New Pandemic Discovery Protocols for Business Interruption Insurance Litigation, 0121 COBJ, Vol. 50, No. 1 Pg. 51

PositionVol. 50, 1 [Page 51]

50 Colo.Law. 51

New Pandemic Discovery Protocols for Business Interruption Insurance Litigation

Vol. 50, No. 1 [Page 51]

Colorado Lawyer

January, 2021



This article builds on two previous Colorado Lawyer articles surveying COVID-19 insurance issues. It highlights recently developed initial discovery protocols for business interruption insurance disputes that are intended to make discovery in these cases more efficient.

Ten months into the pandemic, COVID-19 continues to impact large and small businesses. Many businesses have permanently closed, while others have adapted by transitioning employees to teleworking, developing a virtual retail presence, or seeking federal loan assistance. The aggregate losses for U.S. companies with fewer than 100 workers has been estimated at as much as $431 billion a month.[1] In the wake of these losses, businesses continue to file insurance claims for business interruption (BI) and similar insurance coverage. On the insurance side, insurers could face as much as $100 billion in losses from the pandemic.[2] There has already been a rapid increase in court cases involving commercial property damage BI insurance claims, as explored in a recent two-part Colorado Lawyer series.[3]

Recognizing the need to efficiently process this influx of cases in both state and federal courts, IAALS, the Institute for the Advancement of the American Legal System at the University of Denver, launched a project to create discovery protocols for BI insurance disputes (BI Insurance Protocols).[4] The BI Insurance Protocols provide a new pretrial procedure for cases involving BI insurance for commercial property damage claims arising from the COVID-19 pandemic, with the goal of reducing conflict and cost for the parties and the court. The protocols are designed to be implemented by trial judges, lawyers, and litigants in state and federal courts.

The Current State of Business Interruption Litigation

BI coverage, also known as business income coverage, covers lost income and operating expenses when a business cannot continue normal business operations. The business interruption must result from direct physical loss or damage to the insured's property. Coverage depends on the policy language, insurers' forms, and any exclusions that would preclude coverage for BI losses. The threshold question when determining coverage is whether the business suffered a direct physical loss of or damage to its property according to the policy terms at issue.[5] Jurisdictions disagree about what constitutes physical loss of or damage to the property. For example, some courts have held that property must suffer physical structural damage.[6] Colorado courts have held that physical loss means the property is unfit for physical occupancy or is unusable.[7] During COVID-19, litigation has focused on whether viral or similar exclusions exclude such coverage, and whether specialty coverage applies, such as coverage for business losses due to "civil authority clauses."

Covid Coverage Litigation Tracker

Professor Tom Baker at the University of Pennsylvania Carey Law School developed the online Covid Coverage Litigation Tracker to report data on BI insurance coverage cases related to the COVID-19 pandemic.[8] The data collected includes policyholder name and industry code, insurer name and AM Best number, policyholder and insurer law firms, jurisdictions where the case is litigated, the coverage sought, the type of insurance policy and state of issue, insurance policy forms, and information regarding key litigation events.[9] The site approximates a two-week delay from case filing to tracking on the website.[10] As of November 25,2020, the site lists 1,414 lawsuits filed for BI coverage.[11] The site also keeps track of outcomes on merit-based motions to dismiss and will eventually track and compare specific policy language.[12]

Spectrum of Recent Court Rulings

BI lawsuits across federal and state courts are in early litigation stages. Courts are beginning to rule on defendants' motions to dismiss for failure to state a claim, plaintiffs are seeking to amend complaints, and parties are exchanging initial disclosures. Court rulings on defendants' motions to dismiss for failure to state a claim run the gamut, including dismissing plaintiffs' cases with or without prejudice, denying the motions and proceeding with scheduling orders and setting trial dates, or granting dispositive motions in plaintiffs' favor.

In Studio 417, Inc. v. Cincinnati Insurance Co., the Western District of Missouri denied an insurer's motion to dismiss, rejecting arguments that plaintiffs, a proposed class of restaurants and hair salons, did not state plausible claims for "direct physical loss," "civil authority," "ingress/ egress," "dependent property," and "sue and labor" coverage under their "all risk" policies.[13] The court acknowledged that "'physical loss' is not synonymous with physical dam age" because "loss" includes "the act of losing possession" and "deprivation," and a physical loss may occur when the property is "uninhabitable or unusable for its intended purpose."[14] The court then issued a scheduling order and set trial for May 2022.

In North State Deli, LLC, v. Cincinnati Insurance Co., a superior court in North Carolina granted plaintiffs' partial motion for summary judgment against defendants "jointly and severally" for declaratory judgment, where the policies did not contain viral exclusions and the court concluded that the policy language, '"accidental physical loss or accidental physical damage,'" has "two distinct and separate meanings," and "the phrase 'direct physical loss' included the loss of use or access to covered property even where that property has not been structurally altered."[15] Further, the court told parties that the order represented "a final judgment" with "no just reason for delay of any appeal."[16]

Courts have also dismissed insureds' lawsuits—both with and without prejudice—for failure to adequately allege direct physical loss. In Henry's Louisiana Grill, Inc. v. Allied Insurance Co., the Northern District of Georgia granted the insurer's motion to dismiss with prejudice the insureds' lawsuit seeking coverage for BI and civil authority clause coverage.[17]The court examined the key phrase '"direct physical loss of or damage to' the covered property" and determined that plaintiffs could not state probable claims because they admitted that COVID-19 had never been identified on the premises.[18] The court also rejected plaintiffs' argument, based on the civil...

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