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When the pandemic began in early 2020 and sweeping lockdowns went into effect, insurance firms were facing a catastrophe. Billions of dollars’ worth of claims — many from Hollywood companies, including those involved with the live-event business — were pouring in across the country.
But instead of paying out, insurance companies looked to the fine print and started to deny claims en masse. Most insurers found that policies for lost revenue because of business interruptions excluded coverage for closures forced by the pandemic and required physical loss or damage to property. A legal war erupted over COVID-related insurance claims, and more than 2,300 lawsuits challenging coverage decisions have been filed, according to a COVID-19 insurance litigation tracker created by Penn Law professor Tom Baker.
“With respect to business interruption claims, the insurance industry as a whole took a very aggressive position fighting those,” says Ty Childress, chair of Jones Day’s insurance recovery group and the lead lawyer for World Trade Center Properties in the 9/11 insurance cases. “You had smaller entities that shut down. This was their only survival.”
Janet Ruiz of the Insurance Information Institute, a trade association whose members include some of the biggest insurers in the world, contends insurance companies didn’t have the capacity to handle a crisis the magnitude of the COVID-19 pandemic. “After SARS, insurers realized that pandemics are international,” Ruiz says. “Even with our loss reserves and any type of investing we’re able to do with them, it just wouldn’t have been feasible to have that type of money-on-hand to pay for global losses like we’ve seen.”
After two years and 1 million COVID-19 deaths in the U.S., insurers have been overwhelmingly successful in court, with nearly every case dismissed or ruled in favor of insurance companies. Judges have tossed more than 80 percent of cases that get considered for dismissal. Many of the lawsuits didn’t even make it past the beginning stages of the legal process.
In entertainment, such major players as UTA, Paramount and Live Nation sued their insurers after having their claims partially or completely denied. The suits garnered various results, from complete losses to surviving dismissal attempts to allow for discovery.
The Jeremy Zimmer-led UTA is among the hundreds of losers in the COVID-19 insurance coverage battles. The agency was a part of the first wave of lawsuits brought mostly by small businesses that couldn’t survive without an insurance payout. UTA sued Vigilant Insurance Co. and Federal Insurance Co., two Chubbs subsidiaries, in November 2020 for $150 million, seeking coverage for losses tied to canceled live events and movie and TV productions. UTA argued that its broad “all-risk” policies for “direct physical loss or damage” should cover pandemic-related losses. It emphasized that Vigilant and Federal didn’t include a virus or pandemic exclusion, which can make cases more open-and-shut.
The insurers, as in hundreds of other cases, maintained that the phrase “direct physical loss” requires an actual change or physical alteration to the insured property. They claimed that the temporary limitations placed on the use of UTA’s properties by the closure orders and the alleged presence of the virus in its buildings failed to satisfy those criteria. On top of that, they argued that UTA didn’t sufficiently allege that the virus was actually present at its properties, and even if it could make such an allegation, they said that “the virus harms human beings, not property.”
A Los Angeles judge and state appellate panel sided with the insurers. “In the wake of the COVID-19 pandemic, many insureds have asserted arguments similar to UTA’s, and the majority of courts have rejected them,” reads an order from California’s Second Appellate District issued in April. “It is now widely established that temporary loss of use of a property due to pandemic-related closure orders, without more, does not constitute direct physical loss or damage.”
The appeals court kept in line with precedential decisions in California state and federal courts to go against policyholders in California. In Inns of the Sea v. California Mutual Insurance Co., the first state appellate court to weigh in on a COVID coverage dispute, it was found that the virus could cause direct and physical damage but that Inns didn’t prove that to be true in its case.
An indicator of how COVID-19 coverage lawsuits have fared has been whether they were filed in federal or state court, according to attorneys entrenched in insurance law who have been following the litigation. “It’s a tale of two courts,” says Childress. “In the federal court system, insurers have been largely successful to date. In state courts, it’s a much more mixed story” — (although not for UTA).
Veteran insurance attorney Shaun Crosner notes that “state courts have been more receptive to arguments that insured policyholders are advancing.” He laments their federal counterparts dismissing cases before they get to discovery, explaining that they should have passed on key questions to state high courts before ruling on certain issues.
Michael Levine, also a seasoned insurance attorney, agrees that federal courts have been prematurely tossing lawsuits. “Some of these cases were brought early and poorly pled,” Levine says. “The problem is that they laid the foundation. Courts proceeded to uniformly follow the herd.”
According to the COVID-19 insurance litigation tracker, 85 percent of cases considered for dismissal in federal court get tossed, compared with 66 percent in state court. “The federal courts have largely gone for the insurance industry,” Baker says. “In state court, it’s been much more variable. That’s where the action is, because at the end of the day, these are state law questions.”
Insurance contracts are governed by state law. This means that federal courts will ultimately have to follow the lead of the high courts of each state on key questions like whether COVID-19 causes physical damage to property, which would trigger coverage for most “all-risk” policies.
This means that insurance coverage disputes will ultimately be decided by the supreme courts of each state.
In April, the Massachusetts Supreme Judicial Court and Iowa Supreme Court became the first high courts to decide if businesses should prevail in lawsuits challenging coverage denials. They both sided with insurers.
The cases swung on whether there was physical damage to the properties that triggered coverage. Although policyholder Wakonda Club lost in its lawsuit before the Iowa Supreme Court, the justices held that contamination can constitute physical loss or damage. Like in Inns of the Sea’s case in California, the court didn’t shut the door on recovery of claims for all-risk policies. It just said that the case didn’t present the necessary circumstances for it to find in favor of policyholders.
Baker says the ruling “lays out a roadmap for some of these larger cases to prove that the virus” contaminated the air, physically altering and damaging property like HVAC systems and assembly lines, which in turn forced businesses to cease operations.
Childress predicts that some decisions from federal courts that were prematurely decided could start to “unravel depending on what higher state courts do.”
For insurers, even one ruling siding with policyholders on the direct physical loss or damage issue could spell major trouble. Claire Howard, senior vp and general counsel of American Property Casualty Insurance Association, cautions that a court ruling mandating retroactive business interruption coverage would “undermine the stability of the insurance industry and its ability to pay claims on all existing insurance policies.”
But entertainment players like the Michael Rapino-led Live Nation, MLB and the Los Angeles Lakers — all of which are pursuing cases in California — may have some reason to believe that they’ll be able to recover on their claims. While insurers maintain an unbeaten record in insurance coverage cases so far, that may soon change.
In February, a federal judge found that insurer Factory Mutual may be on the hook for Live Nation’s losses because of closures forced by the pandemic. U.S. District Judge John Kronstadt in a key ruling concluded that it’s possible that the presence of COVID-19 caused “physical loss or damage” to property, holding that virus droplets could have physically damaged property.
MLB’s suit claiming more than $1 billion in losses as a result of the pandemic is similarly promising, especially because it was filed in state court, where claims have been allowed to proceed more liberally.
According to John Tomlinson, chief executive of Gravitas Insurance, policies for entertainment spaces offering varying levels of coverage for local government-mandated shutdowns have emerged over the past year. He says they haven’t been widely adopted, however, because they’re too expensive.
Bryan Sullivan, an attorney in the entertainment industry who has represented policyholders, estimates that those who opt for COVID-19 coverage pay an additional 10 to 15 percent. “If it’s a big enough production, insurance alone could be half a million to $1 million,” he says. “If you’re doing a Marvel movie, I’m sure it’s far greater than that — around $10 million. At those numbers, it has an impact.”
A version of this story first appeared in the May 10 issue of The Hollywood Reporter magazine. Click here to subscribe.
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