Companies with substantial business interruption losses related to the coronavirus (COVID-19) pandemic must take immediate, concrete steps now to preserve their ability to pursue recoveries from insurance and/or financial relief from future governmental programs.
With respect to business interruption losses, insurance policies generally require the policyholder to provide “prompt” notice to the insurer and to follow up with a signed and sworn proof of loss, sometimes within a set number of days after the initiation of losses. Documenting losses and expenses and describing claims in a legally accurate manner is key.
In certain instances, pursuing claims through coverage litigation may be necessary and/or may enhance the ability to recover. Pursuing claims through coverage litigation should be done strategically with a focus on any unique favorable facts and a consideration of the state law(s) that may apply to resolve the coverage dispute, rather than through inapt litigation vehicles designed to aggregate potentially distinguishable policyholder claims together, such as class actions or multidistrict litigation.
Finally, all policyholders should stay informed regarding developments in COVID-19-related business interruption coverage litigation and legislation to maximize their chances at recoveries.
A policyholder’s coverage for business interruption losses is typically found in its property insurance policies, which provide coverage with respect to an insured’s “property” against “all risks of physical loss or damage” except as otherwise excluded. These policies contain conditions that provide that the policyholder is to provide notice “immediately,” “promptly,” and/or “as soon as practicable” in the event of a loss. Certain of these policies also require that within a set number of days, typically 90, after the loss, a sworn proof of loss be submitted absent written agreement otherwise by the insurer. Other policies only state that a sworn proof of loss be submitted within a set number of days after the insurer requests such proof of loss.
In light of these provisions, it is important for a policyholder to promptly provide notices of its losses to its carriers. But it is equally important for the policyholder to accurately and timely document those losses with an initial sworn proof of loss, which requires an accurate legal framing of the claim as well as documentation concerning the existence and amount of losses. And given the extraordinary hardships all businesses are confronting, companies should be prepared to seek an extension for submitting any initial proofs of losses with the carrier, if necessary.
Finally, the notices and other communications with insurers should be framed accurately and drafted in a manner that will not inadvertently and incorrectly obstruct the policyholder’s ability to maximize its access to potentially responsive coverage. Coverage counsel, as opposed to solely relying on brokers, should be consulted in connection with all such communications.
As discussed in our recent LawFlash, as a general matter but depending on the policy language, it may be best to document the losses of earnings or profits and extra expenses arising out of each insured location, as it may be possible to argue for recoveries under a policy’s civil authority coverage for losses arising out of each order limiting, prohibiting, or restricting access to each of the policyholder’s insured locations. In documenting losses, it is important to establish a timeline, including of the issuance dates and durations of civil authority orders and supplemental orders that limited or prohibited access to the insured locations.
Tracking losses and expenses on an insured location by insured location basis also positions policyholders well with respect to variances of different states’ laws concerning the applicability of business interruption losses to the insureds’ losses. Insurance policies are contracts and, as with all contracts, their interpretation is governed by applicable state law(s). Accordingly, it is important in the current circumstances for a policyholder with insured properties in multiple states to understand variances in how courts have construed, for example, the business interruption coverage “physical loss or damage” of property requirement and certain policy exclusions under those states’ laws, in order to develop a strategic approach to enhance the ability to recover its losses.
Policyholders should also monitor draft legislation pending before several state legislatures that would broaden coverage under policies or clarify that, under that state’s law, COVID-19-related business interruption losses are covered under policies providing business interruption loss coverage. As many property insurance policies’ liberalization and conformity to statute conditions apply to broaden or conform coverage to changes in law within “any jurisdiction,” if a statute in a state where the insured has properties is passed to broaden or clarify that there is coverage for COVID-19-related losses, it will be important for that policyholder to identify the losses arising out of such properties.
In a coverage dispute, unless the policy states what law applies, the state law(s) that a court may consider in interpreting how the policy’s terms apply to the underlying losses are governed by the applicable choice-of-law principles in that jurisdiction. Certain common factors considered in determining the applicable law are where the policy was issued, where the insured is headquartered, and/or where the insured risks are located.
Consequently, in a coverage dispute, a policyholder with impacted insured properties in states with favorable coverage precedent or statutes may be able to argue that that state’s law(s) apply, and it will be in a better position to do so if it has captured the losses arising out of each of its insured properties.
Certain policyholders already have initiated coverage actions across the United States and in London. A number of these lawsuits surprisingly seek the certification of a nationwide class of corporate policyholders against certain insurers or the establishment of coordinated multidistrict litigation (MDL) in federal court. Generally, the litigation devices of class actions or MDLs are used by consumers of companies’ products or shareholders of companies. It is an extraordinary development that companies that in other contexts could be the targets of class actions or MDLs are now seeking to represent corporate policyholder classes or to initiate MDLs against insurers.
Additionally, neither of these approaches is appropriate for litigating coverage disputes and will likely prove counterproductive to the best interests of most corporate policyholders.
Class Actions Are Not Viable Nor Desirable
The class action lawsuits seek certifications of nationwide classes of policyholders and assert breach and declaratory relief claims against certain insurers. Historically, such class action efforts have failed. Even if a class representative were able to satisfy the numerosity, commonality, typicality, and adequacy requirements of Federal Rule of Civil Procedure 23(a), the Rule 23 requirements would likely present insurmountable challenges.
To certify a class under Rule 23(b)(2), “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” If the suit is “about damages,” as these putative class actions suits are, the class cannot be certified under Rule 23(b)(2).
An action may be certified as a class pursuant to Rule 23(b)(3) only if “the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.” Contract claims—particularly insurance contract claims—generally should not be subject to a nationwide class certification.
In a diversity action, a federal court must apply the choice-of-law rules of the forum state. If the choice-of-law rules point to the application of laws of different states for different policyholders’ claims (and they necessarily would here), and that law is meaningfully different than the law of the forum state, a nationwide class is not appropriate.
Where the predominant issue is “contract interpretation,” the prospective class representative of a nationwide class generally must bear the burden of demonstrating that the potentially applicable law interpreting the insurance policy terms are so similar that the court may apply the law of the forum state. If that burden is not met, the court cannot conclude that common issues of law and fact predominate in the action.
While policyholders will argue that COVID-19-related losses arise from direct physical loss or damage of property under all various state law approaches to what constitutes “physical loss or damage” to property under business interruption coverage, various state law approaches to that coverage requirement differ. Likewise, variations in state orders and mandates regarding COVID-19, including whether government stay-at-home orders were issued and, if so, the scope of each, and the highly individualized nature of business interruption losses would be further impediments to class certification. Finally, the desire of many businesses with substantial losses to control their own litigation raises questions concerning superiority.
Accordingly, the class action approaches will likely fail on the merits. They also are premised on a fiction that the most effective way to maximize recoveries for policyholders is to seek one singular “up or down” answer by one court or a handful of courts handling classes against different insurers as to whether all COVID-19-related business interruption losses essentially are covered or not covered. Policyholders could find themselves waiting a year or more for a court to decide whether to certify a class, only to find themselves on the outside looking in if certification were denied.
COVID-19-Related Business Interruption Coverage MDL Is Not Apt Nor Desirable
Similarly, the efforts to establish an MDL for COVID-19-related business interruption insurance coverage disputes likely also will fail. The “job” of the United States Judicial Panel on Multidistrict Litigation (MDL Panel) is to “(1) determine whether civil actions pending in different federal districts involve one or more common questions of fact such that the actions should be transferred to one federal district for coordinated or consolidated pretrial proceedings; and (2) select the judge or judges and court assigned to conduct such proceedings.”
Historically, under limited circumstances, certain insurance coverage issues relating to an underlying liability where the underlying liability is the subject of an existing MDL have been considered in the context of that MDL. However, even in those circumstances, the MDL Panel “as a general rule [has] decline[d] to transfer [declaratory judgment insurance actions] if they appear to present ‘strictly legal questions . . . requir[ing] little or no discovery.” “Where, however, such actions require and rely on the same factual discovery, as the already-centralized actions, transfer may be warranted.”
In the Deepwater Horizon MDL, unlike in the Chinese Drywall MDL, the MDL Panel did transfer coverage issues to the MDL court because the coverage issues concerned “events at the core of the MDL” and the insurers supported the transfer. Generally, however, where “insurance coverage questions in . . . cases are likely to be decided by an application . . . [of] policy language under the applicable state law, and the insurance company that might benefit the most from the efficiencies of centralization opposes transfer of [the] cases,” the cases are not transferred to an already existing MDL court.
Here there is no underlying preexisting MDL and most of the actions brought on behalf of businesses seeking an MDL assert declaratory relief claims, which will be resolved with consideration of the applicable state’s law(s) to each policyholders’ claim for coverage.
Most Optimal Recovery/Litigation Approach
Many policyholders will notice their claims and perfect their initial proofs of losses for their COVID-19-related business interruption losses. Certain of those policyholders, particularly those with favorable-to-coverage facts and policy language, may find it prudent to initiate their own coverage litigation in an appropriate forum—cognizant of applicable choice-of-law tests in that court, developments with respect to legislation in that state and other states, and other factors—to preserve and pursue recoveries in the most favorable forum possible, as opposed to a forum selected by their insurer.
All policyholders that have noticed substantial COVID-19-related losses should keep abreast of developments, and consider and reconsider how best to further preserve and pursue recoveries for those losses.
It is important for policyholders confronting significant COVID-19-related business interruption losses to confer with experienced coverage counsel that can advise on a wide variety of issues integral to enhancing the prospects of recovering these losses.
We have experience assisting clients in obtaining business interruption insurance recovery in a wide range of scenarios and have consulted with clients on the implications of COVID-19. We stand ready to assist businesses in maximizing their recovery of business losses in this area. For assistance with these or any other issues, contact any of the Morgan Lewis lawyers listed below.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Scott T. Schutte
Jeffrey S. Raskin
 See Kanter v. Warner-Lambert Co., 265 F.3d 853, 860 (2001); Packard v. Provident Nat. Bank, 994 F.2d 1039, 1050 (3rd Cir. 1993) (“[A] plaintiff may not turn what is essentially a legal claim into an equitable one merely by demanding an injunction requiring the payment of money.”).
 See Fed. R. Civ. P. 23(b)(3).
 See Guadiana v. State Farm Fire and Cas. Co., 2009 WL 6325542 (D. Ariz. Dec. 18, 2009) (citing Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1190 (9th Cir. 2001)) (other citations omitted).
 See In re: Oil Spill by Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, 764 F. Supp. 2d 1352, 1353 (citing MDL No. 2047, In re: Chinese-Manufactured Drywall Prods. Liab. Litig., June 15, 2010, Transfer Order at 2).
 Id. (citing In re: Helicopter Crash Near Weaverville, Calif., on Aug. 5, 2008, 626 F. Supp. 2d 1355, 1356, 157 (J.P.M.L. 2009) (emphasis added).
 See MDL No. 2047, June 15, 2010, Transfer Order at 2.