BIPA Claim Coverage Denials Lack Merit

The collection of biometric data is at issue in hundreds of class action lawsuits and insurance coverage disputes are finding coverage

Recently in American Family Mutual Insurance Co., SI, v. Investment Co., an insurer filed an action seeking a declaration that it does not have to defend its insured against an underlying class action brought under Illinois’s Biometric Information Privacy Act.[1]

This lawsuit joins a growing trend of similar actions brought by insurers seeking to escape from their contractual obligations and abandon their insureds in their hour of greatest need.[2]

In some cases, the insurer agrees to defend under a reservation of rights, meaning that the insurer will provide a temporary defense, while actively working behind the scenes to shirk or eliminate its coverage duties.[3] In others, the insurer denies coverage outright, then files a declaratory judgment action, forcing its insured to fight a war on two fronts: the defense against the BIPA class action and the coverage action against its insurer.[4]

The purpose of these lawsuits is clear: Put the insureds on the defensive, force them to incur attorney fees and intimidate them into dropping valid claims for BIPA coverage.

This article will (1) provide a brief summary of BIPA, as well as the kinds of underlying BIPA claims for which insureds are seeking personal and advertising injury coverage under liability policies; (2) explain how liability policies provide personal and advertising injury coverage for many BIPA claims; (3) refute the insurers’ arguments for denying coverage; and (4) provide recommendations for insureds facing these insurer lawsuits.

BIPA governs the collection, use, and dissemination of biometric data and imposes severe punishments for violations.

The Biometric Information Privacy Act is an Illinois statute regulating the collection, use and disclosure of biometric data, including fingerprints, retina and iris scans, voiceprints, and scans of hand and face geometry.[5] As a general proposition, BIPA prohibits private entities from disclosing a person’s biometric information without first obtaining his or her consent.[6]

Recently, there have been a series of BIPA class actions filed by employees alleging that their employers recorded their fingerprints as a method of keeping track of their time (i.e., when they clocked in or out of their shifts) before disclosing their biometric data to third parties, in violation of BIPA.[7]

For each negligent BIPA violation, claimants seek the greater of $1,000 or actual damages; for each intentional or reckless violation, claimants seek the greater of $5,000 or actual damages.[8] These potential damages can add up quickly. Class actions brought under BIPA can present tremendous potential liability and attract aggressive plaintiff attorneys.

Fortunately for corporate policyholders, most liability policies provide personal and advertising injury coverage for the existential threats presented by these kinds of claims.

General liability policies cover allegations of personal and advertising injury, including publication of material that violates a person’s right of privacy.

Many general liability insurance policies provide coverage for claims alleging personal and advertising injury, defined to include “oral or written publication, in any manner, of material that violates a person’s right of privacy.”[9] This is a standard-issue coverage provision.[10] These policies require the insurer to both defend provide defense counsel or reimburse defense invoices and indemnify the insured (pay for any resulting settlements or judgments).[11]

As discussed in more detail in the next section, the West Bend Mutual Insurance Company v. Krishna Schaumburg Tan Inc. case decided earlier this year held that this standard-form personal and advertising injury provision covers BIPA claims alleging disclosure of biometric data to one or more third parties.[12] Nonetheless, insurers facing claims for coverage for BIPA claims have resorted to a variety of tactics to try and wriggle out of their coverage obligations.

Consider coverage issues for BIPA claims under general liability policies.

Despite the holding in Krishna, insurance carriers continue to repeat coverage arguments already decided in favor of policyholders. In addition, some insurers have gone back to the drawing board and come up with additional reasons for denying coverage.

For example, in McEssy, the insurer asserted four main grounds for denying coverage: (1) the BIPA class action does not allege personal and advertising injury; (2) an exclusion for distribution of material in violation of statutes bars coverage; (3) an exclusion for employment-related practices precludes coverage; and (4) an exclusion for access or disclosure of confidential or personal information applies to prevent recovery.[13]

In Krishna, the insurer tried making the first two arguments, but lost. This section explains why the insurers’ first two arguments for denying coverage failed and why the McEssy insurer’s new arguments should fail as well.

BIPA class actions allege personal and advertising injury because disclosure of biometric data to a single third party constitutes publication.

The insurer in McEssy claims that the underlying BIPA class action does not allege personal and advertising injury because there is no alleged “publication of material that violates a person’s right of privacy,” as the underlying BIPA class action only alleges that the insured provided fingerprint data to a single third-party vendor.[14] The insurer in Krishna made this same argument — but lost.[15]

In Krishna, the insurer tried to argue that there was no personal and advertising injury because publication requires communication of information to the public at large, not simply a single third party.[16] The court rejected this argument, noting that both common understanding and dictionary definitions of the term “publication” include both “the broad sharing of information to multiple recipients” and “a more limited sharing of information with a single third party.”[17]

Krishna thus correctly decided this issue in policyholders’ favor: Disclosure of biometric data to a single third party constitutes “publication of material that violates a person’s right of privacy” sufficient to trigger personal and advertising injury coverage under a general liability policy.

The exclusion for distribution of material in violation of statutes does not apply because BIPA regulates biometric data, not methods of communication.

The McEssy insurer asserts another ground for noncoverage that the court in Krishna also rejected, claiming that an exclusion for distribution of material in violation of statutes bars coverage.[18] This exclusion bars coverage for personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate:

  • The Telephone Consumer Protection Act, including any amendment of or addition to such law; or
  • The CAN-SPAM Act of 2003, including any amendment of or addition to such law; or
  • Any statute, ordinance or regulation, other than the TCPA or CAN-SPAM Act of 2003, that prohibits or limits the sending, transmitting, communicating or distribution of material or information.[19]

Krishna also resolved this argument in policyholders’ favor. Specifically, the court held that this exclusion only applies to statutes that govern certain methods of communication, such as emails, faxes and phone calls.[20]

By contrast, BIPA “says nothing about methods of communication.”[21] Instead, BIPA regulates the collection, use, disclosure, retention and destruction of biometric data — certain types of information.[22] This exclusion does not apply to BIPA class actions claiming disclosure of biometric data, and the insurer in McEssy knows it.[23]

The employment-related practices exclusion does not apply because the BIPA claims in McEssy do not arise out of hiring, firing or job performance.

The insurer in McEssy also raises two new arguments not at issue in Krishna. First, the insurer claims that an employment-related practices exclusion bars coverage for the underlying BIPA class action, because the insured’s alleged fingerprint scanning to track its employees’ time arises out of an employment-related practice.[24] The employment-related practices exclusion bars coverage for personal and advertising injury to a person arising out of any:

  • Refusal to employ that person;
  • Termination of that person’s employment; or
  • Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed that that person.[25]

This exclusion does not apply because the underlying BIPA claims in McEssy do not arise out of the insured’s hiring, firing, or job performance-related decisions. Policy exclusions are construed narrowly against the insurer and in favor of coverage.[26] The insurer also has the burden of showing that a claim falls within a provision that limits or excludes coverage.[27]

Here, Illinois courts have held that whether the employment-related practices exclusion applies depends on the facts specific to each case, although the rationale remains consistent.[28] In order for the exclusion to apply, the complained-of employment-related practice must arise out of the employee’s hiring, firing or job performance.[29]

In McEssy, the BIPA claimants allege that the insured required them to use their fingerprints to clock in and out of their shifts, as a method for keeping track of their time.[30] This administrative system has nothing to do with the employees’ hiring, firing or job performance, so this exclusion should not apply.

The exclusion for access or disclosure of confidential or personal information does not apply because biometric data is not health information.

Finally, the insurer in McEssy raises a second, new coverage defense, arguing that an exclusion for access or disclosure of confidential or personal information applies to bar coverage.[31] This exclusion applies 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 kind of nonpublic information.[32]

This exclusion should not apply because biometric data is different from the listed examples of nonpublic information. Under the exclusion’s plain meaning, biometric data is not similar to virtually all of the listed examples of confidential or personal information.

Most of the examples are data that a person creates or generates, such as patents, trade secrets, processing methods, or customer lists; or financial information or credit card information. The statute specifically states that “biometrics are unlike other unique identifiers that are used to access finances or other sensitive information.”[33]

No one creates or generates biometric data; instead, biometrics are “biologically unique to the individual.”[34] Insurers may argue that biometric data is health information, but that argument should fail because the statute’s definition of “biometric identifiers” does not include information collected, used or stored for health care treatment, such as body weight, X-rays or MRIs.[35]

By contrast, health information such as body weight, cholesterol readings or blood pressure measurements provide insight regarding a person’s health, but is common to many people and does not uniquely identify them. Simply put, fingerprints are not health information, and the exclusion should not apply.[36]

Conclusion

Policyholders who find themselves slammed with insurer declaratory judgment actions are in a tight spot. At a time when they should be focused on the threat from the BIPA claims, when sued by insurance carriers, the policyholders must also retain counsel, incur attorney fees, and answer the insurers’ complaints.

Policyholders that find themselves in this situation need to quickly come up with a strategy to fight back against wrongful denials of coverage. One strategy is to answer the insurer’s complaint, and then quickly move for judgment on the pleadings, as the duty to defend is a question of law, ripe for early adjudication. These intimidation strategies will not work, as long as you are prepared to combat your insurance carriers’ misplaced aggression.

This article was also published in Law360.

[1] Compl. for Declaratory J., Am. Family Mut. Ins. Co. v. McEssy Inv. Co., No. 1:20-cv-05591 (N.D. Ill. Sept. 21, 2020).

[2] See, e.g., Am. Compl. for Declaratory J., Am. Family Mut. Ins. Co. v. Amore Enters., Inc., No. 20 C 1659 (N.D. Ill. Sept. 17, 2020); W. Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc., 2020 IL App (1st) 191834 (Ill. App. Ct. Mar. 20, 2020).

[3] See, e.g., McEssy Compl., at ¶ 15 (accepting the tender of the defense while reserving rights, then filing a declaratory judgment action against the insured); Krishna, at *1 (same).

[4] See, e.g., Compl. for Declaratory J., Am. Guar. & Liab. Ins. Co. v. Toms King LLC, No. 2020CH04472, ¶¶ 42-45 (Ill. Cir. Ct. June 5, 2020).

[5] Class Action Compl., Currie v. McEssy Inv. Co., No. 20CH00000467, ¶¶ 12-13, 25 (Ill. Cir. Ct. July 10, 2020) (citing 740 Ill. Comp. Stat. 14/10 (2008)).

[6] Id. at ¶ 26 (citing 740 Ill. Comp. Stat. 14/15(b) (2008)).

[7] See, e.g., Amore Am. Compl., at ¶ 58; Currie Compl., at ¶¶ 33-35; Toms King Compl., at ¶ 18; Third Am. Class Action Compl., Lark v. McDonald’s USA, LLC, No. 17-L-559, ¶ 122 (Ill. Cir. Ct. Nov. 5, 2019). [8] 740 Ill. Comp. Stat. 14/20 (2008).

[9] See, e.g., Insurance Services Office (“ISO”) Businessowners Coverage Form BP 00 03 01 06, Section II – Liability, § F. 14. e.

[10] For example, the definition of “personal injury” in the Businessowners Liability Coverage Form at issue in Krishna similarly included “injury, other than ‘bodily injury,’ arising out of one or more of the following offenses… oral or written publication of material that violates a person’s right of privacy.” Krishna, 2020 IL App (1st) 191834, at *1.

[11] See, e.g., Insurance Services Office (“ISO”) Businessowners Coverage Form BP 00 03 01 06, Section II – Liability, § A. 1. a. (“We will pay those sums that the insured becomes legally obligated to pay as damages because of… “personal and advertising injury to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.”).

[12] Krishna, 2020 IL App (1st) 191834, at *9.

[13] McEssy Compl., at ¶ 18.

[14] Id. at ¶ 18(c).

[15] Krishna, 2020 IL App (1st) 191834, at *4-6.

[16] Id. [17] Id.

[18] McEssy Compl., at ¶ 18(e)).

[19] See, e.g., Insurance Services Office (“ISO”) Businessowners Coverage Form BP 00 03 01 06, Section II – Liability, § B. 1. s.

[20] Krishna, 2020 IL App (1st) 191834, at *7.

[21] Id.

[22] Id.

[23] McEssy Compl., at ¶ 18(e) n.1 (citing Krishna but nonetheless raising this defense “as a good faith challenge to existing law”). Under Rule 11 of the Federal Rules of Civil Procedure, every pleading must be signed by at least one attorney of record and by signing, the attorney represents that to the best of the person’s knowledge, the “claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.” Fed. R. Civ. P. 11(b)(2).

[24] McEssy Compl., ¶ 18(f). The insurer did not raise this coverage defense in Krishna because the underlying BIPA claimants in that case were the insured’s customers, not its employees. Krishna, 2020 IL App (1st) 191834, at *2.

[25] See, e.g., Employment-Related Practices Exclusion, ISO Form No. BP 04 17 07 02.

[26] Am. All. Ins. Co. v. 1212 Rest. Grp., L.L.C., 794 N.E.2d 892, 897 (Ill. App. Ct. 2003) (“Provisions that limit or exclude coverage are to be construed liberally in favor of the insured and most strongly against the insurer.”).

[27] Id. (“The burden is on the insurer to show that a claim falls within a provision that limits or excludes coverage.”).

[28] Id.

[29] See, e.g., Am. Econ. Ins. Co. v. Haley Mansion, Inc., No. 3–12–0368, 2013 WL 1760600, at *5 (Ill. App. Ct. Apr. 23, 2013) (holding that the employment-related practices exclusion did not apply to alleged defamatory remarks because they had no bearing on the former employee’s previous work performance); 1212 Rest. Grp., 794 N.E.2d at 897-901 (surveying cases analyzing the Employment-Related Practices Exclusion across several jurisdictions and determining that it did not apply).

[30] Currie Compl., at ¶¶ 33-34.

[31] McEssy Compl., at ¶ 18(g).

[32] Exclusion – Access or Disclosure of Confidential or Personal Information and Data-Related Liability – with Limited Bodily Injury Exception, ISO Form No. BP 15 04 05 14.

[33] 740 Ill. Comp. Stat. 14/5(c) (2008).

[34] Id.

[35] 740 Ill. Comp. Stat. 14/10 (2008).

[36] See Cooper v. Westfield Ins. Co., No. 2:19-cv-00324, 2020 WL 5647015, at *8 (S.D. W.Va. Sept. 22, 2020) (applying the exclusion but to alleged disclosure of false information regarding a former employee’s health; i.e., that she had Hepatitis C).

Road Map to Insurance Coverage for COVID-19 Business Interruption Losses

Business Interruption Insurance for Covid-19 losses
The presence of Covid-19 triggers coverage under “all risk” property insurance policies

Insurance Should Be Part of the Covid-19 Solution

Roughly three thousand years ago, King Solomon was asked for a maxim that was true in both good and bad times. He offered, “This, too, shall pass away.” Most businesses will readily admit that, because of the presence of COVID-19, they are in the midst of some dismal times. The presence of coronavirus has rendered business premises unsafe and unusable for their intended purposes. Governmental closure orders have forced many companies to shutter or drastically reduce their operations. In addition, COVID-19 has prevented access to business premises and disrupted the supply chain. Businesses are losing billions of dollars due to the pandemic. These are the exact kinds of risks that “all risks” insurance policies are designed to cover. Yes, this too shall pass, and if history is a barometer of things to come, insurance payments will be part of the solution, not part of the problem.

Insurance Carriers are Part of the Problem

From the start, insurance carriers recognized that their universally sold “all risks” commercial property insurance policies could provide business income protection for COVID-19 losses. They were rightly concerned that their many policy forms might cover coronavirus-related losses. Given the risk, insurance carriers reserved billions to pay for COVID-19 losses. But rather than pay, the insurers have circled their wagons, leaving policyholders wondering how they can secure coverage for COVID-19 losses.

Given how insurance carriers are adjusting COVID-19 losses, recovery for many policyholders may prove to be difficult. Some insurance carriers initially denied COVID-19 claims without investigation, only to be sued for bad faith. Now, most insurance carriers are holding off on rapid denials in the hopes that policyholders will unwittingly compromise their claims. This adjustment process is designed to entice policyholders to make admissions against coverage that can later be used to deny claims. Unfortunately, the tactics being employed to minimize coverage can be difficult to spot. As a result, the road to recovery will likely be littered with businesses that unwittingly fell prey to expertly devised insurance company tactics.

Corporate Policyholders Need a Road Map to Recovery

Although insurance carriers have a road map for denials of coverage, most policyholders do not have a corresponding road map to recovery. While no two policies are exactly the same, “all risks” policies are standard form. Many of the COVID-19 issues raised by insurance carriers today, such as whether “physical loss or damage” has occurred or whether Civil Authority provisions require a complete prohibition of access to the insured premises, have been addressed before, and most of the case law on these issues is positive for policyholders. But not all businesses will recover. Some have difficult policy language. Others will unwittingly support insurance carrier denials by improperly responding to questions and information requests. Still others will make strategic errors in presenting and pursuing their claims.

To prevent these kinds of errors, policyholders need to understand the issues and devise a plan for recovery. This article addresses the issues that corporate policyholders need to consider in developing their specific road maps to coverage.

To continue reading, please click here

This article has been published in PLI Current: The Journal of PLI Press, https://plus.pli.edu.

Miller Friel Attorney Recognized as One of Four D.C. Insurance Lawyers to Watch by Best Lawyers

Best Lawyers recently recognized Miller Friel attorney Tae E. Andrews as one of four Ones to Watch for Insurance Law in the District of Columbia. 

Tae Andrews — Recognized as One to Watch in Insurance Law by Best Lawyers

Best Lawyers gives these recognitions to attorneys who are earlier in their careers for outstanding professional excellence in private practice in the United States.  All candidates must be nominated and vetted by their peers. 

https://www.bestlawyers.com/article/best-lawyers-washington-dc-2021/3125

Cyber Insurance: What Case Law Teaches Us About Coverage

Policyholders have secured cyber insurance to guard against cyber attacks. How well have Insurers done? Lets look at the case law to find out.

Introduction

Cybercrime has come a long way from the days of Nigerian Princes seeking aid from unsuspecting AOL subscribers to liberate their family fortunes from the grips of oppressive regimes. Cybercriminals today are far more sophisticated, and so too are their victims. Now, it is C-Suite executives and publicly traded corporations being swindled by ever-evolving “spoofing” scams, while some of the world’s largest healthcare providers, airlines and hotel companies fall victim to massive data breaches as a result of “phishing” schemes and other malware. Indeed, recently a handful of multi-national conglomerates had their operations virtually shut down by malware purportedly released by the Russian military.1 The costs to companies associated with these modern-day cyberthreats can be staggering. Cybercrime is among the most significant risks facing businesses today. Fortunately, in the event of an attack, companies may not have to go it alone. In many instances, insurance may be available to cover some or all of the loss.

This article highlights a few of the more recent massive cyber incidents inflicted on well-known U.S. companies, and discusses the various types of insurance products marketed and sold to protect businesses against such risks, as well as notable court decisions addressing the scope of cyber coverage under such policies. Finally, some practical pointers are offered for effectively insuring against the risks of modern cyberthreats.

The Growing Threat of Cybercrime

Earlier this year, Equifax, the multinational consumer credit reporting agency, finalized the largest data breach class-action settlement in history. The case arose from an incident in 2017 in which hackers accessed personal data, including names, dates of birth, social security numbers and driver’s license numbers from approximately 150 million consumers. Ensuing claims were brought by the Federal Trade Commission, the Consumer Financial Protection Bureau and various state attorneys general. More than 300 class-action lawsuits were also filed by consumers and financial institutions, which were consolidated in Federal District Court in Atlanta, Georgia.2

The Equifax litigation was ultimately resolved …

To read more, click here

This article has been published in PLI Current: The Journal of PLI Press, https://plus.pli.edu.

Fifth Circuit’s “Windstorm” Ruling Holds Silver Lining For Policyholders

A recent decision from the U.S. Court of Appeals for the Fifth Circuit held that a higher deductible applied (so as to bar recovery for the policyholder), but reaffirms that policies covering the peril of windstorms include damages due to heavy rains and flooding accompanying hurricanes. The decision also serves as a warning for policyholders with high deductibles to buy deductible buyback insurance before hurricane season strikes.

Windstorms include wind, rain and flooding

The Pan Am Equities Decision

Pan Am Equities Inc. v. Lexington Insurance Co. presented the issue of which deductible to apply under a commercial property policy.[1] After Hurricane Harvey drenched the greater Houston area in more than 60 inches of rainfall, the policyholder suffered more than $6.7 million in flood damage to two of its properties.[2] The policyholder had a commercial property policy with two different deductibles: a $100,000 flood deductible, and a windstorm deductible with the following language:

5% of the total insurable values at the time of the loss at each location involved in the loss or damage arising out of a Named Storm (a storm that has been declared by the National Weather Service to be a Hurricane, Typhoon, Tropical Cyclone, Tropical Storm or Tropical Depression), in Tier 1 Counties including Florida, regardless of the number of coverages, locations or perils involved (including but not limited to all Flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain) and subject to a minimum deductible of $250,000 any one occurrence.[3]

A deductible is “a clause in an insurance policy relieving the insurer of responsibility for an initial specified small loss of the kind insured against.”[4] An insurer’s duty to pay only kicks in after the policyholder’s losses exceed the amount of the deductible. “The purpose of a deductible is to shift some of the insurer’s risk to the insured, which is accomplished by setting a limit on the value of covered losses below which the insurer is not obligated to pay.”[5] The calculation of a policy’s deductible is thus extremely important because if the policyholder’s losses don’t exceed the deductible, the insurer doesn’t have to pay anything.

In Pan Am, the total insurable value of the policyholder’s two properties exceeded $190 million.[6] If the $100,000 flood deductible applied, the policyholder could recover most of its losses.[7] However, if the windstorm deductible applied, the insured would not recover anything, because its $6.7 million in losses would not exceed the deductible (5% of the $190 million in total insurable values).[8]

The district court held that the higher windstorm deductible applied because the flooding that damaged the policyholder’s properties resulted from Hurricane Harvey, which was a windstorm.[9] Critically, the court noted that a hurricane is a windstorm by any definition.[10] The policyholder tried to argue that the windstorm deductible only applied to wind damage, but the court rejected this argument, noting that the windstorm deductible did not apply only to wind damage.[11]

On appeal, the Fifth Circuit affirmed, holding that the windstorm deductible applied to all loss due to windstorm, including flood damage to the policyholder’s buildings.[12] The court again rejected the policyholder’s argument that the windstorm deductible only applied to wind damage.[13]

Pro-Policyholder Implications of Pan Am Equities

While the Fifth Circuit ruled in the insurer’s favor in Pan Am, the decision may benefit policyholders more than insurers. Specifically, the policy at issue in Pan Am did not define what the term “windstorm” meant.[14] The Pan Am decision affirms that a hurricane is a type of windstorm[15] and hurricanes usually involve heavy rains.[16] Many policies provide coverage for the peril of windstorms and insurers routinely argue that the peril of windstorm does not include flooding.

The implication of the Pan Am decision is that the windstorm peril includes damage caused by heavy rains and flooding associated with storms such as hurricanes. This is a heavy blow to insurer attempts to distort the plain meaning of their policies as somehow only covering wind damage.

The Importance of Deductible Buyback Coverage

Policyholders can also take steps to minimize their potential exposure by purchasing deductible buyback insurance. A commercial property policy may have a relatively low flood deductible, but if the insured property suffers flood damage from a windstorm (such as Hurricane Harvey), Pan Am Equities holds that, in certain circumstances, the higher windstorm percentage deductible may apply.

Policyholders should consider purchasing deductible buyback insurance. These policies buy back, or restore, coverage for large deductibles under commercial property policies. For policyholders based in high-risk areas such as the Gulf Coast, now is a good time to review your coverage, before hurricane season arrives. As Pan Am makes clear, total insured value percentage deductibles for windstorms may leave businesses exposed to the elements when the next hurricane strikes.

This Article was also published in Law360.

[1] No. 19-20363, 2020 WL 2709351 (5th Cir. May 26, 2020).

[2] Pan Am Equities, Inc. v. Lexington Ins. Co., No. H-18-2937, 2019 WL 2115173, at *1 (S.D. Tex. May 2, 2019).

[3] Id.

[4] Penthouse Owners Ass’n, Inc. v. Certain Underwriters at Lloyds, London, 612 F.3d 383, 387 (5th Cir. 2010).

[5] Id.

[6] Pan Am, 2019 WL 2115173, at *2.

[7] Pan Am, 2020 WL 2709351, at *2.

[8] Id. at *1.

[9] Pan Am, 2019 WL 2115173, at *3 (citing Leonard v. Nationwide Ins. Co., 2006 WL 1674288, at *1 (S.D. Miss. June 13, 2006) (“a hurricane is a type of windstorm”).

[10] Id.

[11] Id.

[12] Pan Am, 2020 WL 2709351, at *3.

[13] Id. at *4.

[14] Id. at *1 n.1.

[15] Pan Am, 2019 WL 2115173, at *3.

[16] Id. (citing Seacor Holdings, Inc. v. Commonwealth Ins. Co., 635 F.3d 675, 681 (5th Cir. 2011)) (holding that “losses caused by a Named Windstorm, which under the policy’s definition includes hurricanes, could include losses caused by heavy rains”).

Miller Friel Proudly Announces the Newest Member of Its Insurance Coverage Team – Stephen R. Mysliwiec

Miller Friel, PLLC is pleased to announce that Stephen R. Mysliwiec has joined the firm as a partner, serving clients from Miller Friel’s Washington, DC office.  Steve was previously a partner in the Washington, DC office of DLA Piper, one of the world’s largest law firms, where he was a partner for over 30 years.
 
Steve is recognized as one of the leading insurance recovery lawyers in the country, representing some of the largest and best known companies in the world with respect to all lines of commercial insurance.  Steve has litigated numerous insurance coverage disputes involving policyholders in the real estate, construction, banking, healthcare, life insurance, hotel, assisted living, computer, transportation, steel, commodities, and food service industries.  Steve also represents trade associations, builders, and owners regarding various insurance coverage and liability issues arising from claims of defective workmanship and defective building materials. He has submitted numerous amicus briefs in appellate courts around the country on these issues.  Steve iscurrently representing a number of companies in connection with their business income losses caused by COVID-19.  

Steve’s practice also involves advising clients with respect to the insurance aspects of transactional matters. He helps developers, contractors, owners, lenders, landlords, tenants and other clients in the real estate, construction and financial services sectors deal with insurance and indemnity issues in complex real estate and construction transactions. He also advises clients regarding the insurance aspects of mergers and acquisitions, insurance for initial public offerings, insurance issues in bankruptcy proceedings, trade credit insurance, reps and warranties insurance, and environmental insurance. He also has substantial experience advising owners and lenders regarding insurance programs for professional sports stadium projects, including OCIP programs.

“Miller Friel is thrilled to have a lawyer of Steve’s experience, reputation and caliber,” said Brian Friel, Co-Founder and Managing Partner.  Brian added, “with the addition of Steve to our team, Miller Friel continues its path forward asone of the leading insurance policyholder law firms in the country, exclusively representing companies pursuing insurance recovery.” As noted by Co-Founder, Mark Miller, “Steve shares our vision as a single practice law firm, focused entirely on representing corporate policyholders without any conflicts or constraints imposed by insurers or brokers, in a team effort to maximize insurance recovery.” 

“I share Miller Friel’s belief that a boutique insurance recovery law firm is the right model to most effectively and vigorously represent corporate policyholders,” added Steve.  “Also, I am drawn to Miller Friel because of its cohesive team atmosphere, surrounded by other attorneys who have been fighting for insureds since the early days of this practice area.”  Steve further stated, “DLA Piper is a wonderful firm, and it was difficult for me to decide to leave.  But my practice is focused on representing policyholders, which I will be able to continue to do with Mark and Brian and the rest of the Miller Friel team. I look forward to helping expand the firm’spolicyholder client base andtoburnishing the firm’s reputation as one of the leading, if not the leading, corporate policyholder law firms in the country.  There is a sense of excitement and focus here at Miller Friel that is very special.  I am excited about continuing to represent my policyholder clients and to expanding my practice both nationally and internationally.”  Steve received his B.A magna cum laude fromthe University of Notre Dame in 1970 where he was a member of Phi Beta Kappa, his M.A. from the University of Notre Dame in 1972, and his J.D. from Yale Law School in 1975, where he was Notes Editor of the Yale Law Journal. Steve was a law clerk in the Fifth Circuit for the renowned Judge John R. Brown.

INSURANCE COMPANIES WILL PAY FOR CV-19 LOSSES

Twenty-six years ago, I sat in an overcrowded courtroom filled with insurance company lawyers ready to argue that insurance companies should not pay for environmental cleanup costs.  A distinguished grey-haired gentleman lawyer, my boss, was leading an assault on the insurance industry.  He walked slowly to the podium and said, “Your Honor, you see all of these men and women here in nice suits?  They are all liars.”  The question American businesses should ask with respect to coronavirus is whether history repeats itself.

The CEO of the insurance giant Chubb, Evan G. Greenberg, stated in a recent WSJ Opinion that it won’t help anyone “to try to pin the damage on insurers like my company.”  Decades ago, insurance carriers made this same argument with respect to the environment.  There, insurance companies were held responsible, and American businesses were helped greatly.    The same will likely hold true for coronavirus losses.

Mr. Greenberg’s is wrong to assert that “virus is not covered.” At a minimum, Mr. Greenberg begs a legal question that will be decided by the courts.  Insurance companies willingly and knowingly sold insurance policies covering “all risks.”  For decades, if not longer, it has been the law that “all risks” policies cover all risks of direct physical loss or damage unless specifically and unambiguously excluded.  And, courts throughout this country have held that coverage is provided in similar situations, where property cannot be used for its intended purposes, or is otherwise rendered unsafe to use.  COVID-19 is a covered risk.  It has rendered property unsafe and unusable.  The presence of Covid-19 alone triggers coverage. 

The only question, then, is whether COVID 19 is excluded from coverage.  On April 10, President Trump correctly noted that there is a problem with what insurance carriers are pushing, stating: 

In a lot of cases, I don’t see it. I don’t see reference, and they don’t want to pay up.  I would like to see the insurance companies pay if they need to pay.

No insurance policies, other than those being currently issued, contain COVID-19 exclusions. Some policies address viruses.  Others do not.  Each policy needs to be individually considered, and in a lot of cases, coverage clearly exists.

Mr. Greenberg claims that it would be “wildly counterproductive” to force big insurance companies to pay for losses they didn’t insure.  Insurance companies litigated what they claimed were uncovered environmental claims for decades, only to pay in the end.  The failure to pay covered claims is and has always been counterproductive. 

Recognizing this, numerous states are considering bills requiring insurers to pay for Covid-19 losses.  To this, Greenberg claims protections under Article I of the Constitution.  This classic “red herring” distracts us from the fact that most insurance policies address this issue head on.  Insurance is a regulated industry, and insurers are contractually bound to follow newly enacted laws and regulations.  Constitutional crises avoided. 

History repeats itself.  We are in for a fight.  But, businesses that fight for coverage will be rewarded. See The Good News About Coronavirus Insurance Claims

Future Battles Foreshadowed In First COVID-19 Insurance Suit

The financial impact of damage caused by the coronavirus is immense. Virtually every business in the U.S. is suffering and policyholders need to take action now to preserve their rights to coverage.

Last week, one New Orleans restaurant took such action by filing suit against its insurer. Oceana Grill v. Certain Underwriters at Lloyd’s, London, filed in the Civil District Court for the Parish of Orleans, State of Louisiana, stands as the first insurance lawsuit on record for coronavirus coverage.[1] It will not be the last, and other policyholders across the country will face similar, if not identical, coverage disputes.

The restaurant’s petition demonstrates one way a policyholder may seek coverage. It also sheds light on coverage battles to come and underscores the importance of securing coverage for coronavirus losses.

Oceana Grill filed its lawsuit against its insurer seeking coverage under an all-risks property policy.[2] All-risks policies typically cover all risks of direct physical loss or damage to insured property occurring during the policy period, unless they are specifically excluded.[3]

Under an all-risks policy, once the policyholder demonstrates a loss or risk of damage to the property, the insurer has the burden of proving that the policy clearly and specifically excludes the cause of the loss.[4]

Many courts have held that the presence of harmful substances that render property uninhabitable or unusable constitutes “direct physical loss or damage” and that tangible or structural damage is not required.

The Oceana Grill petition tees up the question of whether coronavirus losses constitute direct physical loss or damage under property policies. Policyholders can expect their property insurers to claim that physical damage is required, and that coronavirus does not cause tangible or structural damage to insured property.

However, courts across the country have held that the phrase “physical loss or damage” does not require tangible damage to a building’s physical structure.[5] These decisions hold that the presence of harmful substances such as asbestos, fumes or odors in quantities sufficient to render the property uninhabitable or unusable may constitute direct physical loss within the meaning of a property policy.[6]

1. The presence of coronavirus constitutes direct physical loss or damage.

The Oceana Grill plaintiffs argue that coronavirus constitutes a cause of real physical loss and damage that is physically impacting public and private property, and physical spaces in cities around the world.[7] The Centers for Disease Control and Prevention have now stated that it may be possible for a person to contract COVID-19 “by touching a surface or object that has the virus on it and then touching their own mouth, nose, or possibly their eyes.”[8]

The Oceana Grill plaintiffs also allege that coronavirus “physically infects and stays on the surface of objects or materials, ‘fomites,’ for up to twenty-eight days, particularly in humid areas below eighty-four degrees,” and surface infection of insured premises by coronavirus “would be a direct physical loss needing remediation to clean the surfaces of the establishment.”[9]

2. Coronavirus losses may also implicate civil authority coverage.

Many commercial property policies also cover business income losses suffered when a civil authority prohibits or impairs access to either the policyholder’s premises or property other than the insured’s property. The Oceana Grill plaintiffs also seek a declaratory judgment that orders issued by Louisiana Gov. John B. Edwards trigger the civil authority coverage of their policy.[10]

As the plaintiffs correctly predicted,[11] civil authorities initially tried to slow the spread of coronavirus by limiting the size of social gatherings, but many have since ordered the outright closure of service-industry businesses such as bars, restaurants, gyms and movie theaters. Losses due to these government-mandated closures may also trigger civil authority coverage.

3. Pollution exclusions should not apply to coronavirus losses.

The Oceana Grill petition notes that the policy does not include an exclusion due to losses from a virus or global pandemic.[12] However, insurers are preparing to deny coverage for coronavirus losses based on pollution exclusions. These exclusions are designed to exclude coverage for environmental cleanups. A common version bars coverage for the costs of cleaning up or removing “pollutants,” defined to include any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.[13]

Insurers argue that virtually everything is a pollutant, but courts analyzing pollution exclusions have construed them narrowly, noting that the terms “irritant” and “contaminant” are “virtually boundless, for there is no substance or chemical in existence that would not irritate or damage some person or property”[14] and reading the exclusion literally “would negate virtually all coverage.”[15]

These cases also note that pollutants are primarily inorganic in nature, and have held that bacteria was not similar to the listed examples.[16] The use of the term “waste” also implies that the term applies to industrial byproducts, and not organic matter.[17]

4. Policyholders must act now to preserve their claims under property policies.

The past few weeks have spread fear and uncertainty. Yet even in these uncertain times, policyholders can be sure of a few things. First, for many service-industry businesses, the stakes literally could not be higher. As the Oceana Grill plaintiffs note, the restaurant’s closure due to coronavirus represents an existential threat to its survival as a business.[18]

In these bleak times, the same holds true for many bars, restaurants, gyms, movie theaters and other businesses in service industries. Securing coverage under property insurance may mean the difference between making it and filing for bankruptcy.

Second, do not assume that your policy does not cover business losses. When disaster strikes, insurers try to discourage policyholders from filing claims by setting a media narrative that there is no coverage for a given event. Businesses should not be dissuaded from making claims. Don’t take an insurance company’s advice on what is or is not covered.

Insurers sell coverage for all risks, including coronavirus. Don’t let insurers shake their heads and solemnly declare that there just isn’t coverage. As with all advice, consider the source.

Third and finally, policyholders must act now to preserve their claims under their property policies. This requires reviewing the policies and providing the required notice as soon as possible, to stave off insurer claims of late notice. Fighting coronavirus losses by securing property insurance coverage requires immediate action.

This Article was also published in Law360. See also Insurance Coverage for Coronavirus Claims/

[1] Pet. for Declaratory J., Oceana Grill v. Certain Underwriters at Lloyd’s, London, No. 20-02558 (La. Civ. Dist. Ct. Mar. 16, 2020).

[2] Id. at ¶ 14.

[3] Port Auth. of N.Y. v. Affiliated FM Ins. Co., 311 F.3d 226, 231 (3d Cir. 2002).

[4] See, e.g., Cincinnati Ins. Co. v. Banks, 610 F. App’x 453, 457 (6th Cir. 2015); Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281, 1287 (10th Cir. 2006).

[5] See, e.g., Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826-27 (3d Cir. 2005) (holding that a genuine issue of material fact existed regarding whether the insured’s property was nearly eliminated or destroyed, or made useless or uninhabitable, sufficient to constitute a “physical loss”); W. Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968) (holding that fumes from gasoline seeping into the soil under an insured church and rendering it uninhabitable established a “direct physical loss”); Widder v. La. Citizens Prop. Ins. Corp., 82 So. 3d 294, 296 (La. Ct. App. 2011) (holding that dust from lead paint rendering a home unusable or uninhabitable qualified as a “direct physical loss”); Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997), aff’d in part, rev’d in part sub nom. Sentinel Mgmt. Co. v. Aetna Cas. & Sur. Co., 615 N.W.2d 819, 825-26 (Minn. 2000) (“Direct physical loss also may exist in the absence of structural damage to the insured property.”); Farmers Ins. Co. v. Trutanich, 858 P.2d 1332, 1335 (Or. Ct. App. 1993) (holding that odors from a methamphetamine “cooking” lab constituted “direct physical loss” within the meaning of the policy); Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1, 17 (W.Va. 1998) (“Direct physical loss also may exist in the absence of structural damage to the insured property . . . Losses covered by the policy, including those rendering the insured property unusable or uninhabitable, may exist in the absence of structural damage to the insured property.”).

[6] See, e.g., Port Auth., 311 F.3d at 236; First Presbyterian Church, 437 P.2d at 55; Widder, 82 So. 3d at 296; Trutanich, 858 P.2d at 1335.

[7] Pet. for Declaratory J., ¶¶ 19-20.

[8] Centers for Disease Control & Prevention, How COVID-19 Spreads (2020), https://www.cdc.gov/coronavirus/2019-ncov/prepare/transmission.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fabout%2Ftransmission.html.

[9] Pet. for Declaratory J., ¶¶ 21, 23.

[10] Id. at ¶¶ 25, 35.

[11] Id. at ¶ 31 (“[P]laintiffs expect[] that more restrictive orders may occur within the next 30 days as they have occurred in other cities around the world, including New York City, New York, where restaurants have been ordered to close . . .”).

[12] Pet. for Declaratory J., ¶ 15.

[13] Keggi v. Northbrook Prop. & Cas. Ins. Co., 13 P.3d 785, 789 (Ariz. Ct. App. 2000).

[14] Id. (citing Nautilus Ins. Co. v. Jabar, 188 F.3d 27 (1st Cir. 1999)).

[15] Id. (citing Am. States Ins. Co. v. Kiger, 662 N.E.2d 945, 948 (Ind. 1996)).

[16] See, e.g., Motorists Mut., 131 F. App’x at 828 (noting that bacteria defied description as a solid, liquid, gaseous, or thermal pollutant because it was a living, organic “irritant” or “contaminant”); Keggi, 13 P.3d at 790 (holding that a pollution exclusion did not bar coverage for injuries suffered from drinking bacteria-contaminated water).

[17] Keggi, 13 P.3d at 790.

[18] Pet. for Declaratory J., ¶ 18.

Coronavirus Insurance Coverage Implications — Good News

A quick Google search would have businesses believing that there is no insurance coverage for coronavirus losses.  Insurance carriers and brokers have seized control of the narrative, and they have done a good job of convincing policyholders that coronavirus claims are not covered.  This analysis offers an alternative and correct view — businesses are covered.

Coronavirus Insurance Coverage — At Least One Thing is Positive for Business

There is a frenzy of misinformation about coverage for coronavirus claims. Fortunately, none of this has any bearing on coverage.  To get the correct answer, one must read the insurance contract without preconceived notions of coverage.  If this is done, businesses are left with many insurance-related options to counter coronavirus-related losses.

This point is illustrated by looking at how insurance policy language addresses three common coronavirus claims: (1) third-party lawsuits, (2) business interruption losses, and (3) event cancellation losses. 

1. Third-Party Lawsuits

With coronavirus, businesses are susceptible to lawsuits alleging that they should have done something to prevent injury to persons.  The first of these claims was just filed–a lawsuit alleging wrongdoing on the part of a cruise ship company.  Just as night follows day, more will follow. 

General Liability policies cover allegations of “bodily injury.”  If a claimant alleges that he or she was injured, coverage is triggered.  Coronavirus lawsuits are classic examples of covered general liability claims. 

Insurance carriers, however, are pushing the narrative that coronavirus is a pollutant and therefore excluded from coverage pursuant to pollution exclusions.  This is an old concept.  In the past, insurers found themselves paying pollution claims, no matter what kind of pollution exclusions they put in their policies.  So, they expanded the exclusions to prevent coverage for environmental cleanups.  

Insurance carriers now argue that pollutants include any kind of “irritant” and that pollution exclusions apply to almost any claim.  For example, if the sun got in a person’s eyes and that resulted in a car crash, insurers would argue that the sun is an irritant, and that the pollution exclusion precludes coverage.  Yet, everyone knows that sunshine is not a pollutant.  Similarly, if a third party is burned and sues, insurers will argue that fire is an irritant, and that the pollution exclusion precludes coverage.  Of course, fire is not a pollutant, and at least one court awarded bad-faith damages where an insurance carrier made this claim.  See Winning Bad Faith Coverage Cases at Trial.

Common sense will prevail here as well.  Coronavirus is not a pollutant. 

2. Business Interruption Losses

Almost certainly, the largest category of losses business will experience as a result of the coronavirus are business interruption losses.  Airline flights have been sidelined, people are not going out, and businesses of all kinds are suffering.  The narrative insurers push here is an old one: insurers argue that property policies are not triggered unless there is physical injury to tangible property.  This narrative was developed after 9/11 to stem payments to businesses suffering huge financial losses. 

Based on policy language, though, physical injury is not required.  All-risk property insurance policies cover “all risks of physical loss or damage.”  This insuring clause addresses two separate things.  First, it states that it covers all risks of physical loss.  Second, it states that it covers all risks of damage.  Damage includes all forms of financial loss.  Coronavirus is the risk.  If it caused damage in the form of financial loss, this falls squarely within coverage. 

There is substantial case law on this issue as well. 

  • Case Example One — A church smelled because gasoline was leaking into the basement.  The house was unsafe and smelled so bad that the owner had to move out.  The insurer denied coverage, stating that there was no physical damage to the house.  The court held otherwise, finding coverage.
  • Case Example Two – A river meandered, leaving a structure precariously sitting on a riverbank.  The structure was fine, but it could not be used because it was unsafe and could fall down.  The insurer argued there was no coverage because there was no physical damage to the property.  The court ruled otherwise, finding coverage.
  • Case Example Three – A homeowner rented its house to crack dealers.  After the crack dealers left, the home smelled so bad that it could no longer be rented.  The home had no structural damage, so the insurer denied coverage.  The court disagreed, as the house could not be used as intended. 

There are two overlapping and well-developed lines of cases holding that physical injury to property is not required.  The first relies on the inability of the property to be used as intended.  The second relies on the fact that the property was somehow rendered unsafe.  Both lines of cases are directly applicable to coronavirus losses. 

In addition, property policies contain numerous other insuring clauses that similarly do not contain a requirement of physical injury to property in order to be triggered.  Among them, ingress/egress coverage (covering financial losses when a business is prevented from entering their property) and civil authority coverage (covering losses when the government prevents normal operations). 

The leading case on these issues is Fountain Powerboat Indus. v. Reliance Ins. Co., 19 F. Supp. 2d 552 (E.D.N.C. 2000).  The Fountain Powerboat Decision is one of History’s Best Insurance Decisions.  There, the Fountain Powerboat company of North Carolina had a work slowdown as the result of a hurricane.  It pursued relief under their property insurance policy pursuant to an “ingress/egress” provision.  Its insurance carrier denied coverage based on an all-too-common insurance industry custom and practice—denying coverage because there was no physical damage to insured property.  The court flatly rejected this argument in favor of insurance policy language and awarded Fountain Powerboat the attorney’s fees it incurred to pursue the action against its insurer.   

3. Event Cancellation Losses

Every day now, more and more major events are being canceled or postponed because of the coronavirus, including trade association conferences, college and professional sporting events, and concerts.  Even a conference on Coronavirus was canceled because of coronavirus.  What is missing from the headlines are the myriad of trade associations that need money from events to survive but have been forced to cancel events because of coronavirus. 

Event cancellation insurance is commonly triggered when an event is necessarily cancelled, abandoned, curtailed, or postponed.  A typical scenario, where an event is cancelled (or postponed) due to coronavirus concerns, falls squarely within coverage.  See Event Cancellation Insurance Claim Denials Tips for Recovery

Yet, insurers are fighting coronavirus event cancellation claims.  One argument that insurance companies are making is that an event was cancelled due to fear and panic.  Given that policies don’t contain fear or panic exclusions, there is no merit to this argument.  Similarly, insurers allege that the events could have proceeded but for the public’s fear and panic. 

Not all event cancellation policies are the same.  In some situations, insurers argue that the cancellations must result from the “physical or legal inability to proceed” with an event, and short of either a physical barrier preventing the public from entering a hotel conference center or sports arena, or a government order banning any mass gatherings, there is no coverage.  Again, the insurers’ position is inconsistent with the policy language.  For example, if there is a genuine fear of contracting the virus, this is a “physical inability” to proceed with the event.  In addition, many companies have instituted travel bans, making it physically and legally impossible for employees to travel.  Also, even if a government recommends that the public not attend mass gatherings (events with over 250 people), this is a form of “legal inability” to proceed with events. 

Both of these reasons for denial bring to mind a situation that we are currently addressing.  We had a settlement meeting with seven insurance companies scheduled for months.  The meeting was to take place in NYC, and the insurers had agreed to be present in person at that meeting.  Several days before the meeting, various insurers notified us that they could not attend because of coronavirus.  Many had travel restrictions.  Others were just unwilling to subject themselves to any additional risk of contracting the virus. 

Were these insurers motivated by panic?  Should this insurer-scheduled event have gone forward as planned?  The insurers said, “No.  We won’t attend.  We are rational.  You need to cancel.  Coronavirus is a legitimate reason to cancel.”  In other words, events that insurers should attend must be canceled, but all others must go forward.  

Unless the insurers learn to be honest about what is going on, their hypocrisy will cost them dearly.  Coronavirus cancellations are exactly what event cancellation policies are designed to cover. 

The “Social Inflation” Excuse: Why Warren Buffett was Wrong in 1975 and Insurers Are Wrong Now In Shirking Coverage of Opioid Litigation and Other Public Nuisance Shakedowns

The concept of “social inflation” is back in vogue these days among property/casualty industry underwriters and their service providers in trade journals and other media.  The term generally refers to the allegedly increasing costs of insurance claims resulting from various aspects of the US civil justice system, including increased third-party litigation funding, lawyer advertising, injured parties’ perceptions of what they are owed, and corresponding jury awards.

Today, insurers are shirking their duties to defend and indemnify insureds caught up in public nuisance litigation extortion, most notably in the opioid litigation.  If insurers were truly concerned about the expansion of judge-made law and corresponding erosion of traditional notions of tort causation, they would honor their promises and stand with their customers to defeat these dangerous claims. Muddled thinking about “social inflation” is no justification for refusing the contractual promise to defend claims that undoubtedly may result in covered, albeit unjust, liability.

Indeed, skeptical observers suspect that the hue and cry over “social inflation” is simply cover for underwriters raising rates and restricting coverage.  Available data contradict the notion of an industry supposedly “under siege.”  For example, the Insurance Information Institute reports net income after taxes in the property/casualty industry in 2018 and 2019 were at the highest level in a decade.

1. Warren Buffett on “Social Inflation”

Today’s commentators on “social inflation” frequently invoke decades-old quotes from Warren Buffett.  In the 1970s – before he was the Oracle of Omaha – Buffett raised “social inflation” as an excuse for poor performance.  For example, addressing insurance losses in his 1975 letter to shareholders, he wrote: “‘Social’ inflation caused the liability concept to be expanded continuously, far beyond limits contemplated when rates were established – in effect, adding coverage beyond what was paid for.”  Although insurers today quote Buffet as an authority equivalent to the Founding Fathers or the Four Evangelists, Buffet’s 1975 statement is wrong as a matter of both contract law and public policy.

Expansions of liability do not, in Buffett’s words, add liability coverage “beyond what was paid for.”  Coverage for uncontemplated liability is precisely what liability insurance buyers paid for.  Policyholders should continue to enforce their contractual rights to coverage they’ve paid for, and resist industry attempts to restrict coverage based on purported “social inflation” arguments.

2. Expanding Notions of Justice Are the Norm

This is not to deny that the US justice system has from time to time expanded liability beyond what either insurers or insureds likely contemplated when entering contracts.  In 1975, Buffett was presumably speaking about asbestos liability.  In 1980, environmental liability was expanded with enactment of the Superfund law.  Lead paint, toxic mold, tobacco, Chinese drywall, and firearm litigation followed that.  The current opioid and revived sexual misconduct litigations are further examples.

Indeed, today US business faces a sustained effort to turn public nuisance into a catch-all tort cause of action to seek a judicial remedy for every societal ill.  These public nuisance shakedowns, nominally in the name of governments and the “public good,” and typically led by private contingent-fee lawyers with deep pockets often funded by litigation speculators, eviscerate (among other things) a core requirement of centuries of tort jurisprudence: proving that the defendant caused the alleged harm.  Courts have facilitated these shakedowns by going far beyond resolving cases and controversies, and far outside their expertise, to craft public policy in the form of judicial remedies when managing the risks of beneficial but potentially harmful products more properly, under our form of government, should be a legislative and regulatory function.

3. Businesses Buy Insurance Specifically to Transfer Risk, Both Known and Unknown

The past and present expansions of liability do not, in Buffett’s words, add coverage “beyond what was paid for.”  Coverage for uncontemplated liability is the entire point of liability insurance, which is to transfer the risk of liability, with the insurer accepting the risk that resources available from premium and investment return from an entire pool of insureds will be enough to pay claims. 

In the typical contract, an insured buys an insurer’s promise to pay “those amounts the insured becomes legally obligated to pay as damages” resulting from a claim.  The grant of coverage – “what was paid for” in Buffet’s words – is just that: ALL damages that the insured is liable to pay, subject only to exclusions and policy limits.  Of equal or greater importance, policyholders also pay for the insurer’s promise to defend against “any suit” asserting claims that are potentially or arguably covered by this grant, even if the suit is based on groundless, false or fraudulent allegations.

From a public policy perspective, the socially beneficial aspect of risk-spreading through insurance is only realized when the risk is actually spread, and insurers honor their promises and do not abandon their insureds.  If insurers collect premium from businesses providing legal, useful and in many cases government-approved and -regulated goods and services, only to turn around and deny coverage when courts impose retroactive liability, then the insurance enterprise is not beneficial, it’s a harmful tax on productive businesses.

Policyholders, with the assistance of experienced coverage counsel, should resist insurer efforts to deny or restrict coverage on the basis of “social inflation.”