For the past three months there has been a lot of information about Covid-19. What is not clear is how insurance policies, in particular, commercial insurance policies do or do not provide coverage for losses experienced because of Covid-19 or government reaction to Covid-19.
How these cases and the resulting lawsuits are being handled is discussed in a May 2020 article written in the National Law Review. The title of the article is, When Insurers Deny Claim, Brokers Are Next In Line For Allegations of Wrongdoing.” Here is what the article tells us.
In the wake of government orders shutting down or seriously limiting the operations of businesses to deal with the COVID-19 outbreak, many affected businesses have turned to their insurers for coverage. This has led to a flurry of lawsuits across the nation seeking rulings that such claims are covered and asserting that the failure to accept such claims constitutes breaches of contract, bad faith, and other common law and statutory violations.
Perhaps anticipating that courts may find these purported losses not covered under applicable policies of insurance, insureds have begun to look elsewhere for relief, including to insurance brokers, as demonstrated by three recent lawsuits: Sean Boutros, M.D., P.A. v. Sentinel Insurance Co. Ltd., John’s Grill v. The Hartford Financial Services Group, Inc., and Ybarra Investments, Inc. v. Scottsdale Insurance Company. In all three cases, insureds sought business interruption coverage after their businesses were forced to shut down due to COVID-19, and all three sued the insurer and the broker through which they purchased the insurance.
In Boutros, the insured plastic surgery practice seeks a declaratory judgment not only construing the policy but also that the insurer and broker are required to indemnify the insured for its losses. In support of its claims, the insured alleges that the insurer and broker, “accepted the insured’s policy premiums with no intention of providing any coverage…” and suggests that the broker played a role in denying the claim by alleging that the insurer “and its agents have questioned or denied coverage . . .”.
In John’s Grill, in addition to declaratory relief, the insured restaurant and its owner assert eight additional causes of action against the insurer and brokerage agency, including breach of the covenant of good faith and fair dealing, bad faith denial of an insurance claim, fraudulent misrepresentation, constructive fraud, unjust enrichment, violation of California’s Unfair Competition Law (UCL), attorneys’ fees and costs. Additionally, insureds seek injunctive relief under the UCL to prevent defendants from taking the same position on future claims. In support of the constructive fraud claim, the insureds allege that the defendants were fiduciaries or quasi-fiduciaries of the insureds and did not act or consider the interests of the insureds. The allegations against the broker indicate that the broker sold the insureds the policy, defendants generally “made or approved materially false and misleading statements to plaintiffs when it sold plaintiffs the Policy” and “joined in the denial of” the insureds’ claim.
In Ybarra, the insured restaurant also seeks a declaratory judgment that its losses are covered and asserts a breach of contract claim against the insurer and the individual broker without specifying how the insurance contract is applicable to the broker. The insured also sets forth a negligence claim against the individual broker. Specifically, the insured alleges that the broker is “engaged in the business of procuring appropriate insurance coverage” for clients such as the insured, and that he failed to advise the insured that the policy’s virus exclusion would leave it without coverage for an outbreak like COVID-19, despite the insured’s request for “the best available policy with complete coverage for any catastrophic events.”
As with the claims against insurers and now the agents, brokers and agencies, the basis for the broker’s liability seems to continue to expand. Thus, in Boutros the alleged liability appears to be limited to whatever role it played in denying the claim, while in John’s Grill it is that plus allegedly false or misleading pre-sale representations, and in Ybarra the alleged liability expands to the broker’s failure to use due care in procuring appropriate insurance.
It has been reported that errors and omissions carriers are anticipating, and it seems logical to expect, that a number of claims will follow against agents, brokers and agencies based both on such alleged misrepresentations and alleged failures to procure adequate coverage or to warn that losses related to COVID-19 would not be covered. The ultimate outcome of such claims may well turn on the answers to key questions, including whether there was a duty to inform the insured of the existence of coverage for such risks under the particular circumstances at issue.