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Reinstatement of COVID BI case has potential to set a ‘worrying precedent’

19th July 2022 - Author: Luke Gallin

The recent ruling by a California court of appeal to reverse a lower court’s dismissal and reinstate a COVID-19 related business interruption (BI) lawsuit filed against a division of global insurer Allianz, has the potential to set a “worrying precedent”, according to analysts at Jefferies.

JudgeLast week, Division Seven of California’s Second District Court of Appeal allowed, by unanimous decision, a COVID-19 BI dispute to go forward.

In a rare victory for policyholders, the first of its kind ruling in the California appellate courts, reversed the trial court’s ruling that COVID-19 cannot, as a matter of law, cause direct physical loss or damage sufficient to trigger BI coverage under a commercial property policy.

As a reminder, the plaintiff (owners of Hotel Erwin and Larry’s restaurant) notified their insurer, Fireman’s Fund Insurance Company, which is part of Allianz, of their COVID-19 related losses, but were denied coverage, which led to the insurer being sued in July 2020 for breach of coverage.

The lawsuit argued that the plaintiffs suffered direct physical loss or damage because their properties harboured coronavirus particles, which in turn caused the virus to spread, while government orders required their businesses to close in response to multiple employees testing positive.

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Ultimately, Fireman’s Fund raised objections and argued that the plaintiffs were unable to show direct physical loss or damage to their properties, also noting that the mortality and disease exclusion precluded coverage.

The demurrer was sustained, without leave to amend in October 2021, by the Los Angeles County Superior Court Judge Craig D. Karlan, who said that a physical change in the condition of the properties was needed to trigger coverage, and that exclusion also applies to bar coverage.

But the plaintiffs appealed, saying that the trial court wrongly dismissed the case at the pleadings stage. The appellate panel has agreed with this argument and has reversed the trial court’s ruling, saying that this was “error at the nascent phase of the case.”

The appellate Court ruled that the policyholders had adequately alleged that they suffered direct physical loss or damage by saying the virus was present on their properties, with the panel also ruling that the mortality and disease exclusion does not bar coverage.

So, the case, Marina Pacific Hotel & Suites, LLC et al. v. Fireman’s Fund Insurance Company, is now allowed to go forward, and while it is only expected to result in a direct cost of $22 million for Allianz, which is minimal for the Group, it could drive similar appeals.

According to analysts, “although the direct insured cost appears thus far to be immaterial to Allianz, this case may have the potential to set a worrying precedent that could be used to drive similar appeals.”

“As investors appear (in our view) to consider this issue largely settled, we’re slightly concerned that any apparent change in legal opinion on these pandemic-related cases could weigh on the valuations of commercial underwriters. As such, although it’s very early days, we intend to monitor this case for future developments,” added Jefferies analysts.

The ruling reflects an emerging trend allowing policyholders to move forward with their claims for BI losses in the wake of the pandemic, bucking the earlier trend that favoured insurers, and highlighting that COVID-19 BI disputes are far from over.

In the context of pandemic-related cases, notes Jefferies, it’s also worth considering how the current social inflation trend could exacerbate the adverse litigation trend for carriers.

“Perhaps best summarised as the uplift in frequency and severity of litigation, as well as the heightened probability of a favourable outcome for claimants. In the context of these pandemic-related cases, we believe that these existing trends in litigation have the potential to lift the risk of an unfavourable outcome for insurers,” warn analysts.

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