Are judges putting aside policy interpretation rules in COVID decisions?
Courts are leaning on previous decisions instead of the language in each policy, which is raising significant issues for appeal.
Affiliated Factory Mutual Insurance Co. (AFM) was recently awarded judgment in a COVID-19-related business interruption claim heard before the Northern District of New York. In doing so, the court followed in the footsteps of other federal courts across the country when it failed to consider all parts of the policy as required by state law and made fact determinations at the Rule 12(c) pleading stage.
Mohawk Gaming Enterprises, a casino and resort operated by the Saint Regis Mohawk Tribe located on the border of New York and Canada, was forced to close its operations due to government orders. It filed a claim with AFM requesting coverage for business interruption under the civil authority section of the policy. AFM ignored the basis of Mohawk Gaming’s claim and instead acknowledged the claim as one for communicable disease coverage — a coverage with a low sublimit. Eventually, the insurer denied Mohawk Gaming’s claim, and Mohawk sued AFM seeking recovery of business income losses that it incurred when it was forced to close due to the COVID-19 pandemic.
AFM moved for judgment on the pleadings, arguing that the government order closing Mohawk Gaming did not trigger the civil authority provision of the policy. The district court agreed. In granting the insurer’s motion, however, the court made two errors.
First, the court failed to consider all parts of the AFM policy as required under New York law. Specifically, it failed to afford meaning to language contained in the policy’s two communicable disease clauses, meaning that necessarily applies throughout the policy. Both of those clauses specifically contemplate that “communicable diseases” as defined and covered under the AFM policy can cause loss and damage to property. Yet, the court did not analyze the meaning of those clauses within the context of this policy. Instead, the court followed other decisions from “numerous courts around the country,” each of which is based on different policy wording and their own inherently flawed reasoning to conclude that the presence of virus “is insufficient to trigger coverage when the policy’s language requires a physical loss or physical damage.”
For example, the court relied on Sharde Harvey DDS, PPLC v. Sentinel Insurance Co., Ltd. But the policy in Sharde did not include any communicable disease coverages. Nor does Uncork and Create LLC v. Cincinnati Insurance Co., which the court also relied upon, include communicable disease coverage. Thus, the district court looked to the “scorecard” of cases without looking at the differences in coverage under the policy at issue here. That was an error.
In fact, a federal court in Texas recently rejected the very same reasoning employed in Mohawk Gaming after recognizing that the FM/AFM policy form “is much broader than [others] and expressly covers loss and damage caused by ‘communicable disease.’” In New York, as in Texas, insurance coverage is not determined based on a “scoreboard.” It is based on the words and phrases actually used by the parties.
Courts that have performed a proper analysis have concluded that the policy language and the type of claims alleged matter and, in many cases, mandate coverage for COVID-19-related losses (or, at a minimum, present issues of fact that cannot be resolved by early motions practice).
The Mohawk Gaming court failed to undertake this critical analysis and wrongly relied on the scoreboard to summarily dismiss the claims.
Second, the district court made a factual determination about whether COVID-19 physically alters property without hearing from scientific experts. Mohawk Gaming was forced to close its casino to the public after an outbreak of COVID-19 was discovered at a college five miles away. The AFM policy provides business interruption coverage for losses caused by “an order of civil or military authority [that] prohibits access to a location” if that order “is the direct result of physical damage of the type insured” at or within five miles of a covered location. Mohawk Gaming contended that COVID-19 caused “physical loss or damage” of the type insured by the policy and that because COVID-19 was located within five miles of the casino, the business interruption coverage applied.
In its order, the court ruled that the meaning of “physical loss damage” unambiguously does not cover the “mere presence or spread of the novel coronavirus.” But it considered no evidence of whether the presence of COVID-19 causes a physical alteration of the property, the true test under New York law (and most other states’ laws) for whether physical damage to property has occurred. Whether a certain substance can have a certain type of effect is clearly a question of fact — one that the court decided on its own without the benefit of scientific evidence, or any evidence for that matter.
The Mohawk Gaming decision thus raises significant issues for appeal. As noted, the court failed to afford meaning to the policy’s two express acknowledgments that “communicable disease” — a term defined by AFM — can cause “loss or damage” to property. Relatedly, because the Mohawk Gaming court missed the express acknowledgment that communicable disease may cause loss or damage to property, the court failed to contemplate that such loss or damage is “loss or damage of the type insured.” What’s more, the court was wrong to defer to “the great majority of courts that have addressed” the issue because the question is what the meaning of the policy is under New York law, not what other courts think about the language.
Besides, no “great majority” of courts addressed the issue under the uniquely broad FM/AFM policy prior to the court in Mohawk Gaming, and to date, only the court in Cinemark has squarely reconciled the policy’s express communicable disease provisions with the policy’s generally used phrase “loss or damage” to property. The only other decision to squarely analyze policy wording from the FM/AFM policy form (as opposed to merely looking to the scoreboard) is Thor Equities, LLC v. Factory Mutual Insurance Co., where a federal court in New York rejected the insurer’s strained interpretations of the policy’s contamination exclusion, finding that provision to be ambiguous and, thus, not applicable to losses caused by COVID-19. Finally, the court made an inappropriate fact determination at the Rule 12(c) stage of litigation.
Unfortunately, the district court was not alone; federal district courts across the country, faced with the novel and pressing issue of COVID-19-related losses, have made similar errors. Cases are proceeding through appeals courts now, where the intermediate courts will have an opportunity to correct those errors.
Michael S. Levine is a partner, Geoffrey B. Fehling is counsel, and William P. Sowers Jr. is an associate with Hunton Andrews Kurth LLP. The opinions here are the authors’ own.
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