The Covid-19 pandemic spawned a great deal of insurance coverage litigation. Decisions have been, to put it mildly, inconsistent, but the theme in most of them is good writing: drafting of policy text, as well as preparation of pleadings in cases challenging denials of coverage.
Your sixth-grade teacher was right: words do matter. So was the Beat writer Jack Kerouac, who hoped, “One day I will find the right words, and they will be simple.” Insurance policies comprise thousands of words and are far from simple, and sometimes that gets the insurance companies in trouble.
On June 15, 2022, the Fourth Circuit Court of Appeals’ 3-2 decision in Cajun Conti LLC, et. al. v. Certain Underwriters at Lloyd’s, London reversed a trial court decision originally in favor of the insurer. The reversal was made on the grounds that the language of the policy was so ambiguous in what was excluded, yet clearly stated elsewhere that it covered “all risks,” that the court had to construe it in favor of coverage.
The majority opinion comprises many citations to a dictionary. That is never good for an insurer that contends that its clear language precludes coverage.
The Oceana Grill in New Orleans (owned by Cajun Conti LLC) was one of thousands of restaurants forced by the pandemic and civil authority orders to reduce its business to take-out for many months. Its dining rooms were closed, by order of the mayor, from March 16, 2020, to May 16, 2020, but reopened at only 25% capacity and remained open at extremely limited capacity thereafter. The Grill submitted a claim under its all-risk commercial insurance policy for the loss of income from the shutdown and subsequent slowdown of the business.
After a bench trial, the trial court ruled in favor of Lloyd’s on the grounds that the “contamination due to virus did not constitute direct physical loss of or damage to property.” In reversing that decision, the Fourth Circuit examined the language of the policy and found that it did not define “direct physical damage” or “loss.”
Relying on expert testimony at the trial, the Fourth Circuit found that there were indeed virus particles on the premises that precluded full use of the restaurant and that this fit within the provision for coverage in the event of losses due to “suspension” of operations because of “physical damage.” In discussing the absence of definitions of terms that would support the insurer’s position, including a virus exclusion, the court wrote, “contract terms must be interpreted in a common-sense fashion.” It found that virus particles fit within a common-sense definition of “direct physical loss or damage” because they rendered the premises unusable to full capacity. “Loss” included a slowdown as well as shutdown, again as a matter of common-sense interpretation.
The shoe was somewhat on the other foot in the June 20, 2022 decision of the Appellate Division of the Superior Court of New Jersey in Mac Property Group LLC, et. al. v. Selective Fire and Casualty Co., et. al. Here, six appeals were consolidated to consider a matter of apparent first impression: whether coverage for business interruption as a result of a civil authority order is nonetheless excluded by a virus exclusion in the policy. The court answered that question in the affirmative, ruling that but for the virus there would have been no civil authority order by Governor Phil Murphy that led to the shutdowns and slowdowns of the businesses at issue. This is a novel determination that other courts, and perhaps even New Jersey’s Supreme Court, may decline to follow.
The Superior Court also noted that none of the plaintiffs contended that the virus was on their premises as particles or otherwise, contrary to the position the plaintiff took in the Fourth Circuit case. Given what has been revealed in scientific research about the coronavirus and how virus particles can be transmitted through the air within a business property, one must wonder: Was the court’s observation simply of no moment because the carriers in this New Jersey case had already included a virus exclusion, thus rendering an allegation of the presence of virus particles unhelpful to the plaintiff’s cases? Or was the court purposefully sending a message to policyholders’ attorneys to brush up the prose of their pleadings?
Courts considering these cases have differed widely in consideration of these issues. The Cajun Conti panel in the Fourth Circuit opined that the term “direct physical damage” was ambiguous. The Mac Property Group court took a different view. Some courts will highlight perceived deficiencies in policy language and others will instead focus on the text of the pleadings by policyholders challenging denials.
There is no uniformity of approach among the judiciary in considering these relatively new Covid insurance cases. Mac Property Group may be on its way to the New Jersey Supreme Court, so the end of that story may not have been written.
But three things are about as clear as possible in this multiplicity of judicial opinion: First, if carriers continue to use phrases like “direct physical damage” or “loss” without defining them, they may put their coverage denials at risk and will create a lot of work for their counsel and the policyholders’ attorneys. The Mac Property Group court, while ruling for the carrier, took pains to note that many insurance agreements are “contracts of adhesion.” Second, good writing on both sides of the “v” can go a long way toward minimizing legal expense. Third, carriers should revisit their policies in light of recent developments, including judicial opinions, and policyholders should read their policies—every word.
If you have any further questions regarding Covid-19 insurance litigation or policy language, please contact Kenneth Rashbaum.