Infected Judgment: Problematic Rush to Conventional Wisdom and Insurance Coverage Denial in a Pandemic
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INFECTED JUDGMENT: PROBLEMATIC RUSH TO CONVENTIONAL WISDOM AND INSURANCE COVERAGE DENIAL IN A PANDEMIC ERIK S. KNUTSEN AND JEFFREY W. STEMPEL *© Abstract The COVID-19 pandemic created not only a public health crisis but also an insurance coverage imbroglio, prompting near-immediate business interruption claims by policyholders impacted by government restrictions ordered in response to the pandemic. Insurers and their representatives “presponded” to the looming coverage claims by quickly moving to denigrate arguments for coverage, engaging in a pre-emptive strike that has largely worked to date, inducing too many courts to rush to judgment by declaring—as a matter of law—that policy terms such as “direct physical loss or damage” do not even arguably encompass the business shutdowns resulting from COVID-19. Our closer examination of the term and of other key coverage questions suggests that policyholders have a much stronger case than suggested by the initial—and often superficial and conclusory—conventional wisdom flowing from the first wave of judicial decisions. Only a few courts have analyzed the COVID coverage debate with the type of reflective care, judicial humility, and respect for the trial process one would hope to see. The “early returns” in these coverage wars have been analytically disappointing, creating risk of an unfortunate path dependency or cascade of cases excessively narrowing the meaning of key terms such as “loss” and “damage,” and diminishing the quality of future coverage decisions. * Respectively, Professor of Law, Queens University-Canada and Doris S. & Theodore B. Lee Professor of Law, William S. Boyd School of Law, University of Nevada Las Vegas. Thanks to Bill Boyd, Jay Feinman, Chris French, Dan Hamilton, Yong Han, Helmut Heiss, the late Doris Lee, Ted Lee, Randy Maniloff, David McClure, Ann McGinley, our colleagues in the American College of Coverage Counsel and the Project Group for the Principles of Reinsurance Law (PRICL), and the ALI Restatement of the Law of Liability Insurance process. The opinions expressed in this article are of course our own and should not be attributed to any of those we cite or thank. © 2020 Erik S. Knutsen and Jeffrey W. Stempel. 186 CONNECTICUT INSURANCE LAW JOURNAL Vol. 27 TABLE OF CONTENTS I. INTRODUCTION....................................................................................187 A. COVID-19 AND COVERAGE CONTROVERSY.....................................187 B. CONSIDERING COVID COVERAGE DISPUTES IN THE BROADER CONTEXT OF THE INSURABILITY OF PANDEMIC-RELATED LOSSES....194 C. INSURANCE IMPLICATED IN A PANDEMIC...........................................197 1. Business Interruption Coverage............................................198 2. Civil Authority Coverage......................................................199 3. Contingent Business Interruption Coverage..........................200 4. Ingress/Egress Coverage.......................................................201 II. INSURER PUBLIC RELATIONS BLITZ: INSURERS PUSH THEIR ANTI-COVERAGE MESSAGE..............................................................201 III. THE KEY COVERAGE ISSUE: DISCERNING THE (REASONABLE) MEANING(S) OF “DIRECT PHSYICAL LOSS OR DAMAGE”.........228 A. THE INSURER ARGUMENT FOR REQUIRING TANGIBLE DESTRUCTION TO TRIGGER COVERAGE..........................................................................228 B. THE FLAWS OF THE INSURER-ADVANCED CONVENTIONAL WISDOM.............................................................................................230 1. Dictionary Fetishism: Improperly Collapsing “Loss” and “Damage”.............................................................................230 2. Dictionary Definitions Support Policyholders at Least as Much as Insurers.............................................................................234 3. Apt Use of Dictionaries in COVID Coverage Controversies Often Supports Coverage......................................................237 4. Prior Insurer Industry Action Contradicts Insurers’ Current Interpretation Angle..............................................................239 5. Past Judicial Treatment of the “Direct Physical Loss or Damage” Clause Has Been More Favorable to Policyholders than Initial COVID Coverage Decisions Suggest..................241 IV. THE DISAPPOINTING EARLY CASELAW CONCERNING COVID-19 BUSINESS INTERRUPTION CLAIMS.................................................249 A. THE PREVAILING ANALYSIS...............................................................249 B. MISAPPLYING TRADITIONAL CONTRACT AND INSURANCE LAW.......251 1. Glib Tautology and False Consensus Bias.............................252 2. Reasonable Policyholder Expectations of Coverage for Pandemic-related Losses.......................................................260 3. Causation, Civil Authority Coverage, and the Virus Exclusion.....................................................................261 2020 INFECTED JUDGMENT 187 4. Ambiguity in Property Coverage for Pandemic-related Losses.......................................................264 C. THE POTENTIAL FOR COVID INSURANCE COVERAGE CASES AS A BLUEPRINT FOR BETTER DECISION-MAKING.....................................265 V. CASELAW AND THE VIRUS EXCLUSION........................................269 A. CASES WITHOUT A VIRUS EXCLUSION...............................................274 B. CASES WITH A VIRUS EXCLUSION.....................................................277 VI. CONCLUSION........................................................................................281 I. INTRODUCTION A. COVID-19 AND COVERAGE CONTROVERSY As the world now knows, a variant of the SARS coronavirus emerged in Asia in late 20191 creating a severe concentration of infections in Wuhan, China that spread rapidly throughout the world reaching the United States perhaps as early as December 2019.2 By February 2020, the new virus named COVID-193 was a 1 “SARS” (Severe Acute Respiratory Syndrome) is the name given to a class of particularly dangerous virus that causes respiratory problems but often adversely affect other organs. Julia Ries, Here’s How COVID-19 Compares to Past Outbreaks, HEALTHLINE (Mar. 12, 2020), https://www.healthline.com/health-news/how-deadly-is-the-coronavirus- compared-to-past-outbreaks. SARS viruses are common in animals and only occasionally cross over to humans—with dangerous results. Id. The SARS-1 virus, which spread rapidly between 2002 and 2004, infected many and caused an estimated 774 deaths worldwide (though none in the United States). Id. See generally Center for Disease Control and Prevention, CDC.GOV, https://www.cdc.gov (providing range of information regarding the SARS virus and COVID-19 in particular). 2 See CDC.GOV, supra note 1 (noting that as of January 1, 2021, COVID-19 surpassed twenty million cases and 341,199 deaths in the United States). Accord, Johns Hopkins Coronavirus Resource Center, https://www.coronavirus.jhu.edu. 3 COVID-19 is “a mild to severe respiratory illness that is caused by a coronavirus (Severe acute respiratory syndrome coronavirus 2 of the genus Betacoronavirus)” transmitted chiefly by contact with infectious material (such as respiratory droplets) or with objects or surfaces contaminated by the causative virus, and is characterized especially be fever cough, and shortness of breath and may progress to pneumonia and respiratory failure.” See COVID-19, MERRIAM-WEBSTER DICTIONARY (2020), https://www.merriam- webster.com/dictionary/COVID-19. The term coronavirus derived from the crown-like spikes of the virus that appear when it is viewed by microscope. Kathy Katella, Our New COVID-19 Vocabulary—What Does it All Mean?, YALE MEDICINE (Apr. 7, 2020), https://www.yalemedicine.org/stories/covid-19- 188 CONNECTICUT INSURANCE LAW JOURNAL Vol. 27 widely acknowledged serious problem4 that was deemed a “pandemic” by March 11, 2020.5 Beginning in March 2020, state and local governments began issuing glossary/. It is a relative of the SARS-CoV (often referred to as “SARS” or Severe Acute Respiratory Syndrome) that caused substantial injury and death in a 2002-2003 worldwide outbreak. Id. Coronaviruses of various types can cause common colds as well as SARS and Middle East respiratory syndrome (MERS). Id. The variant emerging in 2019 “is believed to have started in animals and spread to humans. Id. Animal-to-person spread was suspected after the initial outbreak in December among people who had a link to a large seafood and live animal market in Wuahn, China.” Id. COVID-19 is thus the name for the disease resulting from infection by the virus with the letters COVI standing for coronavirus, the D for disease, and the number 19 in the name resulting because this particular strain of the virus emerged in Wuhan in November 2019 Because the name is derived from initials, it is frequently abbreviated as “COVID-19” in capital letters. 4 See Christopher C. French, COVID-19 Business Interruption Insurance Losses: The Cases for and Against Coverage, 27 CONN. INS. L.J. 1 (2020) (acknowledging that COVID- 19 infections were presenting serious problem). As is not common knowledge, governments exhibited a range of reactions to the COVID-19 problem. Some (e.g., Canada, New Zealand, Hawaii), ordered substantial comprehensive “lockdowns” as a means of retarding the spread of the disease. See, e.g., Lauren Vogel, COVID-19: A Timeline of Canada’s First-wave Response, CAN. MED. ASS’N J. NEWS (June 12, 2020), https://cmajnews.com/2020/06/12/coronavirus-1095847; Alexis Robert,