Dorothy Atkins | August 14, 2020

A steakhouse chain with more than 50 restaurants around the country has hit Zurich American Insurance Co. with a lawsuit in Illinois state court, alleging the Swiss insurance giant broke their contract by refusing to cover business losses caused by the pandemic, even though the chain paid for premium coverage.

In a 23-page complaint filed Aug. 12, Firebirds International LLC argued that the coronavirus poses an “imminent threat” to each of its 54 “Wood Fired Grill” restaurants, and since the spring, state-mandated closures have ravaged its business.

The Charlotte, North Carolina-based company said it paid the insurer premiums for $146 million per occurrence coverage for property damage and business interruption losses. And yet, Zurich has refused to reimburse the company “a single dollar” for its recent losses, in clear breach of their contract, according to the suit.

“There is no ‘contamination’ or ‘virus’ exclusion within this portion of the policies that could possibly exempt Zurich from providing Firebirds full payment thereunder,” the complaint says.

The provisions at issue cover business income losses, or “time element” coverage, including gross earning losses. They also cover losses caused by property damage and restricted access to property, including “loss of access caused by an order issued by a civil authority,” as well as any costs incurred in order to temporarily protect and preserve the insured property, the complaint says.

The six-count complaint asserts multiple breach of contract claims and asks the court to declare that its losses fall under multiple policy provisions.

Firebirds’ counsel, Jeffrey P. Goodman of Saltz Mongeluzzi & Bendesky PC, told Law360 on Friday that the company has been denied insurance coverage, “like so many other businesses,” even though his client paid a premium for an “all risk” policy that did not include any virus exclusions.

“It’s disappointing, but at the end of the day the Zurich policy here covering Firebirds is a very strong policy for the business owner,” Goodman said. “They clearly paid for certain protections with the understanding that Zurich would satisfy [the contract]. That’s the very reason we have insurance.”

Firebirds’ lawsuit is one of several that have been filed against insurers by restaurant chains, movie theaters, shopping malls, hair salons and other hospitality businesses that have been forced to close their doors since March due to state-mandated closures that aim to slow the spread of COVID-19.

The businesses generally claim that the insurers wrongfully denied them coverage for their losses, and the disputes have shed new light on the importance of various insurance policy terms and exclusions, including provisions that exclude coverage for losses due to contamination by viruses and bacteria.

Many of the lawsuits playing out in courts have also hinged on whether a virus can cause a “physical loss” to property, and so far, courts have appeared to lean in favor of the insurance companies on the matter. Earlier this month, a D.C. judge ruled that government shutdown orders don’t constitute a “direct physical loss” that triggers the policy.

The ruling followed a decision in July by a Michigan state judge who dismissed Gavrilides Management Co. LLC’s suit seeking $650,000 from Michigan Insurance Co. for losses it suffered after Gov. Gretchen Whitmer issued executive orders that limited its two restaurants to takeout and delivery orders.

At a hearing in the Judicial Panel on Multidistrict Litigation to determine whether to roll such suits into an MDL, attorneys called “direct physical loss or damage” the “five simple words” that were a common thread throughout the suits.

Representatives for Zurich didn’t immediately respond Friday to a request for comment.

Firebirds is represented by Adam J. Levitt, Amy E. Keller, Daniel R. Ferri, Mark Hamill, Laura E. Reasons, Kenneth P. Abbarno, Mark A. DiCello and Mark Abramowitz of DiCello Levitt Gutzler LLC; Robert J. Mongeluzzi, Jeffrey P. Goodman, Marni S. Berger and Samuel B. Dordick of Saltz Mongeluzzi & Bendesky PC; Mark Lanier, Alex Brown and Skip McBride of The Lanier Law Firm PC; Timothy W. Burns, Jeff J. Bowen, Jesse J. Bair and Freya K. Bowen of Burns Bowen Bair LLP; and Douglas Daniels of Daniels & Tredennick LLP.

Counsel information for Zurich American Insurance wasn’t immediately available Friday.

The lawsuit is Firebirds International LLC v. Zurich American Insurance Co., case number 2020CH05360, in the Circuit Court of Cook County, Illinois, County Department, Chancery Division.

–Additional reporting by Mike Curley.  Editing by Alyssa Miller.

Alison Frankel | July 30, 2020

(Reuters) – No fewer than three different people used the word “nightmare” at a Judicial Panel on Multidistrict Litigation hearing Thursday morning about whether to consolidate hundreds of federal-court suits by insurance policyholders whose claims for business interruption coverage was denied. And one of them was a judge.

That apt depiction of the challenge that these cases pose for the JPML came from U.S. District Judge Matthew Kennelly of Chicago – a JPML panel member whom many plaintiffs’ firms have proposed to oversee a nationwide consolidation of the business interruption litigation. Judge Kennelly was asking questions of the insurance industry’s lead counsel, Richard Goetz of O’Melveny & Myers, who had told the panel that insurers oppose any MDL consolidation, whether it’s a single nationwide proceeding or multiple insurer-by-insurer or state-by-state MDLs. But 200 of the more than 400 suits already filed in federal court are class actions, Kennelly said.

“Isn’t that going to be nightmare to reconcile and resolve if there isn’t some form of consolidation?” Kennelly asked Goetz.

The insurers’ lawyer fired back that consolidation would be the nightmare – and that the panel should not allow plaintiffs’ lawyers to use the specter of prospective class actions to justify an MDL that would be crippled by variation among state insurance laws, state public emergency declarations, insurance policy language and contracts and plaintiffs’ individual circumstances. Even the theories plaintiffs have asserted in the class actions on file differ widely, Goetz said.

“That would be the tail wagging the dog,” he advised the panel. (For the record, the third person who described management of the business interruption coverage litigation as a “nightmare” was David Boies of Boies Schiller Flexner, who represents plaintiffs opposed to a nationwide MDL.)

The JPML did not clearly indicate which way they’re leaning at Thursday’s hearing, which was conducted by Zoom with more than 440 people listening in on an audio-only phone line. Plaintiffs’ lawyers presented the panel with a variety of options, as I’ll explain. The judges had tough questions about all of the proposals – including the insurance industry’s suggestion that the panel simply allow individual judges to decide the cases before them.

U.S. District Judge Ellen Huvelle of Washington, D.C., who presided over the hearing, was clearly concerned about lumping insurers that have been named as defendants in only a handful of cases into a vast MDL. U.S. District Judges Catherine Perry of St. Louis and David Proctor of Birmingham pressed plaintiffs to specify the common factual issues in the cases, a prerequisite for MDL consolidation. Judge Kennelly was particularly interested in whether there are common epidemiological questions about the nature of COVID-19 and how it’s spread that cut across the entire litigation.

Judge Proctor said he agreed with arguments by plaintiffs’ lawyers that small businesses need a quick resolution because they’re counting on insurance coverage to survive the pandemic. But a single MDL judge would have to deal with policy language from hundreds of insurers and the laws of all 50 states, he said. “How in the world is a judge going to get through all this with any type of efficiency?” Judge Proctor asked.

But at other moments in the hearing, Judge Proctor seemed interested in the prospect of multiple MDLs, or multiple tracks within an MDL, for different insurers. He homed in on plaintiffs’ arguments that although policy language varies from insurer to insurer, each carrier uses consistent language across its policies. Judge Proctor also suggested that MDL judges could effectively coordinate with state judges overseeing insurance coverage suits filed in state court.

Leading the charge for a single, nationwide proceeding was Mark Lanier of the Lanier Law Firm, who told the JPML (in a phrase repeated by other plaintiffs’ lawyers who presented arguments) that all of these cases are governed by five words: “direct physical loss or damage.” (Lanier’s firm, which is working on these cases with DiCello Levitt Gutzler, Burns Bowen Bair and Daniels & Tredennick, is pushing for Judge Kennelly to preside over a single proceeding.) Lanier contended that variations in state insurance law are overwhelmed by every state’s basic contract law principles.

Other plaintiffs’ lawyers, however, suggested alternatives to a nationwide MDL. Patrick Stueve of Stueve Siegel Hanson proposed MDLs against three carriers – Cincinnati, Lloyds and the Hartford – that have each been named in multiple suits instead of a single proceeding that, he said, would be “not manageable.” Shelby Guilbert of King & Spalding, who represents about 50 bars and restaurants in Chicago that are all suing Society Insurance, opposed any formal consolidation by the JPML, even when Judge Huvelle asked if it would be better for Society policyholders to be litigating before one judge instead of five or six.

Arguing on behalf of dozens of insurers, Goetz directly confronted the judges’ concern with efficiency. Individual cases, he said, are already moving fast. Insurers have filed motions to dismiss in 18 suits. Rather than stop these cases in their tracks to wait for an MDL to gear up, Goetz said, the panel should allow the suits to move ahead on their own to deliver the quickest resolution. (Sarah Gordon of Steptoe & Johnson, who argued against consolidation on behalf of The Hartford, reiterated the point that the fastest way to find out if individual policyholders were wrongly denied coverage is to allow their individual suits to go forward outside of an MDL.)

Perhaps looking for a reason to justify consolidation, Judge Huvelle asked Goetz if there were similarities among those 18 dismissal motions. Goetz said they addressed varying claims and were very different.

Plaintiffs’ lawyer Adam Levitt of DiCello Levitt predicted to me that if an insurer wins one of those dismissal motions, the industry will argue that the ruling should be binding nationwide, despite emphasizing dissimilarities at Thursday’s hearing. “This nationwide economic collapse calls for a unified response, and, yet, at today’s JPML hearing, the insurance industry argued for a fragmented, chaotic, judicial response,” Levitt said.

I emailed Goetz after the hearing to ask but he didn’t get back to me. Hartford counsel Gordon referred me to a company spokesman who didn’t immediately respond.

Lanier said in an email that the business interruption insurance litigation is a “tough situation” for the JPML. “The choice is between a very difficult MDL or chaos,” Lanier said, noting that this will be a rare MDL ruling that could affect the stock market. “I hope they opt for MDL. It will speak with one voice to the economy.  The economy will listen.”

Jeff Sistrunk | July 30, 2020

The Judicial Panel on Multidistrict Litigation on Thursday peppered attorneys for policyholders and insurance carriers with questions over whether the hundreds of COVID-19 business interruption coverage disputes pending in federal courts nationwide should be centralized in one or more courts or left to be resolved case by case.

During a 90-minute hearing held via Zoom, the JPML heard arguments from 15 attorneys on dueling petitions filed in April by two groups of policyholder plaintiffs, one seeking to centralize federal business interruption cases in the Northern District of Illinois in Chicago and the other asking for them to be centralized in the Eastern District of Pennsylvania in Philadelphia.

Arnold Levin of Levin Sedran & Berman LLP, who represents the petitioners seeking centralization in Philadelphia, told the seven-member JPML there is no merit to insurers’ contention that consolidation is inappropriate due to the high number of different defendants and policies involved in the coverage cases. He pointed to several past MDLs, such as one concerning orthopedic bone screw products liability litigation, that centralized cases involving multiple different defendants and products.

“So, Mr. Levin, what is the common issue of fact?” asked U.S. District Judge Matthew Kennelly.

“The common issues of fact are, one, whether or not there is property damage. Did the virus get into the property?” Levin replied. “Also, the exclusions are all the same.”

Levin added that the insurance policies at issue “have all been formulated, for the most part,” by the Insurance Services Office.

“We have sought discovery from the ISO to show they are the same,” he said.

Mark Lanier of The Lanier Law Firm PC, who represents the petitioners requesting centralization in Chicago, also contended that the hundreds of cases will share certain common factual issues, “regardless of state, regardless of insurance company, regardless of policy.” Those include whether the different iterations of the novel coronavirus should be treated as one or multiple occurrences under a policy, whether the virus is considered to be present “everywhere people congregate” and what type of scientific analysis “is going to be acceptable and not acceptable,” according to Lanier.

“The preponderance of common facts will, by and large, be huge,” he said.

Moreover, Lanier added, many insurers that have already filed motions to dismiss policyholders’ suits have asserted the same arguments, including that COVID-19 did not cause “direct physical loss or damage” to the insured business, as required for business interruption coverage to apply. Those “five simple words” are a common thread running through these coverage disputes, he argued.

“So you are telling me the state laws of all 50 states interpret those five words in the context of every insurance policy the same way?” U.S. District Judge Catherine D. Perry asked Lanier.

Lanier replied that he would not say “quite that, totally,” but that “by and large, every state has the same basic principle of contract interpretation, that you give plain and ordinary meaning to contractual terms.”

“I don’t think the courts are going to find this to be that different in terms of each state, and I think that is why insurance companies are seeking a national legislative solution,” he said.

While the petitions requesting centralization in Philadelphia or Chicago have garnered the support of some policyholder plaintiffs, other policyholders have opposed them and pitched wildly varying proposals of their own.

The full range of policyholders’ views was on display during Thursday’s hearing. Some attorneys representing policyholders backed one of the two petitions, while others opposed any form of centralization. Several attorneys pushed for centralization in California, Florida or Washington. And still others advocated for the creation of multiple MDLs, either by consolidating cases filed against the same insurance company or lumping together cases lodged in the same state.

For instance, Patrick J. Stueve of Stueve Stueve Siegel Hanson LLP, who represents several policyholders in suits pending in Missouri federal court, suggested an “incremental approach” in which the JPML would create smaller MDLs to consolidate cases against “insurers who have been sued in many lawsuits, in multiple jurisdictions, by many plaintiffs firms.” Currently, only a few of the nearly 100 insurers named in coverage cases around the country meet that criteria, including The Hartford, Cincinnati Insurance Co. and underwriters at Lloyd’s of London, he said.

“Several smaller MDLs will ensure the most manageable and efficient resolution of these cases,” he said.

While policyholders’ views are varied, insurance carriers have uniformly opposed the formation of any kind of MDL.

Arguing on behalf of Westchester Surplus Lines Insurance Co. and more than 30 other insurers, Richard Goetz of O’Melveny & Myers LLP said the factual differences among the coverage disputes outweigh any commonalities. Goetz emphasized that all the organizations that filed amicus briefs with the JPML, including both insurance industry trade groups and the prominent policyholder advocacy group United Policyholders, oppose centralization.

“The fact issues are overwhelmingly centered on individual plaintiffs,” he said. “What is their business? Did they close? When and why would they have had any business if they had remained open? Did they claim that the virus was or was not there? Was there a stay-at-home order, and what did it say?”

Goetz further contended that creating smaller “insurer-specific” MDLs is “not the answer,” given that the policy language and factual circumstances can vary even across cases involving the same insurer.

U.S. District Judge Nathaniel M. Gorton asked Goetz what his “alternative suggestion” would be for dividing up the business interruption cases.

“Your honor, I think you could leave the cases where they are,” Goetz said, pointing out that insurers’ motions to dismiss have already been fully briefed in at least 18 cases.

Sarah D. Gordon of Steptoe & Johnson LLP, who represents Hartford and a number of its subsidiary insurers, later said she agreed with Goetz that the creation of multiple single-insurer MDLs would not resolve the issues that would abound with an industrywide MDL.

“The only efficiency that might be gained from a single-insurer MDL is a reduction in the variation of policy language, but even at the single-insurer level, there are still variations,” Gordon said.

The case is In re: COVID-19 Business Interruption Protection Insurance Litigation, case number 2942, before the Judicial Panel on Multidistrict Litigation.

–Editing by Gemma Horowitz

Joyce Hanson | July 29, 2020

A group of Lloyd’s underwriters has asked to send two pizza companies’ COVID-19 coverage suit to Florida, telling a New York federal court that the companies suing are based in the Sunshine State as are the agents who sold them their commercial property insurance policies.

The Lloyd’s of London insurers argued Wednesday before the New York court that the Florida-based lead plaintiffs in the proposed class action, Gio Pizzeria & Bar Hospitality LLC of Coral Springs and Gio Pizzeria Boca of Boca Raton, are merely engaging in forum shopping.

The pizzeria companies claim their case should be heard in New York only because their policies provide that service of a complaint should go to London-based Lloyd’s service agent, “who happens to be in New York,” the underwriters say in their motion to transfer venue.

But the truth, according to the underwriters, is that the two policies delivered to the Gio Pizzeria companies were issued by a Floridian producing agent and a Floridian surplus lines agent. And the pizzeria companies don’t like their odds of winning in Florida federal court because five other COVID-19 cases pending there may hurt their chances of prevailing on the argument that government closure orders triggered their policies’ “civil authority” coverage, the underwriters say.

“Plaintiffs’ filing in this court is nothing more than transparent forum shopping,” the underwriters argue. “The critical witnesses and evidence regarding are located in South Florida. The Southern District of New York’s connection with this dispute is nonexistent. Further, transfer to the Southern District of Florida will allow this matter to proceed in coordination with the five currently pending putative class actions against members of the Lloyd’s, London insurance market, arising out of COVID-19.”

The Gio case stems from Lloyd’s underwriters’ denial of coverage after the plaintiffs were forced to reduce business at their Nick’s pizzerias due to the COVID-19 pandemic and resultant orders issued by civil authorities in Florida mandating the suspension of business for on-site services.

Attorneys from DiCello Levitt Gutzler LLC filed the suit April 17 on behalf of the two Gio Pizzeria companies, joining the Lanier Law Firm PC, Burns Bowen Bair LLP and Daniels & Tredennick in launching class action suits against six insurance companies in federal courts over their denials of coverage for businesses shut down because of the coronavirus outbreak.

The complaints target Certain Underwriters at Lloyd’s, London in New York, Society Insurance in Wisconsin, Auto-Owners Insurance Co. in Ohio, Topa Insurance Co. in California, Oregon Mutual Insurance Co. in Oregon, and Aspen American Insurance Co. in Texas, the attorneys announced in an April 17 press release.

In each case, the businesses, which include the pizzerias, bakeries, taverns, restaurants, nightclubs and bridal retailers, allege they paid premiums to the insurance companies for business interruption insurance for situations in which they could be forced to close through no fault of their own, but their claims have been denied.

Adam Levitt of DiCello Levitt Gutzler LLC, a lawyer for the Gio Pizzeria companies, on Wednesday shot down the underwriters’ bid to transfer venue, telling Law360 in an email that the suit is lodged in the proper court.

“Our complaint and the underlying facts speak for themselves. We filed our case in the correct venue,” Levitt wrote. “It would be helpful if defendants, instead of playing procedural games in an effort to confuse, attenuate, and frustrate the litigation process, would actually step up and honor their substantial contractual obligations to our clients and the other class members.”

Counsel for the Lloyd’s underwriters could not immediately be reached for comment Wednesday.

The Gio Pizzeria plaintiffs are represented by Adam Levitt, Mark DiCello and Ken Abbarno of DiCello Levitt Gutzler LLC.

The underwriters at Lloyd’s are represented by Peter J. Fazio of Aaronson Rappaport Feinstein & Deutsch LLP.

The case is Gio Pizzeria & Bar Hospitality LLC et al. v. Certain Underwriters at Lloyd’s, London, case number 1:20-cv-03107, in the U.S. District Court for the Southern District of New York.

The Houston Rockets basketball organization and its venue the Toyota Center sued FM Global’s midmarket unit on Wednesday seeking business interruption coverage for coronavirus-related losses.

In the suit, Clutch City Sports & Entertainment LP (d/b/a Toyota Center) and Rocket Ball Ltd. v. Affiliated FM Insurance Co., which was filed in state court in Providence, Rhode Island, where FM Global is based, the team and the venue said the insurer wrongly denied their claim last month.

According to the suit, the Rockets and the Toyota Center, which hosts concerts and other shows in addition to National Basketball Association games, bought an “all risks” commercial insurance policy from Affiliated FM that provides $412 million in property damage limits “with a substantial portion of that amount in coverage for business interruption losses.” The policy includes $100,000 sublimits for property damage due to communicable disease and business interruption due to communicable disease.

The organizations paid $719,490 in premium for the coverage, which went into effect on Oct. 6, 2019, court papers say.

The Toyota Center attracted nearly 1.3 million people to events in 2019 but has attracted only 340,000 in 2020 due to the forced closure of the venue during the COVID-19 pandemic, court papers say.

City and state officials issued various orders in March imposing restrictions on businesses in Houston and issued further orders in June after an increase in COVID-19 cases in the state.

The venue and the Rockets contend in the suit that the presence of COVID-19 at the Toyota Center constitutes physical damage that triggers coverage for lost revenue under various clauses in its policy, including business interruption, extra expense, attraction and communicable disease coverage, according to the suit.

The communicable disease sublimits “do not purport to reduce other coverages available under the Policy. They are additive,” according to the suit.

“AFM is unable to discuss because it is a legal matter,” a spokesman for FM Global said in an email in response to a request for comment.

The suit is one of scores of suits filed by businesses across the country. Most of the suits are pending, but judges in Michigan and New York ruled in favor of insurers in two cases.


Mike Curley | July 16, 2020

The NBA’s Houston Rockets and their home arena are suing their insurance company, alleging it denied them coverage for losses stemming from the COVID-19 pandemic in an act of bad faith as part of a companywide policy to deny coverage for similar claims.

In a complaint filed in Rhode Island state court Wednesday, Clutch City Sports & Entertainment LP, which owns the Toyota Center, and Rocket Ball Ltd., which owns the Rockets, say Affiliated FM Insurance Co. owes them coverage under the team’s $412 million property insurance policy.

According to the Rockets, the arena was forced to shut down after the COVID-19 pandemic hit Houston and the NBA suspended the remainder of its season, saying the presence of the virus in Houston and the arena constitutes physical loss and damage under the policy.

“The loss of functionality is no less physical than the impact of a property having lost its roof to a tornado or hurricane,” the team wrote. “Where once the property could carry on its business function, the property with a blown away and crumbling roof cannot operate in that way. Where once the property could seat patrons away from the elements, it can no longer do so. That is physical damage, as is the loss of function at Toyota Center caused by COVID-19.”

As a result of the pandemic, the arena says it had to cancel 29 events, including nine Rockets games, plus an unknown number of playoff games. While the NBA has announced plans to resume its season, the team and arena say, none of the games are set to be played at the Toyota Center.

According to the complaint, the team’s policy with Affiliated FM, which is a subsidiary of FM Global Group, expressly considers a communicable disease like COVID-19 as physical loss and damage, as the policy specifically covers “cleanup, removal and disposal” of communicable disease.

The team further alleges that the governor’s shutdown orders, which closed the doors on nonessential businesses, also trigger the policy under the civil authority clause, which grants coverage for business interruption caused by government orders prohibiting access.

According to the complaint, the policy’s exclusion for contamination does not apply, as it does not include communicable disease like COVID-19 among its list of contaminants. In addition, the team argues that the policy’s sublimits for communicable disease coverage don’t limit coverage of the business interruption and physical damage claims, and should not apply.

The complaint also cites an internal “talking points” memo from FM Global, which the team claims informs insurance adjusters that the virus doesn’t count as physical damage, nor does a communicable disease. According to the team, this memo is the basis for FM Global and its affiliates’ bad faith effort to deny coverage for COVID-19-related claims, as adjusters are not instructed to take into account the policy language or local law when denying the claims.

A spokesperson for FM Global declined to comment Thursday.

Attorneys for the Toyota Center and the Rockets referred questions to the Toyota Center. A spokesperson for the team declined to comment.

The suit comes after Minor League Baseball teams began suing their insurers over coverage after the cancellation of their season, including the farm team for the New York Yankees.

The arena and the team are represented by Stephen M. Prignano of McIntyre Tate LLP; W. Mark Lanier, Alex J. Brown, Ralph D. McBride and Matthew D. Przywara of The Lanier Law Firm PC; Denman H. Heard of Heard Law Firm PLLC; Adam J. Levitt, Mark A. DiCello and Kenneth P. Abbarno of DiCello Levitt Gutzler LLC; Timothy W. Burns, Jeff J. Bowen, Jesse J. Bair and Freya K. Bowen of Burns Bowen Bair LLP; and Douglas Daniels of Daniels & Tredennick.

Counsel information for Affiliated FM was not available.

The case is Clutch City Sports & Entertainment LP et al. v. Affiliated FM Insurance Co., case number PC-2020-05137, in the Providence/Bristol County Superior Court, Rhode Island.

The Houston Rockets and billionaire owner Tilman Fertitta are suing their insurer for denying the National Basketball Association team’s bid to tap its business-interruption insurance policy over revenue losses from the Covid-19 pandemic.

Fertitta’s Rocket Ball Ltd. and Clutch City Sports & Entertainment L.P., the respective holding companies for the team and Toyota Center where the Rockets play, sued Affiliated FM Insurance Co. Wednesday in state court in Rhode Island. That company is a division of commercial property insurer FM Global Group, which is based in Johnston, Rhode Island.

The suit is the first by an NBA team seeking to recover losses tied to the economic body blows wrought by the coronavirus. Fertitta said in court filings he paid around $719,000 in annual premiums for more than $400 million in business-interruption insurance. He said the policy covers the pandemic because it was not specifically excluded.

Steven Zenofsky, a spokesman FM Global, declined to comment on the Rocket’s suit.

Fertitta, who also owns the Golden Nugget casino and the Landry’s restaurant chain, joins more than 50 other businesses across the U.S. who’ve sued insurers for denying claims on business-interruption policies, according to data compiled by Bloomberg.

Pandemic Exclusions

The stakes in this wave of business-interruption cases are high for insurers, who say such policies were only intended for physical damage and were never priced to cover a global virus outbreak. Many specifically exclude pandemics.

U.S. companies with fewer than 100 workers could face aggregate losses of as much as $431 billion a month, the American Property Casualty Insurance Association estimated. That’s nine times more than the $47 billion the industry said it paid for covered losses arising from the Sept. 11, 2001, terrorist attacks, when only a third of claims were for business interruptions, according to the Insurance Information Institute.

Insurers could face as much as $100 billion in losses from the pandemic, Wells Fargo & Co. analyst Elyse Greenspan estimated in a note to clients in June. Chubb Ltd. Chief Executive Officer Evan Greenberg has warned that the pandemic is likely the largest event in insurance history.

The NBA is straining to restart its suspended season by having 22 teams gather at a facility in Walt Disney World in Orlando, Florida. The plan is to have an eight-game wrap-up to the regular season, then hold playoffs at the facility. Players will live in seclusion at the park during the truncated season.

New Epicenter

Lawyers for the Rockets and the team’s arena say in the suit that the pandemic, in which Houston has emerged as a new epicenter, has hit them especially hard. On July 14, Texas Covid cases increased by almost 11,000, a new record, with the statewide total numbering more than 270,000.

Toyota Center officials were forced to cancel not only NBA games, but rodeos, concerts, a World Championship BBQ cook-off and other revenue-generating gatherings, according to the suit. The Rockets’ lawsuit contend loss of use of the arena constitutes “physical damage” triggering the coverage.

“The property has been impaired,” the team’s lawyers said in their 30-page complaint. “The loss of functionality is no less physical than the impact of a property having lost its roof to a tornado or hurricane.”

The case is Clutch City Sports & Entertainment LP and Rocket Ball Ltd v. Affiliated FM Insurance Co., No. PC-2020-05137, Providence/Bristol County Superior Court (Providence).

(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.