An Insurer Brings a Covid-19 Declaratory Judgment Action

Covid-19 coverage suits against insurers are expanding daily. We recently summarized some key litigation issues concerning the “Exclusion of Loss Due to Virus or Bacteria”; the need to establish “direct physical loss of or damage to property at the described premises” for business interruption insurance; and the same type of damage or loss to property, other than the insured’s premises, to get civil authority coverage.

On Monday (April 20, 2020), an insurer became the plaintiff when Travelers brought a declaratory judgment action against a Los Angeles law firm, asking a California federal court to “[e]nter a declaratory judgment that the Policies do not provide coverage for the losses claimed….” The case is Travelers Insurance Company of America v. Geragos & Geragos, P.C. A copy of the complaint can be found here.

Travelers begins its complaint with a statement aimed at putting its coverage denial in context: “Travelers understands that the COVID-19 Pandemic has affected the public and the vast majority of businesses throughout the country (and world) in unprecedented ways. But these challenging and unfortunate circumstances do not create insurance coverage for losses that fall outside the terms of a policyholder’s insurance contract.”

Travelers alleges the law firm’s broker told Travelers that “G&G closed its business in light of directives issued by government officials in California and New York (the “Governmental Orders”), and was suffering an ongoing loss of business income as a result of closing its law firm’s physical offices.” Travelers also alleges the firm’s CEO told Travelers that (i) “SARS-CoV-2 purportedly causes physical damage because other countries impacted by the COVID-19 Pandemic have fumigated public spaces, and scientists have found that SARS-CoV-2 is detectable in aerosols and on certain surfaces for particular periods of time”; (2) “he was claiming loss of business income due to the Governmental Orders and courts being closed”; and (3) the firm lost rental income in New York.

After reciting relevant policy terms and exclusions, Travelers sets out various bases for its position:

  1. “There is no coverage for G&G’s claimed losses of business income under the Business Income provision … because any suspension of G&G’s operations was not ‘caused by direct physical loss of or damage to property at the described premises.’”
  2. “[T]he presence of SARS-CoV-2 on a surface would not cause physical damage to that surface.”
  3. “[T]here can be no coverage for G&G’s claimed losses of business income under the Business Income provision because the COVID-19 Pandemic is not a Covered Cause of Loss.”
  4. “There is no coverage for G&G’s claimed losses of business income under the Civil Authority provision … because the Governmental Orders were not ‘due to direct physical loss of or damage to property at locations, other than described premises, that are within 100 miles of the described premises.’”
  5. “[T]he Government Orders do not prohibit all access to G&G’s premises.”
  6. “There is no coverage for G&G’s claimed losses of business income under the Business Income and Extra Expense From Dependent Property provision … because any suspension of G&G’s operations was not ‘caused by direct physical loss or damage at the premises of a Dependent Property’ within the meaning of the Policies. Any temporary closure or limitation of operations of courts in which G&G conducts litigation was the result of governmental actions taken to slow the spread of the COVID-19 Pandemic, not the result of direct physical loss or damage at the premises of a Dependent Property.”
  7. The “EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA” excludes “’loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.’ SARS-CoV-2 is a virus that induces or is capable of inducing physical distress, illness or disease.”

Geragos & Geragos had earlier sued Travelers for coverage in California’s Superior Court (Los Angeles). A copy of that complaint can be found here.

When juxtaposed with Travelers’ claims, the law firm’s allegations set out the battle lines:

  1. “The global COVID-19 pandemic has physically impacted both public and private property and physical spaces around the world, as well as the right of the general public to gather and utilize retail business locations. The currently-raging pandemic has been exacerbated by the fact that the deadly virus physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days. The scientific community in the United States and indeed, across the world, including the World Health Organization, has recognized that the Coronavirus is a cause of real physical loss and damage.”
  2. “Indeed, a number of countries such as: China, Italy, France, and Spain have required the fumigation of public areas prior to allowing them to re-open. A recent scientific study printed in the New England Journal of Medicine explains that the virus is detectable for up to three hours in aerosols, up to four hours on copper, up to 24 hours on cardboard boxes, and up to three days on plastic and stainless steel. Notably, the most potent form of the virus is not airborne but rather present on physical surfaces.” (footnote omitted)
  3. The local (Los Angeles) order directing closure of non-essential businesses “specifically referenced that it was being issued based on the dire risks of exposure with the contraction of COVID-19 and evidence of physical damage to property.” Shortly after that, the Governor “issued a state-wide ‘Stay-at-Home Order’ for all residents of California. In this case, the property that is damaged is in the immediate area of the Insured Property.”
  4. “Any effort by Travelers to deny the reality that the Coronavirus causes physical loss and damage would constitute a false and potentially fraudulent misrepresentation that could endanger policyholders, such as Plaintiff, and the public.”
  5. “[T]he Policy does not include an exclusion for a viral pandemic and actually extends coverage for loss or damage due to physical loss and damage, including by virus….”

The court(s) will have to determine the scope and meaning of direct physical loss or damage to property. They will also have to address either (i) the presence of a factual dispute over whether the virus exclusion is in the applicable policies, or (ii) if present, why that exclusion might apply to discrete viruses, but not viral pandemics. There may also be an abstention issue in the federal action.

Moreover, as discussed in our previous post, all of these legal disputes may be superseded by emergency legislation to create coverage where it may not otherwise exist, in return for a state or federal “backstop” to protect insurers from bankruptcy.