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Some COVID rulings favor policyholders

empty restaurant

A Louisiana appeals court’s refusal to dismiss policyholder litigation in a COVID-19-related business interruption case is significant and expected to be influential, policyholder attorneys say.

But with another intermediate appeals court in New Jersey issuing pro-insurer rulings in eight cases, the overall direction of state appeals court rulings remains unclear. 

Many policyholder attorneys have held out hope that state appeals court rulings would follow a different path than the uniformly pro-insurer rulings that have been issued to date by federal appeals courts.

In a divided opinion, the Louisiana Court of Appeal for the 4th Circuit overturned a lower court in June and held that a New Orleans restaurant is entitled to business interruption coverage for pandemic-related losses because of ambiguous policy language, according to the ruling in Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al.

In February 2021, following a bench trial that was the first trial to be held on the issue, a Louisiana state judge had ruled in favor of Lloyd’s of London underwriters in the case filed by the owner and operator of the Oceana Grill in New Orleans’ French Quarter. The policyholder appealed the ruling. 

The Louisiana appeals court ruling on June 15 came a day after a New York appeals court also ruled in a policyholder’s favor. 

The New York State Supreme Court Appellate Division, First Judicial Department, upheld a lower court decision and ruled that the New York Botanical Garden was entitled to COVID-19-related business interruption coverage from an Allied World Assurance Co. Holdings Ltd. unit. That ruling was somewhat unusual in being based on a “pollution legal liability policy.” 

Courts in numerous other COVID-19-related cases have ruled that businesses that closed operations during government-mandated shutdowns in 2020 did not suffer physical damage and therefore business interruption coverage was not triggered. 

Although many federal appeals courts have upheld the rulings, relatively few state appeals courts have so far issued decisions.

Attorneys in the Louisiana case did not respond to requests for comment.

Policyholder attorneys who are not involved in the case said the ruling is significant.

Scott D. Greenspan, senior counsel with Pillsbury Winthrop Shaw Pittman LLP in New York, said this is the first policyholder victory from any state appellate court that focuses on the physical loss or damage issue, “so it’s a tremendous victory for policyholders and is likely to result in additional appellate decisions in favor of policyholders,” he said.

Bradley Dlatt, an associate with Perkins Coie LLP in Chicago, said, “State courts are ultimately the arbiters of state law and, for a while now, courts have been hesitant to rule in policyholders’ favor because many federal courts, without benefit of discovery and fully developed case records, started making rulings on whether or not a novel virus could cause loss” or physical damage to property.

The Louisiana case “is a particularly significant one because it came with a fully developed factual record,” Mr. Dlatt said.

Peter A. Halprin, a partner with Pasich LLP in New York, said in a statement that the Louisiana appeals court “applied a bedrock principle of insurance policy interpretation, holding that the phrase ‘direct physical loss of or damage to’ was ambiguous and should thus be construed against the drafter and in favor of coverage.”

The ruling will influence other appellate courts, he said.

Marshall Gilinsky, an insurance recovery attorney and shareholder at Anderson Kill P.C. in New York, said in a statement that “while federal courts of appeals have ruled that the virus does not constitute physical loss or damage, case law from many state courts suggests otherwise, and state courts have been more receptive to businesses’ COVID-19 claims.” 

Craig Stanfield, a partner with King & Spalding LLP in Houston, said that while the decision was a “bit mixed” because it was not unanimous, it is nevertheless significant, giving policyholders “something to hang their hats on.”

Meanwhile, the Superior Court of New Jersey appellate division in Jersey City, which is one level below the state supreme court, has issued three separate rulings, covering eight cases, in insurers’ favor.

It first ruled in six COVID-19-related business interruption cases in Mac Property Group LLC & The Cake Boutique LLC v. Selective Fire and Casualty Insurance Co. et. al.

This was followed by another such ruling against a country club in Rockleigh Country Club, LLC v. Hartford Insurance Group. Both decisions affirmed lower court rulings.

In the third ruling, the appeals court overturned a lower court and ruled against Atlantic City-based Ocean Casino Resort, and in favor of units of Zurich Insurance Group Ltd., American International Group Inc. and Allianz SE in COVID-19-related business interruption coverage. 

That case was AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Co., AIG Specialty Insurance Co. and Interstate Fire and Casualty Co. and National Fire & Marine Insurance Co.

Unclear policy language at issue in business interruption decision

The Louisiana Court of Appeal for the 4th Circuit in New Orleans held in June that a New Orleans restaurant had business interruption coverage for pandemic-related losses because of ambiguous policy language.

The majority ruling in the 5-2 decision in Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al. said the policy “covers the loss of business income due to necessary ‘suspension’ of operations caused by ‘direct physical loss or damage to the property.’” 

“‘Suspension’ is defined in the policy as the ‘slowdown or cessation of your business activities.’ Therefore, under the terms of the contract, the complete cessation of operations and uninhabitable property are not prerequisites to payment for business losses suffered due to the suspension of operations caused by ‘direct physical loss or damage to the property,’” the ruling said. 

“Suspension includes the slowdown of business activities, which occurred here, as well as the complete cessation of business operations which occurs when a property is entirely uninhabitable,” the ruling said. 

The majority noted that the restaurant had an “all-risk” policy “where all risks are covered unless clearly and specifically excluded.’” 

“The words of the policy foresee a situation in which business losses can be covered by less than the complete destruction of the property or less than the complete loss of the property’s utility,” the ruling said. 

“The presence of this ambiguity and the existence of two equally reasonable interpretations as to what constitutes a ‘direct physical loss or damage to’ the insured property requires the Court to liberally construe the provision in favor of coverage for the appellants and against the appellee, who drafted the vague provision,” the majority said, in reversing the trial court’s decision and ruling in the restaurant’s favor. 

The dissenting opinion stated, “While the majority argues that the language is open to more than one reasonable meaning and is ambiguous, the jurisprudence and plain language of the Policy do not support that contention.”