Insurer warns Delaware high court of 'litigation flood' if jurisdiction is allowed in pandemic coverage cases
Is selling a policy to a Delaware LLC sufficient to trigger jurisdiction in the state during a claim dispute?
In a uniquely Delawarean case, the state’s Supreme Court heard arguments Wednesday on when a company incorporated in Delaware is legally considered to be located there and when it’s not.
A Delaware LLC named 300 West 22 Realty claims its Superior Court case seeking a pandemic-related business interruption insurance payout shouldn’t have been dismissed, arguing its policy with Strathmore Insurance Company gives it the right to litigate the dispute both in its state of incorporation and the jurisdiction where it is physically present.
The argument came two months after the U.S. Court of Appeals for the Third Circuit issued a non-precedential ruling that upheld a District of Delaware decision to dismiss the insurance case, Yankees Entertainment and Sports Network LLC v. Hartford Fire Insurance Company, because the lawsuit didn’t come out of any action the insurer took in Delaware. Nicholas Insua of Reed Smith — which also worked on the Yankees Entertainment and Sports Network case— told the Delaware high court it shouldn’t make the same finding.
“The facts are similar, but we believe that the act of selling an insurance policy to a Delaware LLC is something that should be sufficient to trigger jurisdiction under the statute,” Inshua said. “The state has an interest in companies that are organized under the laws of Delaware and purchase insurance, and if a lawsuit arises, then we believe that should be sufficient enough to find jurisdiction under the statute.”
Robinson+Cole’s Jonathan Small, appearing for Strathmore, focused the majority of his argument on the swell of pandemic insurance coverage litigation that could be brought in Delaware if the Superior Court’s decision is overturned.
“The upshot of 300 West’s argument in this appeal, which the Third Circuit rejected, is that of the thousands of COVID-19 business interruption coverage lawsuits filed nationwide, any brought by a Delaware-incorporated policyholder could have been filed in Delaware,” Small said. “The consequences of the appellant’s overreaching position are potentially severe given, as this court well knows, Delaware has more incorporations than any other U.S. state.”
The case was initially filed in early 2022, with 300 West seeking a declaration that it was entitled to insurance coverage for pandemic-related losses from its hotel, located in New York. Superior Court Judge Mary M. Johnston granted dismissal in March.
Insua argued the real estate entity is located, for the purposes of the Delaware statute, in Delaware as well as in New York because at the time it purchased the insurance policy, 300 West 22 was a Delaware LLC. While the policy in question covers damage to the property itself, that damage ultimately harms the company, which qualifies as a person located in Delaware, and the statute covers both a property and a person, he said, allowing specific jurisdiction in Delaware.
Justice Karen Valihura pushed back on that point, asking how a property-focused policy could be litigated in a jurisdiction the property isn’t located in.
“It’s not like a D&O insurance policy where the insurance policy is covering losses arising from actions of persons, directors or officers; arising from tort or fiduciary liabilities,” Valihura said. “This is intended to cover losses from damage to a place or a thing or a piece of property — here, the Moore Hotel.”
The Superior Court has previously found that Delaware-incorporated plaintiffs physically located elsewhere can have Delaware jurisdiction in insurance disputes, but Johnston noted in her opinion that was in a case involving director and officer liability insurance, an area in which the state has a direct interest.
Considering the case involves a New York insurance policy signed in New York with a New York-incorporated insurer for coverage of a hotel located in New York, the only connection to Delaware is 200 West 22’s incorporation, and saying that’s enough to have Delaware jurisdiction is a “clear overreach,” Small said.
“Despite the exclusive connection to New York, the appellant filed this action in Delaware in a misguided attempt to avoid a mountain of New York case law that had accumulated dismissing similar COVID business interruption insurance cases,” Small said. “Courts in Delaware and elsewhere have repeatedly held that merely contracting with an entity that is incorporated within a forum state does not provide necessary connections between the contract and the forum to support a finding of jurisdiction. Here, that’s all there is.”
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