United States: Insurance Law - Week Of September 23, 2022

PANDEMIC UPDATE

The Fifth Circuit has ruled in a Louisiana case that income that a New Orleans jewelry chain lost while being closed due to pandemic orders were not the result of “direct physical loss.” In Coleman E. Adler & Sons LLC v. AXIS Ins. Co., No. 21-30478 (5th Cir. Sept. 20, 2022), the court ruled that it would follow its earlier opinion in Q Clothier New Orleans LLC v. Twin City Fire Ins. Co., 29 F.3d 253 (5th Cir. 2022) despite the insured's argument that the Louisiana Court of Appeals' more recent ruling in Cajun Conti made clear that Q Clothier was wrongly decided. The court declared that it would only countermand its earlier “Erie guess” if there was a contrary decision by the Louisiana Supreme Court or multiple intermediate appellate court rulings finding coverage. The Fifth Circuit also affirmed the lower court's dismissal of Adler's negligent procurement claims against Marsh and RPS, finding that neither had an affirmative duty to advise him about the availability of pandemic-related insurance coverage. Judge Oldham issued a concurring opinion, agreeing with the court's legal analysis but questioning whether the court had jurisdiction to decide the case as the suit only identified the residence of the limited liability company and not the citizenship of the individual members of the insured limited liability company.

The Illinois Appellate Court has again ruled that COVID losses are not covered under commercial property insurance policies. In Lodge Management Corp. v. Society Ins. Co., 2022 IL App (1st) 211133 (Ill. App. Ct. Sept. 16, 2022), the court held that numerous restaurants, bars and hostelries that had been separately insured by Society had not suffered “direct physical loss or damage”, citing the Appellate Court's rulings in other cases arising out of the consolidated litigation against Society, such as Sweet Berry Café.

NEW CASES OF CONSEQUENCE

SECOND CIRCUIT           Reinsurance/”Follow the Settlements”/Exhaustion (NY)

The Second Circuit has ruled in Fireman's Fund Ins. Co. v. OneBeacon Ins. Co., No. 20-2482 (2d Cir. Sept. 15, 2022) that Fireman's Fund did not act unreasonably in allocating a portion of a $35 million settlement of ASARCO's asbestos coverage claims to a high layer excess policy that was reinsured by OneBeacon even though the limits of some underlying policies had not been paid in full. Relying on its ancient (1928) property insurance ruling in Zeig, the Second Circuit declared that where, as here, the policies did not unambiguously require actual payment of policy limits by the underlying insurers, an insured could “exhaust” those limits by entering into “below limits” settlement so long as it absorbed the difference between the actual payment. Because OneBeacon had not argued that the settlement was otherwise unreasonable or negotiated in bad faith, the court ruled that the “follow the settlements” doctrine required OneBeacon to pay its 15% share of the amount allocated to the policy that it had facultative reinsured.

THIRD CIRCUIT           Jurisdiction/Reciprocal Insurance Exchanges (PA)

The Third Circuit has ruled in Peace Church Risk Retention Group v. Johnson Controls Fire Protection, No. 21-2923 (3d Cir. Sept. 20, 2022) that the availability of federal diversity jurisdiction for a law suit involving a reciprocal insurance exchange should bee based on the states of citizenship of the individual members of the exchange.

ILLINOIS           Late Notice

The Illinois Appellate Court has ruled that a trial court erred in granting summary judgment to a liability insurer based upon the insured's 11 month delay in giving notice of a workplace accident In West Bend Mut. Ins. Co. v. TRRS Corp., 2022 IL App (2d) 210506 (Ill. App. Ct. Sept. 9, 2022), the Second District ruled that whether the insured's notice was unreasonably late was a question of fact that should not have been decided on summary judgment. Although the policy required the insuregive notice “at once,” the Appellate Court interpreted this term as being identical to “immediately” and accordingly held that the issue of notice was subject to the state Supreme Court's fact-based analysis in cases such as Livorsi and Yorkville.

WASHINGTON           Property Insurance/Direct Physical Loss

The Washington Supreme Court has ruled that costs associated with a two year hiatus in the construction of the Alaskan Way Viaduct in Seattle after the Tunnel Boring Machine broke down and had to be rebuilt are not covered under a Builders Risk policy. In Seattle Tunnel Partners v. Great Lakes Reinsurance (UK) PLC., No. 100168-1 (2d Cir. Sept. 15, 2022), the Supreme Court affirmed a lower court's finding that the damage to the TBM was subject to a Machinery Breakdown Exclusion and that the loss of functionality of the tunnel did not constitute “direct physical loss. Damage or destruction” to the tunnel.

OTHER DEVELOPMENTS OF NOTE

Inside the Insurance Industry

Arthur J. Gallagher and Alliant Insurance Services have told a Chicago judge that they have agreed to settle a July lawsuit filed by Gallagher against Alliant, alleging Alliant was poaching employees from Arthur J. Gallagher's Chicago office.

Lawyers, Drugs and Money

CVS Health Corp. and Walmart Inc. have agreed to pay $147.5 million to settle West Virginia's claims against them for contributing to the state's opioid crisis.

New Coverage Litigation of Note

The Basketball Hall of Fame has sued Federal Insurance Company for failing to defend a lawsuit in which the Hall of Fame is alleged to have unlawfully secured funds for renovations to its facility in Springfield, Massachusetts.

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