(Reuters) – Two groups of plaintiffs’ lawyers that want the Judicial Panel on Multidistrict Litigation to consolidate hundreds of federal lawsuits asserting demands for business interruption insurance argued in briefs filed Monday that insurers are exaggerating variations in policy language and state insurance law in order to avoid an MDL.  And in an unusual development, one of the plaintiffs’ groups has submitted an expert witness declaration to back its arguments.

The expert, insurance law guru Tom Baker of Penn Law and Wharton, is building a database of COVID-19 related insurance coverage cases, focusing on the policy language cited by plaintiffs who claim they were wrongly denied coverage for COVID-19 shutdowns.  Baker said he has found that many of the provisions “are nearly identical across insurers.”  And even when policy language varies, he said in his declaration, those variations can be sorted into a relatively small number of categories.

Baker said that’s by the design of the insurance industry, in which “standardization is essential.”  The professor’s assertion seems to contradict arguments just last week in briefs by more than a dozen insurers opposing a COVID-19 insurance MDL.  As I’ve told you, one of the insurance industry’s central arguments against consolidation of scores of federal suits is that there’s too much variation in individual policies and in state insurance law to achieve any efficiency from an MDL.  The insurers contend that consolidation will not streamline the litigation but will instead delay a resolution of claims by policyholders who will have to wait years for the MDL machinery to grind into action.

The plaintiffs’ group that submitted Baker’s declaration – DiCello Levitt Gutzler, the Lanier Law Firm, Burns Bowen Bair and Daniels & Tredennick – highlighted that “irreconcilable tension” in a reply brief filed Monday.  Insurers standardized their policy forms, including relevant provisions addressing property damage and business interruptions arising from government-imposed shutdowns, in part to enable the industry to respond to legal developments, the brief argued.  Moreover, the plaintiffs’ firms Levin Sedran & Berman, Beasley Allen Crow Methvin Portis & Miles and Golomb & Honik argued in their reply brief in favor of the MDL, the insurance industry adopted a “blanket policy to deny coverage,” with denials “typically based upon the same reasoning.”

Both of the reply briefs pointed out that the U.K.’s Financial Conduct Authority has established a test case procedure for business interruption insurance claims, after analyzing policies from eight insurers and concluding that they could be broken down into no more than 17 categories.  The FCA said its test case findings will not resolve all possible permutations of policyholders’ claims, but that it will “resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers.”  The plaintiffs’ reply briefs and Baker’s declaration suggested that an MDL in the country can provide similar clarity.

“There simply is no public purpose to be served by having a multitude of courts decide how standard form language responds to a common risk,” the DiCello Levitt group said in its filing.  “It not only thwarts efficient adjudication; it also thwarts the very idea of standardization.”

The MDL panel is scheduled to consider consolidation of business interruption insurance suits at the end of July.  If the judges decide to consolidate the cases, the MDL will be perhaps the biggest litigation to arise from COVID-19.





Society Insurance urged a Wisconsin federal judge to toss a proposed class action suit accusing it of wrongfully denying coverage for COVID-19-caused losses for bars and restaurants, arguing Monday that the businesses are still open for takeout and never lost access to their locations.

The insurer said the eateries and taverns suffered no direct physical loss to their properties, that closures ordered by civil authorities did not prohibit them from accessing their businesses, and that they failed to show that their food and property were contaminated by the novel coronavirus.

“The walls remain standing, the roofs have not been torn off, and the property remains untouched by fire or water — and, in fact, the plaintiffs are still allowed to use the premises for preparing and serving food for takeout,” the insurer said on Monday.

Society was hit with a proposed class action suit by half a dozen restaurants and bars in Wisconsin, Minnesota and Tennessee in April, accusing it of breaching contracts by not covering business and physical losses from state-mandated closures amid the COVID-19 pandemic. The eateries and taverns, led by Madison Sourdough and Willy McCoys, argued that COVID-19 caused property damage and government closure orders made them lose access to their business locations, according to court records.

“There has been no alteration in the structure or composition of plaintiffs’ covered property,” Society argued in Monday’s dismissal motion. The insurer said the restaurants and pubs failed to show there were “repair, rebuilding or replacement” on any of their properties, so there was no physical loss.

In the motion, Society said that Madison Sourdough’s and Willy McCoys’ switching to takeout and delivery is an “intangible” change in operations “similar to a change in zoning resulting in different hours a business can be open or a temporary suspension of a liquor license.” A short term business operation change or limitation does not create direct physical damage, it added.

The civil authority closure orders due to COVID-19 “has everything to do with protecting human life by controlling when and how people assemble in particular places, and nothing to do with any damaged property,” the insurer claimed in the motion.

“It is not plaintiffs’ premises themselves that are unsafe, but the possible threat of transmission among large groups of people within any area,” Society said in the motion.

The fact that the restaurants and bars are encouraged by state governments to do takeout demonstrates this distinction, the insurer said.

And since Madison Sourdough and Willy McCoys are able to produce food and beverages for takeout and delivery in their business locations, they cannot allege that either their food and drinks or their property are contaminated, so their argument that they suffered losses caused by COVID-19 contamination does not stand, Society added.

Representatives for both parties could not be reached for comment.

Madison Sourdough and Willy McCoys are represented by Adam Levitt, Mark DiCello and Ken Abbarno of DiCello Levitt Gutzler LLC, Mark Lanier and Alex Brown of the Lanier Law Firm PC, Timothy Burns, Jeff Bowen, Freya Bowen and Jesse Bair of Burns Bowen Bair LLP, and Douglas Daniels of Daniels & Tredennick.

Society is represented by Beth J Kushner, Christopher E Avallone, Heidi L Vogt and Janet E Cain of von Briesen & Roper SC

Rising Dough Inc. et al. v. Society Insurance, case number 2:20-cv-00623, in the U.S. District Court for the Eastern District of Wisconsin.

Expert Analysis

Well in advance of an initial public offering, late stage startups are now regularly adding high-powered, independent directors to their boards.

These companies often not only have prospects for high valuations, but also face global regulatory and compliance risks, as well as related party transaction issues, that call for a board with more sophistication and experience with navigating fiduciary duties than a group that consists solely of founders and employees of the lead venture capital investors.

While the proliferation of stockholder class actions against directors of publicly traded companies has driven directors of these companies to insist upon enhanced layers of directors and officers, or D&O, insurance to protect them from exposures to these suits, the same cannot be said of private company directors.

In the public company realm, the number of these suits in each of the last two years is double that of each of the prior several years and the costs of D&O insurance for publicly traded companies has similarly doubled.

But what about the world of private companies, especially the late-stage startups that are managing a growing spectrum of risks while taking more rounds of capital contributions at high valuations? Most directors and officers of late-stage startups would be surprised to learn that their D&O insurance may follow the standard terms for private company D&O coverage and therefore omit coverage for private suits and enforcement actions claiming securities fraud. How significant is this omission from the coverage of private company D&O policies?

As the U.S. Securities and Exchange Commission’s enforcement division recently announced, “[T]here is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is nonpublic, development-stage, or the subject of exuberant media attention.” Echoing this sentiment, one of the leading securities class action plaintiffs firm, Robbins Geller, has been promoting an initiative titled, “Reining in Unicorns: Protecting Pensioners and Entrepreneurs From Fraud.”

Two factors support this focus by the SEC and the plaintiffs bar. First, startups are risky businesses by definition. They regularly rely on unproven technology and are susceptible to being driven by a culture that deprioritizes internal controls.

Second, the shareholder base of late-stage startups, thanks in part to changes in SEC rules, has expanded to include a broad group of a significant number of family offices, pension funds and traditional actively managed funds, none of which has tolerance for being misled and all of which have the wherewithal to prod the SEC enforcement division and the plaintiffs’ bar to get involved.

These two factors make for a chemistry that is ripe for the assertion of securities fraud claims.

The most common securities fraud claims against startups involve alleged failures to adequately disclose risks and problems of the business’s technology to those buying shares of the company. For example, the SEC, followed by class action plaintiffs’ counsel suing on behalf of investors, claimed in 2018 that Theranos Inc. had failed to disclose the flaws in its blood testing technology.

Another recent pairing of an SEC enforcement action and a private investor suit claimed that fiduciaries of Lucent Polymers Inc. fraudulently induced the acquisition of its securities by overstating the capability of the company’s technology to “turn garbage into gold.”

Last year, the SEC settled an enforcement action against Silicon Valley startup Jumio Inc. for overstating the revenues of the company as part of a plan to facilitate the sale of shares by the founder.

In addition, we are aware of pending private suits and SEC inquiries into allegations of misstatements and omissions in connection with private financing rounds of other high profile, venture-backed companies.

Other areas ripe for securities fraud claims are those of employee benefits and M&A. There have been a number of suits against private companies for material misstatements and omissions in disclosures to employees when the company is buying back their equity or equity awards as a means for providing the employees with liquidity.

Moreover, suits have been brought against private company targets in the merger context based on allegations of material omissions from the information or proxy statement provided to the target company’s stockholders in connection with the stockholder approval of the merger.

As companies scramble to raise money to keep themselves afloat during the pandemic, there is a meaningful risk that they will cut corners on disclosure and understate risks that will later come back to haunt them. On the flip side, there is a risk that companies will fail to inform their employees sufficiently of their positive prospects when buying back stock and equity awards from these employees while the runway to a future IPO gets longer.

Against this background, directors and officers of private companies, especially late-stage startups, should consider purchasing enhancements to their company’s D&O insurance policy that make it much more like a public company D&O insurance policy and much more likely to cover these new risks confronting private companies and their directors and officers.

We are not recommending that these directors and officers seek to have their private companies entirely replace a private company policy with a public company policy. Instead, we are recommending consideration of the following modifications to the private company form.

First, and most importantly, directors and officers need to insist on removal of the standard private company D&O policy exclusion for securities fraud investigations, enforcement actions and private investor claims.

Second, directors and officers need to insist that the private company’s D&O policy gives the private company, rather than the insurance company, control of the defense and settlement of any securities fraud investigation, enforcement action or lawsuit. This can be accomplished readily by insisting that the insurer’s duty-to-defend provisions are removed in favor of provisions requiring the insurer to pay defense costs on behalf of the insureds.

Finally, the amount of the D&O insurance limits of liability should be examined, and likely increased in many instances, based on the risks of securities investigations, enforcement actions, lawsuits and associated defense costs and settlement payments.

In the absence of appropriate D&O insurance, the indemnity and expense advancement undertakings that these companies offer their directors and officers is only as valuable as the credit of the company itself. Moonshot prospects and valuations often go hand in hand with weak balance sheets that are unable to withstand the type of material adverse developments that trigger securities fraud suits.

Venture capital fund employees who serve as directors at their portfolio companies will have the benefit of indemnities and insurance from their funds. But the new influx of high quality, independent directors, as well as executive officers, will be left to rely solely on the strength of the target company’s balance sheet and the areas covered by the company’s D&O policy.


Ethan Klingsberg is a partner and head of U.S. corporate and M&A at Freshfields LLP.

Tim Burns is a partner and founder at Burns Bowen Bair LLP.

Vinita Sithapathy is an associate at Freshfields.

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



Daphne Zhang | June 9, 2020

Mutual Insurance Co. has urged a New York federal judge to toss a suit brought by Time Inc. demanding $6.9 million in indemnification of settlement and defense costs for class actions accusing the magazine company of deceptive marketing, saying that Time’s “intentional” unfair business practice is not covered by its policy.

Mutual claimed Monday that the global media liability policy it sold to Time only covers claims for “negligence,” but magazine subscribers have alleged that Time “knowingly” and “willfully” engaged in false advertising for automatic payment renewals, so Time’s practice was not “negligent” and Mutual has no obligation to cover its costs.

In the motion, Mutual said its policy specifically excludes coverage for unfair business practices and false advertising, both of which were alleged by Time’s readers. The insurer added that the consumers sought restitution of subscription fees as a result of Time’s allegedly false marketing, but that the policy does not pay for any loss in the form of “restitution.”

Time called Mutual’s move for summary judgment “an ambitious and unachievable goal” in its motion for partial summary judgment also filed Monday, claiming that a big part of the settlement payment constituted “loss” under its policy with Mutual. The magazine company demanded that “at a minimum” Mutual must pay for a significant part of its $4.98 million settlement expense.

Time and its subsidiary Synapse Group Inc. were sued by two California residents in May 2016, alleging that Time enrolled them in automatic subscription renewal without their consent and failed to inform them of the higher charges as required by California Law, according to court filings. The magazine readers told California state court that Time used Synapse as a marketing agent to indirectly trick them into annual renewals after the initial free or discounted offers.

The class representatives’ counsel filed another complaint against Synapse in June 2018, alleging that Synapse was aware of consumer complaints but still engaged in false marketing. Four months later, Time and the class representatives reached a settlement that required Synapse to pay $4.9 million.

Time first sought coverage from Mutual in June 2016, a month after it was first sued by the magazine subscribers. Mutual denied its claims a month later, saying the policy did not cover restitution and excludes coverage for unfair business practices, false advertising and disputes over fees.

Time sued the insurer in July 2018 seeking indemnification for its defense costs, and amended the complaint in 2019, after approval of the class action settlement, asking for coverage of more than $6.9 million from the two class actions.

In Monday’s motion, Mutual said it has no duty to reimburse Time and Synapse for the $4.98 million settlement payment and $2.18 million in defense costs since the consumers were only trying to recover “restitutionary damages.” The policy specifically stated that covered loss does not include restitution, it added.

Time countered on Monday that “irrespective of whether the policy definition of loss excludes coverage for restitution,” Mutual must still pay all of Time’s loss and defense costs in a legal proceeding as dictated by the policy, adding that the two class actions have caused it serious financial risk.

The media company said that under New York law, an insurer’s duty to defend is “exceedingly broad,” and Mutual should provide a defense whenever “the allegations of the underlying complaint suggest a reasonable possibility of coverage,” as its allegations already have.

Time also struck back at Mutual’s contention that neither action against Time and Synapse “contained a cause of action for negligence,” so it would not provide indemnification.

The consumers’ allegations trigger coverage since Mutual had agreed to pay legal proceeding expenses from “negligence, including any actual or alleged error, omission, misstatement” of the policyholder, Time argued.

The media company said that it was accused of failing to show offers in a “clear and conspicuous” manner as well as failing to provide an acknowledgment of subscription terms and cancellation policy. Those allegations are plainly “an alleged ‘error,’ ‘omission,’ or ‘misstatement,'” it claimed.

The magazine company added that Mutual’s arguments that the policy exclusions bar coverage do not apply. The policy exclusions are only relevant to “antitrust, price-fixing, and restraint of trade” claims, and the consumers never alleged such claims against Time, the media company said.

Additionally, “the false advertising exclusion applies only to intentional conduct” and “several of the complaints’ allegations do not allege that Time intentionally violated California law,” it said in the motion on Monday.

Mutual had argued that at the core of the consumers’ class suits are “allegations that Time and Synapse violated multiple consumer protection laws by engaging in unfair business practices,” and California enacted a law in 2006 specifically targeting marketing practice like Time’s ongoing charging of consumers’ payment cards without their explicit consent. So there is no question that the companies engaged in unfair business acts and false marketing, both of which were excluded under the policy, Mutual said.

Representatives from both parties did not immediately reply to requests for comment.

Mutual Insurance Co. is represented by William Joseph Brennan and Jacob Jonathan Palefski of  Kennedys CMK LLP.

Time and Synapse are represented by Jesse Bair and Timothy W. Burns of Burns Bowen Bair LLP and Jalina Joy Hudson of Perkins Coie LLP.

The case is Time Inc. v. Mutual Insurance Company Limited, case number 1:18-cv-06835, in the U.S. District Court for the Southern District of New York.

Alicia Grzadkowska | June 9, 2020

Insurers are opposing the consolidation of more than 100 federal lawsuits filed by US companies arguing that they should receive business interruption coverage stemming from COVID-19 shutdowns.

The insurance industry has filed more than 24 briefs opposing multidistrict litigation, following in the footsteps of arguments posed in a brief by two Chubb affiliates that stated consolidation would complicate and prolong the litigation, according to Reuters. The insurers were joined by plaintiffs’ firms, some with MDL experience, who also don’t want their cases moved to a nationwide, multidefendant proceeding.

“There is no reason for a single federal court in one part of the country to interfere with the process of policy interpretation here on a state-by-state basis especially given the lack of uniformity among the policies in question and the differing circumstances surrounding each policyholder’s loss,” read one brief filed by King & Spalding, which is representing 50-plus businesses suing Society Insurance for denying COVID-19 claims.

The MDL judicial panel will consider two motions to consolidate cases when it convenes at the end of July. The consolidation motions filed in April by the plaintiffs’ lawyers Levin Sedran & Berman and Golomb & Honik, as well as DiCello Levitt Gutzler, the Lanier Law Firm, Burns Bowen Bair and Daniels & Tredennick proposed relatively similar arguments for consolidating claims, arguing that policyholders are entitled to coverage under property damage or civil authority provisions.

The motions also argued that it would be more efficient for one court to determine outcomes that will affect thousands of businesses, versus various judges around the country delivering potentially contradictory rulings on the same questions.

On the other hand, the briefs opposing consolidation generally stated that consolidation motions are fundamentally flawed because these cases aren’t the same. Each claim deals with different insurers, different policy language, different state insurance laws, different COVID-19 shutdown orders, and different facts at every business asserting a claim for coverage. Litigation thus won’t be simplified by consolidating the cases.

“Instead, shoehorning all of these cases into a single forum for coordinated pretrial proceedings could delay their ultimate resolution by years, with no corresponding benefits in the form of efficient and effective resolution,” said one brief.

The Chubb brief also highlighted that the MDL panel is typically reluctant to consolidate litigation against multiple defendants, and that the lawsuits filed name 36 different insurance groups and 115 individual insurers. In fact, there have been only two insurance coverage MDLs ever created, and both go back more than 25 years. As recently as 2018, the panel refused to create an MDL for insurance claims stemming from hurricanes in Florida, Puerto Rico, and the Virgin Islands.

Plaintiffs’ firms opposing an MDL also said they’re concerned about delaying a decision for their clients. McKool Smith’s client, for example, is the New York City real estate developer Thor Equities and needs a quick resolution of claims it has asserted under its $750 million property damage coverage. A delay could mean the business survives or dies.

DiCello Levitt, which is leading arguments that business interruption insurance cases should be consolidated in Chicago, plans to offer up a response to insurers and plaintiffs’ firms opposed to the MDL when it files a reply brief next week.