By Steven Allison, Samrah Mahmoud, Sheila Chen and Stephanie Phan

Law360 (May 7, 2020, 6:05 PM EDT )

Steven Allison

Samrah Mahmoud

Sheila Chen

Stephanie Phan

While class actions involving insurance coverage are typically rare, in the last two months, businesses have filed over 25 class actions nationwide alleging that their insurers have failed to cover claims for losses related to COVID-19 business restriction orders. These claims, referred to as business interruption claims, will continue to be filed as shelter-in-place orders and related restrictions in various cities and states continue.

Plaintiffs attorneys have even recently filed a petition to coordinate these business interruption suits in multidistrict litigation. Insurance coverage disputes, however, are generally considered not susceptible to class treatment because coverage claims — and more generally breach of contract claims — often present unique and individualized issues that defeat the purpose of a class action.

This issue is compounded in these business interruption class actions, particularly ones that seek to represent a nationwide class, by the differences in state and municipal orders regarding business operations under COVID-19. As discussed further below, these actions will present significant class certification issues, including issues with key class action requirements like typicality, commonality and predominance.

Business Interruption Claims

As municipalities and states throughout the country have issued varying shelter-in-place orders, businesses that have been forced to close either completely or partially have filed claims with their insurers seeking business interruption coverage under so-called all-risks property and casualty policies.

These types of policies typically provide business interruption coverage on a form titled building and personal property coverage form (CP 00 10) that covers "direct physical loss of or damage to Covered Property ... caused by or resulting from any Covered Cause of Loss." Examples of when this coverage might be triggered include physical damage from natural forces such as fire, wind or lightning.

But it is not typically understood to include coverage for viruses or losses related to viruses, and in fact, the policies may contain exclusions that specifically bar coverage for viruses or do so through other exclusions for biological materials/contaminants and absolute pollution exclusions. [1]

Class Action Issues Related to Business Interruption Claims

Insurance business interruption class actions related to COVID-19 will likely face significant hurdles on class certification due to the individualized issues that may raise. To be granted class certification, a plaintiff must prove several elements that establish the appropriateness and suitability of a class suit, including showing that the plaintiff's claims are typical of the class; and that there are "questions of law or fact common to the class."[2] 

In addition, the plaintiff must also typically prove that "questions of law or fact common to class members predominate over any questions affecting only individual members; and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy" (i.e., predominance and superiority).[3] Where a class involves too many unique or individualized issues, class certification is generally denied.[4]

The insurance business interruption class actions that have been filed around the country may present myriad unique and individualized issues that could hamper plaintiffs' ability to prove elements like typicality, commonality and predominance. These challenges become even more significant when plaintiffs seek to represent nationwide classes of insureds who are subject to different state laws and different municipal and state restrictions.[5] Examples of these individualized issues include the following:

• Policies may differently define "direct physical loss ... or damage," or provide no definition at all, requiring courts to interpret each policy separately.

• Whether there is direct physical loss or damage may depend on whether there is proof that COVID-19 was found on the property. Under most states' coverage laws, a business closure resulting from a state or municipal order is likely insufficient to constitute physical loss or damage;[6] This would then require businesses to offer specific and individualized proof of COVID-19 of in order to prove coverage.

• Likewise, class members in different cities or states are subject to different restrictions, which could create individual issues. Some businesses may have been required to fully shut down, some may have been allowed to operate at reduced capacity or with dine-out only services, others may have chosen to voluntarily shut down but were not required to do so.[7]
  

• There could also be differences among plaintiffs based on the timing of restrictions and how long they were in effect; indeed, certain states and municipalities have already begun to lift restrictions on businesses. All of these issues could impact whether there was direct physical loss or damage under the policies and could result in diverse and unique positions among class members.

• Further, extrinsic evidence, including evidence of communications between individual insureds and insurers, may be admissible in some states either to prove ambiguity or in the event a court finds the applicable policies ambiguous as to coverage for these types of claims.[8] Class members may be required to provide individualized extrinsic evidence regarding any representations that may have been made to them in purchasing or negotiating the policies.

• Some policies may contain specific exclusion for the spread of viruses or other unique exclusions. Many of the proposed classes simply seek to represent nationwide classes of insureds without any requirement that the class members' policies include the same exclusions.[9]

• And even if the policies are exactly the same, including all exclusions, interpretation of the policy terms may differ by jurisdiction. As just one example — some states have interpreted pollution exclusions more broadly than others.[10] Nationwide classes with the exact same policies would therefore still present many uncommon issues.

In short, COVID-19 business interruption class actions present novel and substantial issues that litigants and courts will need to grapple with soon. Although varying COVID-19 shelter-in-place orders are likely to create additional obstacles to certification in insurance coverage class actions, the outcome of these suits may also have ramifications on class actions more generally, as any rulings granting certification in these suits could spur further contract and insurance-based class actions unrelated to COVID-19.

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Steven D. Allison and Samrah R. Mahmoud are partners, and Sheila Z. Chen and Stephanie V. Phan are associates, at Troutman Sanders LLP.

The opinions expressed herein are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] For a more extensive look at key business interruption coverage issues stemming from COVID-19 see Charles (Tony) Jones, Jennifer Mathis, & Michael Huggins, Troutman Sanders, LLP, The Key Coverage Issues Regarding Business Interruption From COVID-19, Vol. 34 #23 Mealey's Litigation Report Insurance 1, April 15, 2020.

[2] Fed. R. Civ. Pro. 23(a)(2)-(3).

[3] Fed. R. Civ. Pro. 23(b)(3).

[4] Wal-Mart Stores, Inc. v. Dukes , 564 U.S. 338, 348 (2011).

[5] See, e.g., Hair Perfect International Inc. v. Sentinel Insurance Company Limited, Case No. 2:20-cv-3729-JAK-KS (C.D. Cal.) (alleging ten nationwide classes); Stan's Bar-B-Q LLC v. The Charter Oak Fire Insurance Co., Case No. 2:20-cv-00613-RSM (W.D. Wash.) (alleging eight nationwide classes); Caribe Restaurant & Nightclub, Inc. v. Topa Ins. Co., Case No. 2:20-cv-03570-ODW-MRW (C.D. Cal.) (alleging eight nationwide classes); Bridal Expressions LLC v. Owners Ins. Co., Case No. 1:20-cv-00833-SO (N.D. Ohio) (alleging four nationwide classes).

[6] See, e.g., Pentair, Inc. v. Am. Guarantee & Liab. Ins. Co. , 400 F.3d 613, 616 (8th Cir. 2005) (loss of use or function of property insufficient without proof of actual physical loss or damage). Even proof of COVID-19 presence at the property may be insufficient to establish physical loss or damage. See, e.g., Mastellone v. Lightning Rod Mut. Ins. Co. , 884 N.E.2d 1130, 1144 (Ohio Ct. App. 2008) (dark staining from mold was not ''physical loss'' because mold was temporary and could be cleaned from surface).

[7] See, e.g., Biscuit Cafe, Inc., et al. v. Society Insurance Inc., Case No. 1:20-cv-02514 (N.D. Ill.) (alleging one subclass for "essential businesses" that were allowed to operate on a limited capacity and one subclass for "non-essential businesses" that were forced to close completely).

[8] See, e.g., Billy Goat Tavern I, Inc. v. Society Ins. Co., Case No. 1:20-cv-02068 (N.D. Ill) (alleging in filed complaint that key term in policy interpretation was not defined by either the policy at issue or the form at issue); Border Chicken AZ LLC v. Nationwide Mutual Ins. Co., Case No. 2:20-cv-00785-JJT (D. Ariz.) (alleging same).

[9] See, e.g., Caribe Restaurant & Nightclub, Inc. v. Topa Ins. Co., No. 20-3570 (C.D. Cal.); Hair Perfect Int'l Inc. v. Sentinel Ins. Co., Ltd. (C.D. Cal).

[10] Compare Keggi v. Northbrook Prop. & Cas. Ins. Co. , 199 Ariz. 43, 48 (Ct. App. 2000) (construing absolute pollution exclusion narrowly to apply to traditional environmental pollution) to Chestnut Assocs., Inc. v. Assurance Co. of Am. , 17 F. Supp. 3d 1203, 1214 (M.D. Fla. 2014) (construing bodily fluids as "pollutant" under pollution exclusion).

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