stranding,” i.e. when an insured ship runs aground. Coverage of this type could apply in the Suez Canal blockage context to perishable cargo or to cargo that was damaged due to the freeing of the ship.
Second, some policies have a “financial loss clause,” which covers losses due to shipping delay without the cargo itself having been damaged. Typically, these clauses require that the ship operator be responsible in some way for the delay and that the delay be due to one of the enumerated perils covered by the policy. Depending on how the facts develop as to why the Ever Given became stranded in the Suez Canal, such as if the crew had been negligent in operating the ship, such “financial loss clauses” may prove an avenue for coverage.
Contractual Indemnity Provisions Might Apply to Cargo-Related Losses Due to the Suez Canal Blockage
In addition to a company’s own insurance, it is possible that various agreements with suppliers or shippers might provide indemnity opportunities to recoup losses due to the Suez Canal blockage. And depending on the nature of those agreements, the property insurance issued to the shipper of the cargo or the liability insurance issued to the owners of the ship blocking the Suez Canal, the latter of which is estimated to be over $3.1 billion,7 may also provide coverage.
Companies should check their policies and contractual agreements as soon as possible. Many policies contain requirements that loss be identified and claimed within a certain period, often a matter of days. Companies would do well to confer with insurance counsel to make sure they understand whether they should submit an insurance claim for their losses.
 Rick Gladstone and Megan Specia, What to Know About the Suez Canal and the Cargo Ship That Was Stuck There, nytimes.com (March 25, 2021), available at https://www.nytimes.com/2021/03/25/world/middleeast/suez-canal-container-ship.html (last accessed March 29, 2021).
 Peter S. Goodman and Stanley Reed, With Suez Canal Blocked, Shippers Begin End Run Around a Trade Artery, nytimes.com (March 26, 2021), available at https://www.nytimes.com/2021/03/26/business/suez-canal-blocked-ship.html?action=click&module=Top%20Stories&pgtype=Homepage (last accessed March 29, 2021).
 Edward Segal, Blocked Suez Canal Is Latest Reminder Why Companies Need Crisis Plans, Forbes.com (March 27, 2021), available at https://www.forbes.com/sites/edwardsegal/2021/03/27/blocked-suez-canal-is-latest-reminder-why-companies-need-crisis-plans/?sh=50c0339a40ac (last accessed March 29, 2021).
 Gregory DL Morris, A Brief History of Marine Insurance (March 6, 2018), available at https://riskandinsurance.com/brief-history-marine-insurance/ (last accessed March 29, 2021).
 4 James K. Carroll, Law and Prac. of Ins. Coverage Litig. § 53:19 (2020 Update).
 Leslie Scism and Benoit Faucon, Suez Canal Insurance Claims Loom as Ever Given Blocks Shipping, wsj.com (March 27, 2021), available at https://www.wsj.com/articles/suez-canal-insurance-claims-loom-as-ever-given-blocks-shipping-11616837401 (last accessed March 29, 2021).
One of the Federal Government’s main responses to the economic devastation wrought by the COVID-19 pandemic, the Paycheck Protection Program (“PPP Program” or the “Program”), has provided billions of dollars to companies in need in the form of forgivable loans (“PPP Loans”). However, the Program’s swift passage in the early days of the pandemic produced issues in implementation, with the Small Business Association (“SBA”) and various other government entities issuing contradictory guidance on PPP Program eligibility. This uncertainty has been magnified by the SBA’s stated intention to audit all PPP loans above $2 million, leaving many companies worried that they will be forced to repay their PPP Loans—or worse. To help guard against this, the insurance industry has developed a new product: PPP Loan Insurance. But with millions of dollars at stake, potential policyholders should evaluate PPP Loan Insurance Policies before they bind.
Understand the Coverage Offered by PPP Loan Insurance Policies
PPP Loan Insurance is a relatively niche product that has yet to receive standardized language across the insurance industry. Thus far, most policies focus on insuring repayment of the PPP Loan due to the SBA’s determination that the policyholder was ineligible for the PPP Loan due to errors or misstatements in the initial certifications made by a policyholder. These “necessity” and “size” certifications refer back to the policyholder’s initial PPP Loan application which contained questions regarding the purpose of the loan, the monthly payroll for the company, and the number of “jobs” at the company.
PPP Loan Insurance Policies are typically “claims made and reported” policies, with the policy term set at 6 years to reflect the 6-year window afforded the SBA to review and challenge the issuance of a PPP Loan.
Pay Close Attention to Certain Exclusions in PPP Loan Insurance Policies
As is true with all types of coverage, there are a number of potential exclusions that could impact how useful a PPP Loan Insurance policy will be for a policyholder’s particular situation. The following are two of the most common.
First, many PPP Loan Insurance Policies have exclusions for fraud and/or intentional misconduct. While not in-and-of itself concerning, there are meaningful variations on the language for this exclusion and a policyholder should ensure it has the most advantageous version for its policy. For example, any fraud exclusion should include a qualifier that the allegations have been “finally adjudicated” or “finally determined by a trier of fact.” This avoids the situation where mere allegations of fraud defeat coverage, instead requiring that the allegations be proven true in a court of competent jurisdiction before coverage is excluded under the policy. Given the potential that the SBA or another related government entity could assert fraud when seeking PPP Program loan repayment, this is an especially important distinction.
Second, some PPP Loan Insurance Policies have exclusions for claims alleging violations of the False Claims Act (“FCA”). Generally, the FCA attaches liability to any individual or organization that knowingly presents or conspires to present a false or fraudulent claim for payment to the government or uses a false record or statement that is material to such claim. Such an exclusion is especially problematic in the PPP Loan Insurance context because the FCA appears to be one of the most likely avenues for the federal government to pursue a PPP Program loan borrower. And it’s not just the Federal Government who could cause trouble for a policyholder; the FCA permits third parties, so-called qui tam realtors, to bring claims and receive a substantial bounty should those claims succeed. This, along with the potential for treble damages, greatly expands the scope of potential liability. Policyholders should attempt to remove FCA exclusions from PPP Loan Insurance Policies.
Be Aware of Potential Coverage Gaps and Problematic Conditions in PPP Loan Insurance Policies
Despite their seemingly straightforward purpose, PPP Loan Insurance Policies can harbor a number of coverage gaps and problematic conditions. Below are three such areas a policyholder should scrutinize when considering a PPP Loan Insurance policy.
First, although PPP Loan Insurance Policies cover PPP Loan repayment, they typically do not cover repayment for all reasons. As outlined above, coverage is typically afforded for repayment arising from an SBA determination that a policyholder was not eligible for the PPP Loan at the time it submitted its PPP Loan application. But the SBA can require repayment for other reasons, such as if it determines that the policyholder has not used the PPP Loan as required by the rules of the Program, e.g. a sufficient percentage of the PPP Loan was used for payroll. Policyholders should consider whether they want to add coverage for potential allegations that they have misused PPP Loans.
Second, the limits of liability for PPP Loan Insurance Policies are usually set according to the principal amount of the PPP Loan. This mirrors the stated purpose of the insurance to provide coverage for repayment of the PPP loan. However, in practice this may not be enough. Policyholders should be aware that the SBA has stated it will charge interest on the PPP Loan at 1% per annum if repayment is ultimately sought. Furthermore, there could also be additional penalties and other costs depending on what the SBA or other related government entity imposes in addition to repayment. Policyholders should consider insisting any limit of liability takes these potential costs into account. Otherwise, even if repayment of the PPP Loan is covered by the policy, it could still result in hundreds of thousands of dollars of additional cost to the policyholder.
Third, like many types of policies, PPP Loan Insurance Policies often contain a provision requiring policyholders obtain the consent of the insurer before settling claims. However, this provision could create significant conflict given the limited scope of PPP Loan Insurance Policies. As these policies exist to safeguard against the cost of repayment of the PPP Loan, their utility is greatly reduced if an insurer can force a policyholder to fight the SBA (or other government entity) on whether repayment is proper. Such a fight could incur significant legal costs, potentially eroding policy limits and embroiling the policyholder in litigation for months or years. Policyholders should insist that any settlement provision involving insurer consent contain language that consent “not be unreasonably withheld” to ensure the policyholder’s interests are protected. With the continued evolution of the PPP Program, including newly approved funding for additional PPP Loans, PPP Loan Insurance has the capability to address a critical vulnerability for companies still struggling through the COVID-19 pandemic. However, understanding PPP Loan Insurance and its permutations is essential. Experienced coverage counsel are best able to assist a policyholder in evaluating the risks and benefits of PPP Loan Insurance Policies.
This article was also published in Law360.
 Lauren Hirsch, Small business loans above $2 million will get full audit to make sure they’re valid, Mnuchin says, CNBC.com (April 28, 2020), available at https://www.cnbc.com/2020/04/28/small-business-loans-above-2-million-will-get-full-audit-to-make-sure-theyre-valid-mnuchin-says.html (last accessed January 5, 2021)
 31 U.S.C. §§ 3729 et seq.
 31 U.S.C. §§ 3729(a)(1)(A, B, C).
E.g.,Janene Marasciullo, For the Unwary, Paycheck Protection Program May Create False Claims Act Liability, Nat’l L. Rev. (June 1, 2020), available at https://www.natlawreview.com/article/unwary-paycheck-protection-program-may-create-false-claims-act-liability (last accessed January 5, 2021); Holly Drumheller Butler, How The Gov’t Is Cracking Down On PPP Fraud, Law360 (June 9, 2020), available at https://www.law360.com/articles/1281065/how-the-gov-t-is-cracking-down-on-ppp-fraud?copied=1 (last accessed January 5, 2021).
Paycheck Protection Program, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program#:~:text=The%20Paycheck%20Protection%20Program%20is,an%20interest%20rate%20of%201%25. (last accessed January 5, 2021)
The District Court of Clark County, Nevada, recently handed down a decision with potentially game-changing effects for policyholders seeking coverage for COVID-19 losses.
Like many other companies, the policyholder there seeks insurance coverage under a commercial property policy for its business interruption losses due to the ongoing pandemic. What sets apart the JGB Vegas Retail Lessee LLC v. Starr Surplus Lines Insurance Co. decision is the court’s disregard of a pollution exclusion that specifically includes the word “virus.”
Even though the insurer listed “virus” as an excluded irritant or contaminant, the court held that the pollution exclusion did not apply, as the intent behind the exclusion was to remove coverage for “traditional environmental and industrial pollution and contamination.”
The decision has major potential consequences for policyholders whose policies have exclusions where insurers managed to similarly slip the word “virus” into places where policyholders wouldn’t otherwise expect to find it.
The presence of coronavirus constitutes a risk of physical loss or damage to covered property.
Commercial policies cover all risks of physical loss or damage to covered property, including business interruption losses and losses caused by closures due to civil or military authority orders. Insurance carriers contend that the presence of coronavirus may not constitute a risk of physical loss or damage to covered property.
However, several courts across the country have held that the presence of the virus itself constitutes a risk of physical loss or damage to covered property sufficient to trigger coverage under commercial property policies.
The policy in JGB Vegas Retail has a pollution and contamination exclusion that specifically lists “virus” as an excluded irritant or contaminant.
A different issue sets apart the Nevada decision: the court’s interpretation of a “pollution and contamination exclusion.”
Many commercial property policies contain exclusions that bar coverage for “the actual or threatened release, discharge, dispersal, migration, or seepage of ‘pollutants’ at an Insured Location.” The policy at issue in JGB Vegas Retail defines “pollutants or contaminants” as:
any solid, liquid, gaseous, or thermal irritant or CONTAMINANT including, but not limited to, smoke, vapor, soot, fumes, acids, alkalis, chemicals, virus, waste (waste includes materials to be recycled, reconditioned, or reclaimed) or hazardous substances.
In COVID-19 cases, insurance carriers often contend that coronavirus is an excluded pollutant, because it is as an irritant or contaminant.
What makes JGB Vegas Retail different is the fact that the pollution exclusion specifically lists “virus” as an excluded pollutant. This is a common insurer tactic: slipping in words where one would not otherwise expect to find them, then ambushing policyholders when they make coverage claims.
When interpreting insurance policies, the plain meaning often controls, so in the insurer’s view, the fact that the pollution exclusion includes the magic word “virus” should end the debate — no coverage for coronavirus-related losses.
The pollution exclusion does not apply because coronavirus is not a traditional environmental or industrial pollutant, despite the presence of the word “virus.”
In the JGB Vegas Retail decision, the court explored the intent behind the pollution exclusion and held that it did not apply. Other courts have held that similarly worded pollution exclusions apply only to instances of traditional environmental and industrial pollution and contamination.
Because the enumerated examples of irritants and contaminants often include only nonliving, inorganic matter, living, organic matter such as bacteria and viruses does not constitute excluded pollutants.
In addition, the court held that because the terms “irritant” and “contaminant” are virtually boundless, interpreting pollution exclusions as broadly as insurers suggest would render the coverage provided by virtually all policies meaningless, for “there is no substance or chemical in existence that would not irritate or damage some person or property.”
The court in JGB Vegas Retail reached the proper conclusion because of the lopsided and unfair nature of how insurance policies are drafted. Far from being negotiated in an evenhanded fashion, insurance policies are contracts of adhesion that are unilaterally drafted by the insurers and offered on a “take it or leave it” basis.
The JGB Vegas Retail decision has tremendous impacts for policyholders with pollution and virus exclusions.
The court’s decision to disregard the word “virus” in the pollution exclusion and refuse to reward the insurer’s chicanery has several impacts, some of which reach far beyond pollution policies.
First, JGB Vegas Retail joins a growing body of law holding that pollution exclusions do not apply to nontraditional irritants or contaminants such as viruses and bacteria.
Second, while the case involves a commercial property policy, many commercial general liability policies have similar or identical pollution exclusions, so the decision also has positive effects for policyholders with other types of liability policies.
Third and finally, JGB Vegas Retail stands as precedent for other courts to upend similar exclusions where insurers managed to slide the word “virus” in places where policyholders would not expect to find it.
This article was also published in Law360.
 JGB Vegas Retail Lessee, LLC v. Starr Surplus Lines Ins. Co., No. A-20-816628-B, at 3 (Nev. Dist. Ct. Nov. 30, 2020).
 Id. at 5.
 See, e.g., Blue Springs Dental Care, LLC v. Owners Ins. Co., No. 20-cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020); Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, 2020 WL 5806576 (N.J. Super. L. Aug. 13, 2020); Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-cv-03127, 2020 WL 4692385, at *2 (W.D. Mo. Aug. 12, 2020).
 JGB Vegas Retail, No. A-20-816628-B, at 4.
 Id. at 5.
 See, e.g., Keggi v. Northbrook Prop. & Cas. Ins. Co., 13 P.3d 785, 789-90 (Ariz. Ct. App. 2000) (holding that a pollution exclusion did not apply to injuries suffered from drinking bacteria-contaminated water and noting that the exclusion “appears to describe events, places, and activities normally associated with traditional environmental pollution claims”); Century Sur. Co. v. Casino W., Inc., 329 P.3d 614, 616-18 (Nev. 2014) (holding that a pollution exclusion did not apply to injuries caused by carbon monoxide and noting the “significant amount of authority” interpreting the exclusion as only applying to traditional environmental pollution); Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 388 (N.Y. 2003) (holding that a pollution exclusion did not apply to injuries from the inhalation of paint or solvent fumes and noting the “environmental implications” of the exclusion).
 Keggi, 13 P.3d at 789-90.
 Id. at 789; see also Casino W., 329 P.3d at 617 (“Taken at face value, the policy’s definition of a pollutant is broad enough that it could be read to include items such as soap, shampoo, rubbing alcohol, and bleach insofar as these items are capable of reasonably being classified as contaminants or irritants… Such results would be absurd and contrary to any reasonable policyholder’s expectations.”). Pollution exclusions (like all policy exclusions) are interpreted narrowly and against the insurer. Id. at 616. By contrast, coverage provisions are interpreted broadly, so environmental policies (which often cover “pollutants,” including “irritants” and “contaminants,” defined using similar or identical language) should cover losses caused by viruses that cause “direct physical loss or damage” to covered property. See Jemb Realty Corp. v. Greenwich Ins. Co., No. 1:20-cv-08537, ¶ 47 (S.D.N.Y. originally filed Oct. 13, 2020).
 See, e.g., McFarland v. Liberty Ins. Corp., 434 P.3d 215, 219 (Idaho 2019) (“Because insurance policies are adhesion contracts not typically subject to negotiation between the parties, ‘all ambiguities in an insurance policy are to be resolved against the insurer…”).
 Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668, 672 (Nev. 2011) (“Because the insurer is the one to draft the policy, an ambiguity in that policy will be interpreted against the insurer.”).
It is not too often that the sport of golf and insurance intersect in an outrageous fashion. In Old White Charities Inc. v. Bankers Insurance, a charity hosted a golf tournament and sponsored a hole-in-one competition. If a golfer hit a hole-in-one, each spectator in attendance would receive $100 in cash; if a second golfer hit a hole-in-one, each fan would receive $500. To guard against the possibility that golfers would hit holes-in-one, the charity hired a broker to place an insurance policy covering the competition.
The broker reviewed and filled out the application, then sent it to the charity to sign. The application included a warranty requiring a minimum distance of 150 yards for the hole-in-one competition. The broker did not strike out the minimum-distance requirement, but instead attached an addendum stating: The pins (as always in a PGA tour event) will be set in a new location each morning of the Greenbrier Classic by the PGA. The insured has no idea nor will have any influence as to where the pins will be set.
The broker’s representative testified that he attached the addendum to negate or override the minimum-distance requirement. During the competition, two golfers hit holes-in-one from 137 yards out. The charity filed a claim for coverage under its policy, but the insurer denied coverage on the basis that the golfers hit the holes-in-one from a distance shorter than the minimum required.
The Coverage Case
The insurer then filed a declaratory action against the charity, seeking a declaration that its policy did not cover the two holes-in-one because they came from less than 150 yards. The U.S. District Court for the Southern District of West Virginia ruled in the insurer’s favor, holding that the policy did not cover the two holes-in-one because they came from a distance of less than 150 yards.
The Broker Negligence Case
The charity then filed a claim against the broker for negligently failing to procure insurance covering the hole-in-one competition. Because one of the charity’s representatives read and signed the application (including the 150-yard minimum-distance requirement), the district court held that the broker did not owe a duty to “secure an insurance policy outside the bounds of the application language.”
In an unpublished opinion (issued without oral argument), the Fourth Circuit affirmed the district court’s summary judgment in favor of the broker.
The Fourth Circuit’s holding should give policyholders pause for several reasons. The decision resolved a disputed, genuine issue of material fact in favor of the broker, on a motion for summary judgement. When ruling on a motion for summary judgment, a court must not “weigh the evidence and determine the truth of the matter,” nor make credibility determinations.
Instead, the court is only authorized to determine whether there are genuine issues of material fact in dispute. If there are, the jury should decide them – not the court. A court improperly weighs the evidence by failing to credit evidence that contradicts some of its key factual conclusions.
Under West Virginia law, a broker has a duty to obtain the coverage requested by its client or inform the client of its inability to do so. The broker negligence case thus presented the question of what coverage the charity requested from the broker. In its briefing in the negligence case, the broker claimed that the charity agreed to the 150-yard minimum distance.
However, in sworn pleadings and discovery in the earlier coverage case, the broker’s representatives said the exact opposite, stating that the charity did not agree to a minimum distance for the competition.
In its briefing in the negligence case, the broker also claimed that the charity never asked it to obtain a policy without a minimum yardage requirement. However, in the coverage case, the broker representative who filled out the application testified that he spoke with one of the insurer’s representatives and told him about the charity’s “inability to state a yardage requirement because of the PGA rules that related to that.” The broker’s claims in the negligence case thus belied its sworn testimony in the coverage case.
In addition, the charity’s leader testified that he met with the broker’s representatives well before the application was completed and explained that the charity could not agree to a minimum distance, because the PGA Tour controlled where the holes would be placed each day of the competition.
The testimony of the broker’s representatives also confirmed that this meeting took place. The charity’s coverage needs were also spelled out in the addendum, which stated that the charity could not agree to a minimum distance because it did not control where the pins were placed on each day of the tournament – the PGA Tour did.
The district court’s decision thus seized on one fact (that one charity representative read and signed the application) while ignoring several others (the prior meeting between the charity’s leader and the broker; the broker’s own statements in its pleadings, sworn testimony and discovery responses in the coverage case; and the language of the addendum itself, which the broker prepared). The decision thus decided a contested, genuine issue of material fact in favor of the broker while failing to credit contradictory evidence.
In addition, the Fourth Circuit found that “the addendum did not contradict or otherwise negate the distance warranty.” In the coverage case, the broker’s representatives testified that they drafted the addendum and attached it to the application to negate the minimum distance warranty. The Fourth Circuit’s decision thus reveals the error of the broker’s approach, but penalizes the charity for the broker’s mistakes.
Finally, the decision fails to account for the practical realities of the insurance-placement process. The charity’s representative who signed the application was not an attorney or insurance broker. This is the exact reason why organizations hire brokers: for their expertise in placing the coverage they need. The Fourth Circuit’s decision thus blames the client for its broker’s errors.
Putting aside the merits of the decision, there are several key takeaways that policyholders can take from this decision to prepare for the future. One takeaway is not to rely on your broker to place the correct coverage. If a broker makes a mistake in placing the coverage, that mistake may be imputed to the policyholder, even if the policyholder was relying on the broker’s expertise.
A second, obvious takeaway is to read your policy applications carefully. Statements made in policy applications have become one of the insurance industry’s favorite ways to deny coverage. But it goes beyond that: the Old White decision illustrates that a policyholder cannot rely on its broker’s expertise, because if the broker makes a mistake, the courts may hold the policyholder responsible for that error.
Consider hiring a coverage attorney to review all your proposed insurance policies and applications. If the insurer slips unfavorable language into your policy application, you may find yourself without coverage and without recourse against your broker, even if you explained in your application what coverage you needed and that you could not agree to certain conditions. When it comes to placing insurance, you’re on your own.
 Old White Charities, Inc. v. Bankers Ins. LLC , No. 18-1914 (4th Cir. Jan. 21, 2020).
 Pl.’s Mem. in Supp. of Mot. for Partial Summ. J. on Liab., Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375, at 6 (S.D. W. Va. Feb. 26, 2018), ECF No. 44 (“Q. And did — we’re going to get into some of the application, but did you complete the application? A. I did. Q. And it was your application, and then you sent it to Old White Charities to execute; is that right? A. Correct.”).
 Id. at 6.
 Id. at 6-7.
 Id. at 7 (“I did not make a change, but I attached a narrative that made it clear that that would not be a part of the consideration.”).
 The two golfers were Justin Thomas and George McNeil. Br. of Appellee, Old White Charities, Inc. v. Bankers Ins., LLC, No. 18-1914, at 9 n.10 (4th Cir. Mar. 6, 2019), ECF No. 49.
 Pl.’s Mem. in Supp. of Mot. for Partial Summ. J. on Liab., Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375, at 11-12 (S.D. W. Va. Feb. 26, 2018), ECF No. 44.
 Mem. Op. & Order, Talbot 2002 Underwriting Capital Ltd. v. Old White Charities, Inc., No. 5:15-cv-12542, at 9 (S.D. W. Va. Jan. 6, 2017), ECF No. 246.
 Compl., Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375 (S.D. W. Va. Feb. 24, 2017), ECF No. 1.
 Mem. Op. & Order, Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375, at 12-13 (S.D. W. Va. June 27, 2018), ECF No. 165.
 Op., Old White Charities, Inc. v. Bankers Ins., LLC, No. 18-1914, at 4 (4th Cir. Jan. 21, 2020), ECF No. 56.
 Mem. Op. & Order, Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375, at 6-7 (S.D. W. Va. June 27, 2018), ECF No. 165 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)).
 Fed. R. Civ. P. 56(a) (“The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”).
 The broker requested a jury trial. Compl., Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375 (S.D. W. Va. Feb. 24, 2017), ECF No. 1.
 Variety Stores, Inc. v. Wal-Mart Stores, Inc. , 888 F.3d 651, 659 (4th Cir. 2018).
 Wilson Works, Inc. v. Great Am. Ins. Grp. , No. 1:11-CV-85, 2012 WL 12960778, at *2 (N.D. W. Va. June 28, 2012).
 Bankers Ins., LLC’s Resp. to Old White Charities, Inc.’s Mot. for Partial Summ. J. on Liab., Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375, at 7 (S.D. W. Va. Mar. 12, 2018), ECF No. 50 (“Old White’s negligence claims fail because the undisputed evidence shows that Old White agreed to the 150-yard minimum.”).
 Def. Bankers Ins. LLC’s Answer & Cross-cls., Talbot 2002 Underwriting Capital Ltd. v. Old White Charities, Inc., No. 5:15-cv-12542, p. 14 ¶ 16 (S.D. W. Va. Nov. 17, 2015), ECF No. 120-2 (“[N]either Bankers nor Old White agreed to the alleged minimum distance requirements […]”).
 Br. of Appellee, Old White Charities, Inc. v. Bankers Ins., LLC, No. 18-1914, at 22
(S.D. W. Va. Mar. 6, 2019), ECF No. 49 (“Old White never requested Bankers to obtain a policy without a minimum yardage requirement.”).
 Dep. of Gene Hayes, No. 5:17-cv-01375, at 79:20–25 (S.D. W. Va. Feb. 26, 2018), ECF No. 43-6 (Q. Did you advise Mike Connatser at All Risks that the narrative was intended to override the distance requirement? A. We talked about the inability for us to state a yardage requirement because of the PGA rules that related to that.”).
 Pl.’s Mem. in Supp. of Mot. for Partial Summ. J. on Liability, Old White Charities, Inc. v. Bankers Ins., LLC, No. 5:17-cv-01375, at 5 (S.D. W. Va. Feb. 26, 2018), ECF No. 44 (“I’ve said repeatedly in the PGA, the PGA controls every bit of that. That’s why I said right off the get-go, we can’t stipulate yardage because we don’t know the yardage.”).
 Id. at 4.
 Id. at 6-7.
 Op., Old White Charities, Inc. v. Bankers Ins., LLC, No. 18-1914, at 5 (4th Cir. Jan. 21, 2020), ECF No. 56.
 Def. Bankers Ins. LLC’s Answer & Cross-cls., Talbot 2002 Underwriting Capital Ltd. v. Old White Charities, Inc., No. 5:15-cv-12542, p. 14 ¶ 16 (S.D. W. Va. Nov. 17, 2015), ECF No. 43 (“Neither Bankers nor Old White agreed to the alleged minimum distance requirements […]”).
 Reply Br. of Appellant, Old White Charities, Inc. v. Bankers Ins., LLC, No. 18-1914, at 5 (4th Cir. Mar. 20, 2019).