Mediation is a solution to COVID-19 insurance lawsuit deluge
The expense and corollary issues around business-interruption claim litigation should make mediation attractive to insurers and policyholders.
Many insurance carriers now face a public relations crisis in light of denied business interruption claims related to mandatory COVID-19 closures.
As of this writing, there are nearly 1,500 pending lawsuits between policyholders and insurers seeking rulings as to whether business interruption or other losses are covered under first-party property insurance policies. The first lawsuit was filed on March 16, 2020 and new litigation is still being filed nearly a year later.
Many of the policies have suit limitation provisions which, where enforceable, contractually reduce the statute of limitations, some to as short as one year, such that many more filings are expected as we get closer to the anniversary of the impact of COVID-19 in the United States. Moreover, other policies have longer suit limitation periods or none at all, and so those lawsuits are yet to be filed. In addition, insurers and policyholders in certain situations have no doubt entered into tolling agreements. Taken together, this means that we are at the proverbial tip of the iceberg in terms of number of suits that will ultimately be filed.
The lawsuits involve numerous insurers and many different industries and classes of businesses. The largest single category of policyholders is in hospitality—restaurants and food services. The lawsuits have also reached into nearly every jurisdiction in the United States.
The key issues in dispute around the country focus on the interpretation of terms such as “direct physical loss of and damage to property” as well as the application of exclusions. Very few of these kinds of lawsuits have been mediated or settled.
As outlined below, it may be time for policyholders and insurers to start thinking about mediating some of these lawsuits with a mediator skilled in insurance issues. Mediation offers a different option that should be considered as complementary, but different than the current no compromise litigation path. Mediation might help get some of these cases to satisfactory resolutions and, in other cases, may lead to a more focused litigation with narrower discovery and a related cost savings.
How mediation could benefit insurers
One reason to consider this approach is the lack of certainty after nearly a year of litigation and the prospect that certainty is not coming anytime soon. Per the COVID Coverage Litigation Tracker, there have been 180 rulings on motions to dismiss and 15 rulings on motions for summary judgment as of this writing. Although insurers had considerable success in the early going, particularly on policies containing virus exclusions, appeals await.
Likewise, on summary judgment motions, policyholders have fared far better, and have won more than lost where there is no virus exclusion in the policy. Appeals await here as well. While there are some conclusions to be drawn from the data, the most obvious one is that these cases will be going on for quite some time and there will be many more decisions, including appellate decisions, that may alter the landscape.
Another consideration is that the battle lines have and appear likely to continue to change. The more recent lawsuits tend to assert different allegations than the earlier decisions and to provide more detailed allegations on the presence of COVID-19 on property and the science behind such alleged property damage. Given this, the precedential value of many of the earlier decisions may be limited. And, as such, there is and will remain considerable uncertainty for both sides for a long time to come.
BI lawsuits carry high risk for policyholders and insurers alike
In addition to the uncertainty, the stakes remain high. Insurers face portfolio risk—a risk that standard language will be deemed in one or more states to mean something that they currently argue that it does not. A win at a state supreme court in any state could have significant consequences for this and the next pandemic, even on cases not yet filed. And this is the extremely rare situation where insurers face simultaneous lawsuits in nearly every state on key coverage language.
For policyholders, per an April 2020 Brookings report, there is a risk of financial challenges and, potentially, insolvency. The other challenge for policyholders is time. While insurers often have deeper pockets and the resources to handle the litigation risk, a total victory in three or four years may be of little benefit to a business that is struggling to stay afloat.
In the United Kingdom, a single regulator, the Financial Conduct Authority, brought a test case. It is estimated that “in addition to the particular policies chosen for the test case, some 700 types of policies across over 60 different insurers and 370,000 policyholders could potentially be affected by the test case.” Financial Conduct Authority v. Arch Insurance (UK) Ltd.,
Unlike in the United Kingdom, where the test case brought relatively quickly to a single court provided some clarity on policy wordings in a reasonable time frame, no such body or avenue exists in the United States. Rather, private lawsuits in individual cases will be dispositive, one at a time, and subject to reversal or revision on a state-by-state basis until state supreme courts have finally spoken, if indeed they speak with clarity and in a way that will be precedential.
The value of virtual mediation
Given the ongoing uncertainty, the costs and the corollary issues around litigation, one tool that is uniquely suited to add value to both sides in this situation is virtual mediation. Mediation can serve multiple functions, including finding out whether a settlement is possible, based on the facts. Mediation can provide a curated conversation around not just the core coverage issue but the size of the loss and the issues that will follow. Mediation could lead to a more thoughtful and nuanced approach to resolving these cases that may lead to some level of satisfaction for both sides. In particular, utilizing a mediator with sufficient insurance expertise can remove some of the uncertainty associated with jurists who may be encountering complex insurance coverage issues for the first time.
Virtual mediation is particularly efficient. Though the insurance company representative may not be local, no travel is required. Virtual mediation has lower costs than in-person mediation, takes less time, provides flexible structuring and scheduling, and can be done in full-day or half-day or other increments, as the case may require. Peter Halprin and Andrew Nadolna, “Is Virtual ADR the ‘New Normal’?”, NYLJ (July 30, 2020). And, perhaps most importantly for all involved, mediation is completely confidential and has no precedential value.
All in all, mediation makes for an attractive alternative in the resolution of cases ripe for settlement that may otherwise get bottlenecked in the litigation process. Mediation, already useful for resolving civil litigation in the pandemic era, may be particularly well suited for settlement of COVID-19 business interruption disputes.
Peter A. Halprin is a partner at Pasich. Andrew Nadolna and Rebekah Ratliff are mediators and arbitrators with JAMS.
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