DISTRICT OF COLUMBIA: An Introduction to Insurance: Policyholder

Practice Area Overview – District of Columbia: Insurance: Policyholder
by Milone Law Firm PLLC, May 2020

Like everything in the world, the landscape of insurance law in 2020 has been dominated by the COVID-19 crisis. Countless businesses have been forced to reduce their activity dramatically, or to cease operating altogether, which has led to unimaginable losses of revenue around the world. These losses have led to an unprecedented level of attention on Business Interruption and related lines of insurance coverage (i.e. Civil Authority, Dependent Business Income, and others) as companies attempt to recoup these losses. The insurance industry has mobilized and argued aggressively in many settings that their policies never were intended to cover worldwide pandemics, even though their policy wording often states otherwise. In the first half of 2020, the battle lines of a dispute between policyholders and insurers that will continue for years have been formed.

The core legal issue is whether government-mandated closures due to coronavirus and COVID-19 constitute “direct physical loss or damage” of insured property, as that phrase is used in various insurance policies. The answer to this question will determine whether many billions of dollars are owed, which in turn will determine whether many businesses survive. Like all insurance disputes, the outcome will turn on three variables: the applicable state’s law, the facts giving rise to each loss, and the policy wording. The critical differences in state law cannot be overlooked. Insurance coverage is purely a creature of state law, and states frequently analyze the same issue very differently.

Through the end of May 2020, there have been approximately 275 lawsuits, in more than 30 states, brought by policyholders claiming coverage for their business losses. The first two preliminary decisions on the property damage question have gone in opposite directions. A court in New York found no “physical loss or damage,” and therefore no coverage, while a court in Paris, France, viewed the issue differently, and ordered the insurer to pay the policyholder’s losses.

The widespread, sweeping nature of business losses has caused many policyholder lawsuits to be framed as class actions, an unconventional development in insurance coverage litigation. The federal government and several states have considered legislation that would require insurers to pay out claims in certain circumstances, and it is not yet clear where the legislative efforts will lead. The landscape for the remainder of 2020 and beyond will remain unclear, and businesses will depend on experienced counsel to navigate developments and secure coverage for their lost revenue.

The biggest challenge facing policyholders in the climate caused by COVID-19 is lack of cash flow. Many businesses having valid Business Interruption claims are unable to assert those claims because, by definition, they have no revenue. Even large companies with cash on hand are hesitant to invest in expensive insurance litigation, when the controlling precedent is still developing and litigation outcomes are unpredictable. The insurance industry, in contrast, is extremely well funded and will spare no expense defending against COVID-19 claims. The insurers know that if coverage for COVID-19 business losses becomes generally accepted, their overall exposure will far surpass their environmental and asbestos liabilities, which have been the most expensive categories of claims in modern history. Policyholders, therefore, may feel as if they are in a David vs. Goliath situation as they begin to pursue these claims.

In addition to first-party business interruption claims, policyholders are likely to confront similar challenges when pursuing COVID-19-related third-party insurance claims. As the world goes through its recovery, there are many potential litigation scenarios – shareholders alleging that companies did not adequately manage the COVID-19 challenges; customers alleging that errors by businesses caused them damages; data breaches while businesses let down their guard; employees alleging that they became sick because employers required them to work; or, schools and businesses accused of reopening without adequate protections. These types of litigation scenario will require policyholders to seek coverage under traditional lines of liability insurance, such as General Liability, Directors & Officers, Errors & Omissions, and Cyber Liability.

Now more than ever, it is important for clients to understand the landscape of policyholder-side insurance law firms, to ask the right questions, and to select the team best suited for their matter. When the modern policyholder Bar emerged in the late 1970s and 1980s, the top lawyers were concentrated at a small number of well-established firms representing large corporate clients. Those firms’ client bases incurred the heaviest environmental and asbestos liabilities, which gave rise to the largest and most complex insurance disputes, so naturally those firms were on the cutting edge of policyholder-side work.

As shown by this year’s Chambers rankings, many of the top policyholder-side insurance lawyers and departments remain at some of the largest, best-known law firms in the world. Such firms remain well positioned to handle large, complex insurance claims due to their relationships with corporate policyholder clients, their litigation bench strength and infrastructure, and their ability both to defend an underlying matter and to pursue insurance recovery, from within one firm (i.e. one-stop shopping). However, large firms that represent mainly corporate clients sometimes lack the flexible rate structures necessary to handle insurance matters cost-effectively, particularly when a claim is novel and its chances of success are debatable. Also, large firms often have relationships with insurance companies, either representing them directly in coverage matters, serving on defense panels, or handling unrelated work such as mergers and acquisitions. While such representations often do not give rise to ethical conflicts, they do pose business conflicts, and policyholder clients may believe that firms with no connections to insurers will advance policyholder positions most effectively and aggressively.

Because well-informed clients often demand purity in this respect, law firms with policyholder-side practices often make business decisions not to represent insurers in any respect. Such firms are in a position to promote themselves as representing “exclusively policyholders, never insurers.” In addition, many of the top policyholder practices emphasize the plaintiffs-side nature of their work, promoting their insurance practice as an oasis of plaintiffs’ lawyers within a generally defense-oriented firm. Such a practice often emphasizes lean staffing, trial readiness, contingency and alternative fee arrangements, use of third-party funders when appropriate, and an overall philosophy of resolving cases efficiently and strategically.

In keeping with this trend, the marketplace includes a growing number of boutique firms consisting of top policyholder attorneys who have departed large firms and formed their own firms grounded on these principles, devoted entirely to serving policyholders.