Tuesday, March 30, 2021

COVID-19 and Business Interruption Insurance

As a teaser to a forthcoming article I coauthored with two of my students (who co-presented with me) for the Business Law Prof Blog symposium back in the fall, I offer a short excerpt on business interruption insurance litigation resulting from governmental actions forcing business closures as a result of the pandemic, focusing on a recently decided Tennessee case.

In general, business lawyers got inventive in bringing legal claims of many kinds. A federal district court case recently decided in Tennessee, Nashville Underground, LLC v. AMCO Insurance Company, No. 3:20-cv-00426 (M.D. Tennessee, March 4, 2021), offers a notable example involving the interpretations of a business interruption insurance policy. The plaintiff in the action, a Nashville bar, restaurant, and entertainment venue, claimed coverage under the food contamination endorsement in its business interruption insurance policy for the damages suffered when it was forced to close its doors by governmental orders issued in March 2020 in response to the COVID-19 pandemic. The insurer denied coverage. The court held for the defendant insurer on its motion to dismiss for failure to state a claim, finding the contract language unambiguous. The court’s conclusion in its opinion noted sympathy, in spite of the outcome.

Like many Americans, the undersigned can sympathize with Plaintiff and so many of our other small to medium-sized businesses that seem to have borne much of the brunt of the effects of the COVID-19 pandemic. One could understand if Plaintiff (or anyone else) lamented that it simply is not right that this should be the case. But it also is not right, or lawful, for a business's insurer to be on the hook for coverage it simply did not contractually commit to provide. Presumably like a myriad of other enterprises throughout this nation, Plaintiff in retrospect perhaps would have bargained for broader coverage but simply did not foresee such need before the unprecedented pandemic conditions arose in 2020. Accordingly, Plaintiff was unfortunately left without the coverage it now asks this Court to find in an insurance policy that simply does not provide it.

Nashville Underground, supra.  Sympathy notwithstanding, cases of this kind are decided on the basis of specific contract language. Although overall insurers tend to be winning in these contract interpretation battles, insureds are prevailing in some cases, at least in pretrial and summary judgment motion battles. See, e.g., Kenneth M. Gorenberg & Scott N. Godes, Update on Business Interruption Insurance Claims for COVID-19 Losses, NAT’L L. REV. (Oct. 29, 2020), https://www.natlawreview.com/article/update-business-interruption-insurance-claims-covid-19-losses; Richard D. Porotsky Jr., Recent Federal Cases in the N.D. Ohio Split on COVID-19 Business Interruption Insurance Coverage, NAT’L L. REV. (Jan. 26, 2021), https://www.natlawreview.com/article/recent-federal-cases-nd-ohio-split-covid-19-business-interruption-insurance-coverage; Jim Sams, Judge Rules in Favor of 3 Policyholders With COVID-19 Claims in Consolidated Case, CLAIMS J. (Feb. 21. 2021), https://www.claimsjournal.com/news/national/2021/02/24/302197.htm.

The opinions in these cases constitute an interesting emergent body of decisional law relevant to contract and insurance law and practice.  Along with litigation relating to, e.g., force majeure and material adverse change/effect, the legal actions interpreting language in business interruption insurance contracts are bound to offer important lessons and tips for legal counsel and their clients--a legacy likely to affect practice and litigation for many years to come.

The article from which the above quoted text (reformatted for posting here) comes, Business Law and Lawyering in the Wake of COVID-19, is scheduled for publication later this spring in Transactions: Tennessee Journal of Business Law.  I will promote the article here once the final version is available and has been posted to SSRN.  In the meantime, you have a a short preview of one part of the article in this post!

March 30, 2021 in Contracts, Insurance, Joan Heminway | Permalink | Comments (2)

Monday, August 10, 2020

Insurance, Education, and Civil Rights

I recently received word from one of our former guest bloggers, Marcos Mendoza (whom I introduced here and who posted here, here, here, here, and here), that his most recent insurance article, The Limits of Insurance as Governance: Professional Liability Coverage for Civil Rights Claims Against Public School Districts, has been published in the Quinnipiac Law Review.  It is available on SSRN here.  The abstract follows.

Insurance intersects with people throughout their lives, sometimes with elements that are unobserved or misunderstood. That is often the case with “insurance as governance,” a form of private contractual regulation. This theory assumes that insurers, to minimize their financial losses, attempt to shape policyholder conduct by employing private regulatory measures, primarily through underwriting and contractual loss prevention methods. Insurance as governance is about risk reduction.

This article addresses a question regarding civil rights—do insurers influence the civil rights policies of public school districts? A broad legal arc encompasses civil rights litigation against schools, from freedom of speech complaints to sex-based claims involving students. School boards purchase professional liability insurance to defend their operational policies and actions. Previous research has not examined whether insurers attempt to shape school officials’ conduct to reduce these claims. This article finds that insurer influence is surprisingly minimal despite the financial and potential societal benefits.

Landmark scholarship (Rappaport, Harvard Law Review, 2017) established that insurers could positively influence police officer conduct, resulting in fewer civil rights claims against police entities. But this school environment research determines that insurers of public schools do not employ assertive loss prevention methods to limit civil rights claims. This lack of private regulation is because school boards want and exercise significant local control authority, and the administrators of interlocal risk pools—the leading type of insurer discussed within—have political concerns about membership stability, leading to regulatory hesitation.

This empirical study makes two main contributions. First, it involves a discussion of why insurer private regulation does not linearly increase when school district civil rights exposures rise. This contribution includes a review of the school districts’ mutual ownership of the predominant school insurer, the interlocal pool; an examination of the strong local control desires of school boards; and an analysis of the attendant political concerns of the interlocal pool administrators. Second, it reviews the policy adoption process of school boards, notes how school officials interact with and tend to resist insurers, and documents how this sociolegal setting creates insurers’ reluctance to attempt conduct-shaping with school districts regarding civil rights. This article will further private regulation scholarship regarding governmental entities and allow scholars to reassess the reach of insurance as governance.

Both this article and an earlier piece written by Marcos are cited in the new edition of Kenneth Abraham and Dan Schwarcz's Insurance Law and Regulation casebook.

I took a quick peak into the article, even though insurance is not my legal "thing."  (I come from a line of insurance brokers and underwriters, but I went a different way . . . .)  The article is well written and covers a lot of interesting ground.  It is a tale of private ordering and regulation--or, rather, the absence thereof.  On a macro level, the piece asks and answers the question: why, if insurance contracts incentivize policyholder behavior in some circumstances or with some insureds, do they not incentivize behavior in or with others?  Its focus is, as the article title suggests, on public school districts as policyholders and civil rights claims as insured risks. 

Although The University of Tennessee recently faced significant exposure for alleged Title IX violations (settled four years ago), I admit I hadn't thought much about the exposure of school districts to civil rights litigation.  Of course, that exposure includes more than Title IX litigation.  As the article notes, Section 1983 claims, Title VI claims, Title VII claims, and disability claims under the Individuals with Disabilities Education Act and Section 504 of the Rehabilitation Act of 1973 also represent potential liability threats.  Overall, the level of risk is reasonably high.

Yet, perhaps not high enough . . . .  In the introductory portion of the article, Marcos contrasts the regulation of public police through insurance policies (evidenced in prior literature) with the lack or failure of similar regulation of public school districts.  In the conclusion, he notes, among other things, that "it seems that assertive regulation happens with public actors only when the risk exposures become extreme, and not before."  He also observes that insurer, as well as insured, behaviors contribute to the creation of regulatory power through insurance arrangements.  All in all, the article is an instructive read with analogies to many other areas in which common types of contracts are entered into by repeat players in a commercial or other context.

August 10, 2020 in Contracts, Insurance, Joan Heminway | Permalink | Comments (0)