United States: Insurance Law - Week Of July 22, 2022

A second small crack has appeared in the heretofore unbroken wall of insurer appellate victories. In Marina Pacific Hotel & Suites v. Firemans Fund Ins. Co., No. B316501 (Cal. App. July 13, 2022), the Second District of the California Court of Appeal ruled that a trial court erred in granting Firemans Fund's demurrer without leave to amend due to the failure to plead a claim for direct physical loss. Specifically, the Court of Appeal found that allegations that virus particles were not only present in the insured's hotel facilities but had physically bonded to the property "unquestionably pleaded direct physical loss or damage to covered property within the definition articulated in MRI Healthcare-a distinct, demonstrable, physical alteration of the property." The Second District criticized the judicial panel that recently held to the contrary in United Talent, asserting that the scientific evidence with respect to virus particles could be easily eradicated by cleaning a surface was not yet so clear as to permit courts to take judicial notice of such contentions. The court also rejected Firemans Fund's argument that virus particles cannot cause "direct physical loss," noting that the policy clearly contemplates coverage in such cases by insuring $1 million for loss due to the transmission of "communicable disease."

The Eighth Circuit has affirmed an insurer's victory in Rock Dental Arkansas LLC v. Cincinnati Ins. Co., No. 21-2919 (8th Cir. July 21, 2022) that the suspension of the insured's dental practice during the pandemic did not support a claim that the property has suffered direct physical loss or damage, nor had the insured alleged that surrounding property had suffered damage as required for "civil authority" coverage.

Finally, the Seventh Circuit issued a one paragraph opinion last week, confirming that its 2021 decision in Sandy Point Dental precluded coverage in Legacy Sports Barbershop v. Continental Cas. Co., No. 21-02517 (7th Cir. July 22, 2022).

NEW CASES OF CONSEQUENCE

EIGHTH CIRCUIT Surety Bonds/Costs and Attorneys Fees (MO)

The Eighth Circuit has ruled that language in a surety bond allowing the insured party to recover "sums as may be justly due" is not limited to amounts for labor and material and should also include arbitration costs, attorneys' fees, and interest. In Owners Ins. Co. v. Fidelity & Deposit Co. of Maryland, No. 21-2943 (8th Cir. July 22, 2022), the court ruled that the "justly due" language appears to have its roots in the Miller Act and that courts consistently ruled that even though the Miller Act did not explicitly provide for the recovery of attorneys' fees or interest, subcontractors are nonetheless entitled to those items if the underlying contract between the subcontractor and the general contractor permitted their recovery.

CALIFORNIA Procedure/Issue Preclusion

The California Court of Appeal has issued a new order in Thompson v. Crestbrook Ins. Co., A161949 (Cal. App. July 13 2022) directing that its June 22 opinion be published. In its earlier opinion, the First Appellate District had ruled that a property owner's effort to obtain coverage for allegations that it had violated a conservation easement on property that it owned in Sonoma County was barred in light of an earlier suit that it had filed against Burlington Insurance for the same claims that had resulted in an unpublished disposition to the effect that the claims did not involve an accidental "occurrence." Under the circumstances, the Court of Appeal ruled that the insured was collaterally estopped to pursue these same claims against others in state court.

MONTANA Subsidence Exclusion

The Montana Supreme Court has ruled in Loendorff v. Employers Mut. Cas. Co., 2022 MT 143 (Mt. July 19, 2022) that a subsidence exclusion in a CGL policy precludes any duty to defend allegations of structural damage that resulted from the settlement of soil n and around the buildings being constructed by the insured. Despite the trial court's ruling coverage applied because the damage in question was the result of settling of the earth rather than earth movement as a result of the insured's actions, the state Supreme Court held that "while the Homeowners are correct that the Exclusion does not attempt to differentiate between natural and human-caused earth movement, that does not render it ambiguous, but rather encompassing, by design. The Exclusion broadly eliminates coverage for the insured's liability for damage that is related to any earth movements." Finally, the court refused to find that the insureds had a reasonable expectation of coverage in light of the clear exclusionary language of the EMC policy.

PENNSYLVANIA Cyber/Network Access Exclusion

A federal district court has ruled in Construction Financial Administrative Services v. Federal Ins. Co., No. 19-20 (E.D. Pa. June 19, 2022) that an insured was not entitled to coverage for $1.3 million in funds that it mistakenly wired to what it believed was a customer's account. In holding that these was no coverage for the loss, Judge Younge focused on the policy's Unauthorized Network Access Exclusion endorsement, which excluded losses "based upon, arising from or in consequence of any unauthorized or exceeded authorized access to, use of or alteration of, any computer program, software, computer, computer system or any input, output, processing, storage and communication devices that can be connected thereto." Despite the insured's argument that this exclusion did not apply because the proximate causes of this loss was its failure to properly follow paperwork for its disbursement procedures, the District Court, applying North Carolina law, held that the loss clearly arose out of unauthorized access by a hacker who gained access to an employee's email and that the insured's "failure to require documentation is not an independently occurring cause of injury."

OTHER DEVELOPMENTS OF NOTE

Inside the Insurance Industry

W.R. Berkley reported last week that it had 16.9% increase in written premium an improved combined ratio and a 43% increase in operating income for the second quarter of 2022.

Beazley reported that its profits dropped in the second quarter of 2022 although it remains optimistic that its 2022 financial results will be buoyed by an uptick in premium received for cyber insurance policies.

Travelers also reported last week that its quarterly income fell in the second quarter, although less than had originally been expected.

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