COVID-19 Business Interruption Insurance Claims – Don’t Overlook the Ordinance Or Law Exclusion

The legal media have been inundated with articles by lawyers who represent policyholders and insurance companies discussing business interruption claims arising from the COVID-19 pandemic. Some of this discussion has carried over into the mainstream media, including a recent Wall Street Journal article. Much of the discussion focuses on two issues. First, property insurance policies require “direct physical loss or damage” to property (either to the insured property, or non-insured property within a certain distance of the insured property for a coverage called “civil authority”). A virus has never been found to cause damage to property. Second, many (but not all) of these policies have a virus exclusion. I’m not going to write more here about those issues. Plenty of electronic ink has been spilled on them already. But I haven’t seen anyone write about another exclusion that seems likely to apply to these claims if policyholders can somehow convince a court that there was “direct physical loss or damage” to property: the ordinance or law exclusion.

The ordinance or law exclusion typically provides that the insurer “will not pay for loss or damage caused directly or indirectly by . . . [t]he enforcement of or compliance with any ordinance or law . . . [r]egulating the . . . use . . . of any property . . . .” That seems to be precisely what many of the governmental orders being issued do. For restaurants, for example, government orders typically regulate the use of the business premises by limiting operations to takeout and delivery, prohibiting dine-in service. At some point it is expected that dine-in service will be allowed, but limited to tables spaced six feet or more apart, as has begun occurring in some other countries. With respect to other businesses, governmental orders may limit their operations to curbside delivery of items purchased by phone or online, or require or urge them to have employees work from home except for certain limited operations that can only be conducted in the office (such as maintaining the computer servers so the work-from-home workforce can keep working).

Two aspects of the language of this exclusion may cause insurers to rely on it, particularly those that do not have a virus exclusion directly on point. First, the exclusion typically has an anti-concurrent causation clause providing that “[s]uch loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” In other insurance coverage lawsuits, this type of language has quickly put an end to debates about whether there was some other cause of the loss. After Hurricane Katrina, for example, policyholders argued that negligence in maintaining the levees in New Orleans was the cause of the property damage, not the flood. Courts rejected that position for multiple reasons, including the anti-concurrent causation clause.

Second, the ordinance or law exclusion typically states that “[t]his exclusion, Ordinance Or Law, applies whether the loss results from: (a) An ordinance or law that is enforced even if the property has not been damaged . . . .” This language may allow courts, if they so choose, to sidestep the issue of “direct physical loss or damage” if they find that the exclusion applies.

My prediction? The ordinance or law exclusion will be coming to a court near you, as the COVID-19 insurance litigation heats up.

Assignments of Benefits Under Homeowners Insurance Policies: Iowa Supreme Court Rules that Assignment Was Void Because Contractor Was Acting as Unlicensed Public Adjuster

One practice that has plagued the insurance industry in recent years has been contractors soliciting homeowners to make insurance claims after a hailstorm, for example, and then obtaining an assignment of rights to the claim and pursuing litigation against the insurer. The Iowa Supreme Court recently ruled that a contractor’s attempt to obtain such an assignment of rights was void because the contractor was acting as an unlicensed public adjuster, in violation of state law. The line of argument made here may be useful to insurers in other jurisdictions faced with abusive practices by contractors. Continue Reading

The District of New Jersey Affirms Application of Suit Limitation Provision in Train Derailment

Although we cover a wide variety of topics and issues on this blog, one issue that recurs with some frequency is the appropriate application of suit limitation provisions that are found in most property policies. The latest case to confirm that suit limitation provisions are valid and enforceable, and to highlight the peril an insured may encounter by not recognizing or addressing those provisions during the course of a claim, is Consolidated Rail Corp. v. Aspen Spec. Ins. Co., et al., 2019 WL 2417704 (D.N.J. June 10, 2019). That case involved a dispute between Consolidated Rail Corporation, otherwise known as “Conrail,” and Hudson Specialty Insurance Company (among other defendants), one of Conrail’s three excess layer insurance carriers.

The loss in question involved a November 2012 train derailment in Paulsboro, New Jersey, and the subsequent cost incurred by Conrail in reconstructing the bridge on which the accident occurred. Given various permitting and rebuilding issues that arose in the repair of the bridge, the project was not finished until March 2016, nearly three-and-a-half years after the accident. In December 2016, Conrail submitted a proof of loss totaling nearly $14 million to Hudson and the other excess carriers. Hudson denied Conrail’s claim several months later, and for reasons not relevant to this post. Litigation followed, and Conrail and Hudson cross-moved for summary judgment on, among other issues, the applicability of the suit limitation provision that required Conrail to bring suit within one year of Conrail’s discovery of the occurrence giving rise to the claim.

Last week, the Court, Judge Robert B. Kugler presiding, granted Hudson’s motion for summary judgment and dismissed Conrail’s claims. The Court began its opinion by noting that, under New York law (which applied both because the policy included a New York choice of law provision and because the parties agreed New York law applied to this dispute), parties can agree to contract to statute of limitations periods shorter than those designated by statute so long as the shortened period is reasonable under the circumstances. The Court remarked that the New York Court of Appeals has enforced contractual limitations periods as short as six months, and that there was no per se concern with a one-year suit limitation provision.

Conrail’s primary argument against application of the suit limitation provision was that, because it took several years for the necessary repairs to occur, it was not possible for them to commence suit within a year following the derailment. In support of that proposition, Conrail relied on the New York Court of Appeals case of Executive Plaza, LLC v. Peerless Ins. Co., 22 N.Y.3d 511 (2014), in which the court declined to enforce a two-year suit limitation provision because it was “neither fair nor reasonable” to do so under the circumstances presented. The Court rejected Conrail’s comparison to Executive Plaza, finding that, unlike in that case, there were no conditions precedent (such as the completion of repairs, or the submission of a proof of loss) to Conrail’s ability to initiate suit against Hudson – the only thing required by the applicable policy for suit to commence was that it be brought within a year of the subject occurrence. In response to Conrail’s suggestion that it wouldn’t be practical or feasible to commence suit before repairs were completed, and the quantum of damages known, the Court noted that Conrail could have requested an extension of the suit limitation period from Hudson, and chided Conrail for not doing so. In fact, the Court wrote that Conrail “failed to take any action to protect itself,” and that, despite being “more than sophisticated enough” to have done so, Conrail “has only itself to blame.”

The Court also rejected Conrail’s argument that Hudson “slipped” the suit limitation clause into the policy, that it wasn’t agreed to, and that it therefore shouldn’t be applicable or enforceable. The Court held that Conrail’s failure to plead or pursue a reformation theory for more than two years, and until responding to Hudson’s dispositive motion, barred Conrail’s argument. The Court also found that Conrail was stopped from contesting the contents of the policy because it had, as an attachment to its initial complaint, represented that the policy, with its suit limitation provision, was “true and correct.” Any eleventh-hour attempt to challenge the validity of certain provisions of that document would be “irreconcilably inconsistent” with Conrail’s previous assertions.

New Statutory Framework Confronts Florida’s AOB Crisis

A new law represents a major step forward to remedy Florida’s assignment of benefits (“AOB”) crisis, which Florida Governor Ron DeSantis has described as a “racket” in recent years. On Thursday May 23, 2019, Governor DeSantis signed House Bill 7065, which addresses the abuse of post-loss AOBs for residential and commercial property insurance claims, by (among other things):

  • Defining “assignment agreement” and establishing requirements for the execution, validity, and effect of such an agreement;
  • Transferring certain pre-suit duties under the policy to the assignee and shifting the burden to the assignee to prove that any failure to carry out such duties has not prejudiced the insurer’s ability to perform under the policy;
  • Requiring the assignee to give the insurer notice of the assignee’s intent to file suit and establishing requirements for the notice;
  • Requiring the assignee to comply with standards approved by the American National Standards Institute;
  • Limiting an assignee’s recovery if the AOB is executed in an emergency situation;
  • Limiting an assignee’s ability to recover certain costs from the insured;
  • Setting the formula that will determine which party, if any, receives an award of attorneys’ fees should litigation related to an AOB result in a judgment;
  • Allowing an insurer to prohibit AOBs in certain instances, provided that the insurer gives specific notice.

A key provision of House Bill 7065 requires an assignee to give ten business days’ written notice prior to filing suit. This notice must specify the damages in dispute, the amount claimed, and the pre-suit settlement demand, and must include an itemized, detailed written invoice or estimate of the work performed or to be performed. Requiring the repair or remediation company to provide supporting documentation prior to filing suit may put the insurer in a better position to evaluate the claim.

In addition, if the parties fail to settle and subsequent litigation results in a judgment, the Bill provides a means of recovering attorneys’ fees. Insurers in Florida now have the opportunity to recover their attorneys’ fees in certain situations. Specifically, the Bill allows an award of fees based on the difference between the judgment and the amount offered during settlement negotiations. To accomplish this, the Bill defines the difference between the insurer’s pre-suit offer and the assignee’s pre-suit demand as the “disputed amount.”

This provision especially benefits the insurer in cases where the difference between the judgment and the settlement offer is less than 25% of the disputed amount. In that case, the insurer is entitled to 100% of its attorneys’ fees. In cases where the difference between the judgment and the settlement offer is at least 25% but less than 50% of the disputed amount, neither party is entitled to fees.

Another key provision of the Bill creates Florida Statute Section 627.7153, which allows the insurer to issue a policy prohibiting AOBs if:

  • The insurer offers the same coverage under a policy that does not restrict the right to assignment;
  • The restricted policy is available at a lower cost than the unrestricted policy; and
  • The policy prohibiting assignment in whole is available at a lower cost than the policy prohibiting assignment in part.

House Bill 7065 becomes effective on July 1, 2019, and with its passage, there is some hope that abuse surrounding AOB claims will be curtailed. Nevertheless, there have been claims that the reforms treat contractors unfairly. We can certainly anticipate litigation by contractors taking issue with the meaning, scope and equities of the new law. We will monitor and weigh in on these challenges in the months ahead.

The Southern District Finds Unambiguous Policy Language Controls NYU’s Superstorm Sandy Claim

The United States District Court for the Southern District of New York recently granted an insurer’s motion for summary judgment in a case arising from Superstorm Sandy based on unambiguous policy language providing a significantly lower limit of liability for losses resulting from flood damage. In New York University v. Factory Mutual Insurance Co., 2019 U.S. Dist. LEXIS 45105 (S.D.N.Y. March 19, 2019), the court agreed with Factory Mutual (FM) that the policy’s $250 million and $40 million sublimits for flood damages applied to New York University’s (NYU) claim, rather than the policy’s $1.85 billion overall limit.

Superstorm Sandy inflicted damage to several NYU properties, including certain buildings associated with the university’s hospital and medical school. Those damages resulted in sizeable time element—or, business interruption—losses as well as losses under the policy’s additional coverages. FM and NYU agreed that the policy provided coverage but disagreed over which of its limits and sublimits applied to NYU’s claims. FM read the policy to limit losses attributable to flood damage at NYU’s hospital and medical school to $40 million and capped its payments accordingly. NYU read the policy to apply only its overall $1.85 billion aggregate limit to the school’s claims. NYU ultimately brought an action consisting of five counts for declaratory judgment and one breach of contract count claiming FM wrongfully limited coverage.

The dispute centered on which of three limits of liability applied to time element losses and losses subject to the policy’s additional coverages: a $1.85 billion overall coverage limit, a $250 million subsidiary aggregate limit for losses attributable to flood (flood limit), and a $40 million sublimit for flood damage suffered at NYU’s hospital and medical school (flood sublimit).

Relying on the policy’s unambiguous language, the court “easily dispensed with” NYU’s argument that the $1.85 billion overall limit applied. The policy provided that “limits of liability in an [o]ccurrence apply to the total loss or damage at all [l]ocations and for all coverages involved, including any insured time element loss.” The court found this language “unambiguous in subjecting time element claims to the limit of liability for flood, as well as its sublimit.” Moreover, the policy’s time element coverage section “plainly stat[ed] that recovery for ‘time element loss . . . is subject to the applicable limit of liability that applies to the insured physical loss or damage.’” Accordingly, the court held that NYU’s time element loss claims were subject to the $40 million sublimit specific to NYU’s hospital and medical school.

The court also held that NYU’s claims under the policy’s additional coverages were subject to the flood sublimit based on the same unambiguous policy language. Given that language, the court rejected NYU’s argument that, under the expressio unis canon of construction, the lack of specific references to the sublimits within the policy’s time element and additional coverages sections implied that only the overall $1.85 billion limit should apply to the school’s claims. “Rather,” the court reasoned, “consistent with the general principle [under New York law] that interpretive tools need not be deployed when the contract is unambiguous, expressio unius should not be applied to create ambiguity where none would otherwise exist.”

The decision demonstrates how unambiguous policy language may literally make a billion dollar difference in coverage.

District of New Jersey Applies Anti-Concurrent Causation Provision to Superstorm Sandy Claim

In a recent decision arising out of Superstorm Sandy, the United States District Court for the District of New Jersey confirmed the enforceability of anti-concurrent causation provisions.  Zero Barnegat Bay, LLC v. Lexington Ins. Co., No. 14-cv-1716, 2019 U.S. Dist. LEXIS 43625 (D.N.J. Mar. 18, 2019).

In Barnegat Bay, the insured sought coverage for damages suffered as a result of Superstorm Sandy.  Lexington inspected the property and concluded that high winds caused damage to roof shingles, windows, ceilings and walls.  Lexington determined that the damage amounted to $17,344.79 – an amount below the insured’s deductible.

The insured hired its own inspector, who concluded that the wind damage amounted to $466,550.57, which included damage to the same areas identified by Lexington’s inspector (although plaintiff’s inspector attributed a higher value to such damage) in addition to the insured’s pool, a boardwalk, and an electrical transformer.  The insured engaged a causation expert, who concluded that first wind, then flooding, caused damage to the additional property.

Lexington moved for summary judgment with respect to the claimed pool, boardwalk and transformer damage based on the fact that the insured’s own expert’s analysis that damage to these items involved flood damage, and the applicable policy contained an anti-concurrent causation provision which excluded from coverage losses caused “directly or indirectly” by water damage, “regardless of any other causo [sic] or event contributing concurrently or in any sequence to the loss.”  The court held that New Jersey law applies such provisions to exclude coverage for losses caused by flood, even when the flood acts concurrently or sequentially with a covered peril.

Zero Barnegat Bay reaffirms that anti-concurrent causation provisions are potentially applicable even where one cause of loss damages the property prior to damage caused by the excluded loss.

Failure to Cooperate and Misrepresentation: New York Federal Court Grants Summary Judgment Finding Insured Explanations for False Statements “Dubious”

While issues of fact can preclude summary judgment in some cases involving failure to cooperate and misrepresentation, a New York federal court recently granted summary judgment to an insurer in this context. In D’Andrea v. Encompass Ins. Co. of Am., No. 15-CV-467-MJR, 2018 U.S. Dist. LEXIS 146446, 2018 WL 4095098 (W.D.N.Y. Aug. 28, 2018), the insured was seeking property insurance coverage for a fire loss that occurred at a two-unit residence purportedly owned by the insured and rented to tenants. In submitting his insurance claim, the insured provided three sworn statements in proof of loss, including one for the loss of the dwelling and one for loss of use of the dwelling. The dwelling proof of loss requested $225,000 in damages and listed the insured as the owner of the premises. Continue Reading

Residence Premises Condition: New York Trial Court Grants Summary Judgment Based On a Finding of A “Feigned” Affidavit

A New York trial court recently granted an insurer’s motion for summary judgment pursuant to the “Residence Premises Condition” contained in a homeowner’s insurance policy.  Aschmoneit v. Adirondack Insurance Exchange, 2018 N.Y. LEXIS 3418 (August 7, 2018), The court found that the insured did not reside at the home despite an affidavit asserting that he spent “most weekends” making repairs to the home.

On May 24, 2013, a fire occurred at the insured’s home resulting in $150,000 of alleged damages. Adirondack Insurance Exchange (AIE) denied the insured’s claim for coverage on the ground that he did not reside at the property. AIE’s determination was based, in part, on the fact that gas bills showed no gas usage for winter months.  The insured filed suit.

In response to the insurer’s motion for summary judgment, the insured submitted an affidavit stating that he was at the property on a regular basis, “including most weekends,” he performed construction work there, and he stored personal items, fixtures, and furniture on site. In New York, the standard for determining residency “requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain.”  Dean v. Tower Ins. Co. of New York, 19 NY3d 704, 708,979 N.E.2d 1143, 955, N.Y.S.2d 1143, 955 N.Y.S.2d 817 (2012). Notwithstanding the affidavit, the Court held that that the insured’s alleged intention to reside at the home was insufficient to satisfy the policy’s Residence Premises Condition.

In addition, the court noted that the insured failed to produce evidence to buttress his assertions that he spent most weekends at the home. Specifically, the court noted that the insured “fails to reconcile the discrepancy between his purported weekend use . . .  and the lack of gas service during the winter months of his reported occupancy.” In light of these facts, the court stated that the insured’s affidavit “must be viewed as presenting a feigned factual issue . . . .”

The decision in Aschmoneit demonstrates, once again, that self-serving affidavits that do not comport with real evidence may be regarded with skepticism, and may not offer sufficient grounds to oppose a summary judgment motion.

District of New Jersey Finds Post-Denial Communications By Insurer’s Counsel Insufficient to Sustain Bad Faith Claim

Under New Jersey law, an insurer cannot be held liable for bad faith in denying an insurance claim if the claim is “fairly debatable.” Therefore, unless a plaintiff can establish a right to summary judgment on the underlying cause of action for breach of contract, the coverage denial is considered “fairly debatable” and the court must dismiss the bad faith claim. See Pickett v. Lloyd’s, 131 N.J. 457, 473 (1993); Tarsio v. Provident Ins. Co., 108 F. Supp. 2d 397, 401 (D.N.J. 2000). Continue Reading

Scope of Recoverable Damages: District of New Jersey Finds Insureds Not Entitled to Replacement Cost Value Until Damaged Property is Repaired or Replaced

Property insurance policies typically require that the insured repair or replace damaged property before recovering on a replacement cost value (RCV) basis. Until then, the insured is entitled only to the actual cash value (ACV) of the damaged property. The U.S. District Court for the District of New Jersey recently decided a case involving the proper method of calculating the insureds’ loss under a homeowners’ insurance policy following damage to the insureds’ property from Superstorm Sandy. In Giacobbe v. QBE Speciality Ins. Co., 2018 U.S. Dist. LEXIS 77076 (D.N.J. May 8, 2018), the plaintiff insureds contended that they were entitled to the RCV of the damaged property despite the fact that they had not repaired or replaced the property. The insurer moved for summary judgment, arguing that the plaintiffs were entitled only to ACV and that the Plaintiffs failed to offer sufficient proof of damages, i.e., that the ACV exceeded what the insurer paid. Continue Reading