EPISODE 4: A Mediator’s Round (Kitchen) Table: Insurance Coverage for COVID-19 Claims

With the economy grinding down to a crawl due to the COVID-19 pandemic many people have questions concerning the scope of insurance coverage for their business losses. While COVID-19 will lead to a myriad of questions concerning all lines of insurance, the first cases to be filed have involved business loss claims from entities that have been forced to shut down due to stay at home orders. Complying with the Travis County order, Steve Schulwolf of Schulwolf Mediation, conducted an insurance for COVID-19 claims podcast from his kitchen table in Austin, Texas. Joining him are Marc Shrake of Freeman Mathis & Gary out of Los Angeles, California and Frank Weiss of Tonkon Torp out of Portland, Oregon. Mr. Shrake represents insurance companies and is the co-chair of his firm’s Insurance Coverage and Extra-Contractual Liability National Practice Group. Mr. Weiss represents policyholders in complex insurance coverage disputes and serves as his firm’s general counsel.

The three discussed the first case filed, Cajun Conti LLC, et. al. v. Certain Underwriters at Lloyd’s, involving lost business claims from the Oceana Grill, a popular restaurant in the French Quarter of New Orleans. Specifically, Mr. Shrake noted that the matter apparently had been filed prior to the insurer even denying the claim, but allegations such as “any effort by Lloyd’s to deny the reality that the virus causes physical damage and loss would constitute a false and potentially fraudulent misrepresentation that could endanger policyholders and the public” is an aggressive “shot across the bow” intended to make insurers reconsider asserting the “physical” damage requirement.

Mr. Weiss has been asked questions by numerous clients because insurers have proactively suggested that there is unlikely to be coverage for these type of COVID-19 claims because they lack the requisite physical damage or loss to the insured premises. The attorneys acknowledged that the ultimate outcome of these cases will depend on the exact policy language at issue as well as the jurisdiction. Jurisdictions have taken different approaches with some, like Michigan and California, requiring the insured to demonstrate a specific physical alteration of the insured property, while others only require the presence of something (even a gas or smell) on or around the insured property. Mr. Shrake suggested that a recent District of Columbia case, Proper Ventures, LLC dba Proper Twenty-One v Seneca Insurance Co., advocated that the insured only need to show a direct physical loss of the premises. Mr. Weiss suggested that this was seemingly consistent with a West Virginia case that rejected the insurers argument that the potential damage that could be caused by future rockfalls was insufficient to demonstrate “direct physical loss.” Murray v. State Farm Fire and Casualty Co., 509 S.E.2d 1 (W.Va. 1998)(finding “direct physical loss to the insured property requires only that the property be damaged, not destroyed” and structural damage is not required). Mr. Schulwolf noted that insurers will likely look to post-September 11 cases to argue that fear of future losses is insufficient to trigger coverage.

Not surprisingly, Mr. Weiss suggested that these standards could be met relatively easily in dense, urban areas, likely with the assistance of experts and statistical modeling. Mr. Shrake stressed that any evidence would need to demonstrate an identified substance or a specific change to the insured property and suggested that the science suggests that the spread of the disease is typically from person to person and not from animate objects. Mr. Weiss discussed the significance of allegations in Cajun Conti concerning how long the virus can survive on an object and suggested that this could satisfy the physical loss requirement and that recent studies support that more people have been infected than previously believed, which could ease a policyholder’s evidentiary burden. Everyone agreed that creative attorneys will likely develop novel theories that likely will be expensive to develop and present.

Mr. Weiss also suggested that language referencing property damage in applicable stay at home orders, like the Napa County Order, at issue in French Laundry v. Hartford Fire Insurance Co., would greatly benefit policyholders. Mr. Schulwolf noted that the rationale for such orders would likely lead to contentious and expensive discovery citing S. Tex. Med. Clinics, P.A. v. CNA Fin. Corp., 2008 U.S. Dist. LEXIS 11460. Mr. Shrake agreed with the rationale in that case that if an order were issued due to the fear of the risk of further spread, rather than particularized damage there likely would not be coverage under “Civil Authority” provisions. In a sobering moment, Mr. Shrake raised the possibility that, like the Spanish Flu of 1918, the current pandemic will have a “second wave” and the participants discussed the possibility that if the virus were to get stronger it might become more easy to trace and could impact how the parties will present evidence in support of their respective arguments.

Finally, Mr. Schulwolf acknowledged the difficulty of mediating these cases in light of the significant stakes for each side. Both Mr. Weiss and Mr. Shrake suggested that getting an insurer to be the first to pay a COVID-19 business loss claim would be difficult. That said, the possibility of legislative initiatives to retroactively require coverage should make insurers at least open to settlement in certain cases. Moreover, the opportunity to mediate (even online) a portion of a claim, like damages, could assist parties narrow issues for trial. Not surprisingly, Mr. Schulwolf suggested that getting a mediator involved early, even if it did not lead to settlement, could pay dividends down the road as our understanding of the science behind COVID-19 evolves and the legislative and judicial landscape aspect becomes clearer. Listen to the episode here.