In the October 15, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of Kang Haggerty wrote “Business-Interruption Claims in the COVID-19 Era: Litigators Find Hope.”

While the coronavirus itself may be novel, business interruption insurance lawsuits are not. Accordingly, in the initial wave of lawsuits arising from the pandemic, both business owners and courts throughout the country seemed trapped in a fixed mindset about this new type of case. Reeling from loss and damage, business owners assumed that since their businesses had been interrupted by COVID-19, their claims had merit. Courts, meanwhile, reading insurance policies narrowly, dismissed claims related to the virus for lack of tangible alteration to business property. In recent months, however, litigators have embraced more creative arguments to persuade the courts to hear their cases. The courts have, in turn, opened their ears (and maybe their hearts, too) to the plight of American businesses that have suffered on a truly historic scale.

With Complaints Rapidly Increasing across the U.S., Now is the time to act

As of May 26, 2020, 2,278 complaints have been filed nationwide over the global pandemic COVID-19 according to the COVID-19 Complaint Tracker developed by lawyers at Hunton Andrews Kurth LLP. While the largest amount of these complaints deal with prison conditions and civil rights , the next highest areas of litigation involve insurance disputes, consumer disputes, labor and employment issues  and contract disputes. Claims regarding employment, contracts and force majeure provisions, or clauses contained in contracts which excuse performance due to natural destructive acts also known as “acts of God,” are on the rise. These complaints will continue to be filed as the effects of COVID-19 continue to be felt in ever-changing ways. Many of these complaints have been filed in jurisdictions where Kang Haggerty regularly practices—namely COVID-19 hot spots New York, Pennsylvania and New Jersey.

Although the COVID-19 Complaint tracker does not capture all of the COVID-19 related cases filed, it does provide insight into how this disruptive and deadly virus has negatively impacted business and individuals across the United States. Further, these metrics only represent disputes that have escalated to the point of initiating litigation, a costly and potentially prolonged endeavor. Many disputes are not captured in the above data either because a wronged party has not retained representation to advocate for their grievance, talks between opposing parties are ongoing, or settlements have been reached. Determining your best course of action can be critical.

Filing a complaint is one of the many tools skilled litigators have in their arsenal to obtain favorable outcomes for their clients. But before filing a complaint one needs to be clear on what terms govern your agreement, the responsibilities of all parties involved, how actions taken by either party may result in a breach to the agreement, and what protections from disruption are afforded to you under the terms of your agreement, your municipality, state or, or under federal statute. By consulting a lawyer to analyze your situation promptly, you may be able to avoid costly litigation related to any disruptions in service you experience or provide as a result of COVID-19. Kang Haggerty LLC has, for instance, successfully utilized force majeure clauses to excuse nonperformance under contracts, which enabled clients facing millions of dollars in liabilities to walk away from disrupted contracts with no penalty fees assessed or for significantly less than they were facing in settlements. As the metrics make clear, COVID-19 is fertile ground for disputes among individuals and businesses that continue to grow each day as our nation attempts to achieve a new normal.

Please consult our Kang Haggerty COVID-19 Resources: Preparing for Post COVID-19 Litigation page for additional information on specific practice areas and issues to consider, along with helpful tips and advice on preparing for reopening in a COVID-19 world, reducing liability and the likelihood of being sued successfully.

Tianna K. Kalogerakis is an associate at Kang Haggerty LLC, where she concentrates her practice on commercial litigation and business disputes. Tianna is the immediate past president of Barristers’ Association of Philadelphia.

In a changing COVID-19 world filled with new regulations, adjustments, and uncertainty, Kang Haggerty provides services to help our clients avoid litigation or to obtain favorable outcomes in litigation. Some COVID-19 services offered by Kang Haggerty that will help you address COVID-19-related issues include:

• Covid-19 Whistleblower, Qui Tam and False Claims Actions regarding recoupment of misappropriates government funds
• Contracting Disputes Resulting from Non-performance due to COVID-19 and the Invocation of Force Majeure
• Business Disruption or Business Loss Claims due to COVID-19
• Insurance Litigation and Recovery
• Insurance Bad Faith Claims for Refusal to Pay for COVID-19 Losses
• Legal Issues Involving Supply Chain & Distribution
• Compliance with Pennsylvania’s Guidance for Construction Industry Businesses Permitted to Operate During the COVID-19 Disaster Emergency
• Compliance with the City of Philadelphia’s Guidance for Construction Industry Businesses Permitted to Operate During the COVID-19 Disaster Emergency
• Employer liability for Employee Exposure to COVID-19
• Compliance with HIPAA regarding Privacy Standards and Security Measures for Protected Health Information and electronically stored Protected Health Information

Kang Haggerty can provide consultations and analyses on any of the above matters and more, specific to your needs and considerations. COVID-19 presents a series of unique and circumstances in a landscape that is ever-changing. Consult one of our attorneys today to learn the most up-to-date insight on COVID-19 issues impacting you.

Additionally, our business clients can take steps today to prepare for reopening in a COVID-19 world and reducing their liability and the likelihood of being sued successfully:

1. Have a justification for the actions you take
2. Thoroughly document your actions
3. Encourage remote work be confined to company-issued devices and programs
4. Assess your document retention policies
5. Evaluate your regulatory compliance and potential exposure
6. Search for small problems that may become big problems over time
7. Be wary of wrongful conduct and avoid engaging in questionable conduct
8. Touch base with your clients and vendors to keep your rapport strong
9. Determine whether changes or concessions are needed in your contract
10. Consider the future and how your business may grow to take advantage of opportunities presented

Now is the time to take steps to insulate you and your business from liability. Contact us today to determine what steps you should take to protect yourself and your business.

Mohney purchased life insurance from U.S. Life (now succeeded and represented by American General) in October 1991 and September 1992. A year later, the plaintiff suffered an injury as a result of a traffic accident preventing him from returning to work. U.S. Life found Mohney to be totally disabled under the definition of their policy and disbursed insurance benefits on a monthly in basis. In February 1995 U.S. Life suddenly terminated Mohney’s benefits alleging that Mohney no longer met “the covered criteria for total disability as stated in [his] certificates” and was “able to perform regular duties of an occupation for which [he was] qualified”.

The plaintiff immediately initiated civil action against the defendant, and in June 1997 filed a complaint for fraud, breach of contract, violation of the Unfair Trade Practices and Consumer Protection Law (“UTPCPL”), and insurance bad faith. During the following four years, U.S. Life’s objections were granted by the court. In 2001, U.S. Life filed a motion for summary judgement which was granted in part with the exception of Mohney’s breach of contract claim. The trial court found Mohney to be “totally disabled under the terms of the insurance contract” and awarded the plaintiff $20,772.58. Upon appeal the Superior Court affirmed the trial court’s breach of contract judgement, but remanded for a trail on the bad faith matter. In October 2013 the trial court ruled in favor of U.S. Life prompting Mohney to appeal the bad faith ruling which is the central consideration of the present memorandum.

The plaintiffs, Richard and Maria Davis, purchased a 15 acre-plot in Lackawanna County, Pennsylvania to develop a residential housing project. Three years later in 2007, a neighboring property owner, Louis Norella claimed that a part of that property, a 1.86 acre-plot, belonged to him. Fidelity, the title insurance company that had insured the Davises’ property, recognized later that year that there was a problem with the title and assured the Davises that the matter would be resolved. It wasn’t until 2012 that Fidelity finally purchased Norella’s property for $50,000. The plaintiffs claimed that this five-year delay on Fidelity’s part prevented the project from coming to fruition at the time, thus causing a lost profit damage.

In affirming the lower court’s opinion, the Superior Court of Pennsylvania stated that the “excessive delay” experienced by the Davises implicated Fidelity in bad faith action. The court also stated this excessive delay caused direct damage to the plaintiffs.

In 2007, plaintiff Jarred Wolfe in the underlying action had been hit by a car driven by Karl Zierle. Zierle was covered by AllState Property and Casualty Insurance Company, and Wolfe demanded $25,000, or half of the liability limits under Zierle’s policy. When AllState only offered $1,200, Wolfe refused and initiated a personal injury action against Zierle. During discovery in the personal injury action, Wolfe found that Zierle had been driving while intoxicated when the accident occurred, and was granted leave to amend the complaint to include a claim for punitive damages. At this point, AllState suggested that Zierle consult a personal attorney regarding the punitive damages.

Although Wolfe attempted to settle with AllState on various occasions, AllState would not agree to make any concessions from its $1,200 offer, which Wolfe refused to accept. The case ultimately went to trial, and Wolfe received a verdict in his favor and against Zierle for $15,000, along with $50,000 in punitive damages. AllState ended up paying the $15,000 compensatory portion of the judgment. Zierle, who was left responsible for the $50,000 punitive damages portion, entered into an agreement with Wolfe, in which Wolfe would not execute on the judgment in exchange for all claims Zierle may have against AllState under the policy. Wolfe eventually initiated an action in the Pennsylvania court of common pleas, alleging that AllState acted in bad faith by refusing to settle initially with Wolfe.

AllState moved for summary judgment, with the argument that Wolfe lacked the ability to pursue a claim under 42 Pa.C.S. § 8371, as § 8371 created a form of an unliquidated tort claim – which are unassignable to third parties per longstanding Pennsylvania law.

Because Pennsylvania law 42 Pa.C.S. § 8371 did not include clear language regarding the assignability of claims in insurance matters, however, the Supreme Court agreed with Wolfe’s proposition that the principles of statutory construction were necessary to accurately examine the question. AllState contended that statutory causes of action should be outside the scope of the court’s discretion, to be answered by the Legislature for its approval. Further, AllState argued that allowing transfers to third parties would cause potential plaintiffs to pursue unreasonable settlement demands, and in terms of policy, would allow for bad faith actions when there may not have been one.

Wolfe argued that allowing such transfers would allow for the insured to be placed on a more equal footing with their insurance carrier in these key moments. In this insurance bad faith action, Wolfe also pursued claims under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (or UTPCPL), which the Supreme Court did not address. With the ability to place the insured on the same playing field as the insurance carriers, Wolfe argued, it would encourage settlement talks, which would in turn foster more efficient litigation claims.

The Supreme Court disagreed with AllState’s arguments, stating simply they did not believe the General Assembly, “contemplated the supplementation of the redress available for bad faith on the part of insurance carriers…” Stated another way, at the time the statute was created, the ability for an insured to find redress for a bad faith action by an insurance carrier through a third party had not been considered. The Supreme Court did include in its opinion that if their assessment was incorrect, the Legislature should, “implement curative measures pertaining to future cases, subject to constitutional limitations.”

At this time, however, based on the Supreme Court’s opinion, it is clear that third parties have a clear form of redress to pursue claims against insurance carriers. Whether this recent decision will spark an increase in insurance bad faith litigation in 2015 remains an open topic of discussion. Third parties to an action have tended to be placed on the outskirts of bad faith litigation, but the tides are turning.

In a similar action in September 2014, in which an insured assigned his rights to pursue an insurance bad faith claim to a third party, one of the largest reported bad-faith settlements in Pennsylvania history was recorded for $22 million. The consequence of acting in bad faith by, for example, failing to pay the obviously liable claim could end up causing the insurance company a lot more money at the end.

The insurance claim arose from a September 4, 1996 collision in which another vehicle struck plaintiff Sheryl Berg’s 1996 Jeep Grand Cherokee.  The Jeep spun around four times and hit a pole resulting in a bent frame and other “severe” damage according to Nationwide’s claim file notes.  Six days later, Nationwide’s authorized repair shop under its Blue Ribbon Repair Program inspected the Jeep and prepared an appraisal declaring the vehicle a $25,000 total loss.  Ten days later, and under Nationwide’s directive (see below), a revised appraisal report was prepared by the same shop indicating the Jeep could be repaired for $12,300.  The repair process took over four months, and the Jeep continued to have problems after it was returned to the Bergs.

In October 1997, the Bergs learned from a former employee of the repair shop, which was a participant in Nationwide’s Blue Ribbon Repair Program, that there were structural repair problems with the Jeep posing safety risks, and in January 1998, the Bergs brought suit against the repair shop and Nationwide.  In April 1998, in a pre-complaint deposition, the Bergs learned for the first time about the first appraisal declaring the Jeep a total loss due to the badly twisted frame.

The trial was bifurcated with the first phase consisting of a jury trial on Plaintiffs’ claims for common law fraud, conspiracy and liability under Pennsylvania’s Unfair Trade Practices and Consumer Protective Law (the “Unfair Trade Practices Act”).  The jury found the repair shop and Nationwide liable under the Unfair Trade Practices Act and awarded compensatory damages to the Bergs of $1,925 against the repair shop and $295 against Nationwide. The second phase was a bench trial that began on June 5, 2007 on the issues of treble damages under the Unfair Trade Practices Act. The trial court granted Nationwide’s motion for directed verdict because the court found that the repair shop that operated under the Blue Ribbon Program was not a direct repair shop for Nationwide. The Bergs appealed.

In 2012, the Superior Court reversed the trial court’s entry of a directed verdict (44 A. 3d 1164).  Among other things, the Superior Court concluded that “whether processing claims for loss through a third party repair facility or through a direct repair program, insurers must at all times act in good faith vis-à-vis their insureds.” (44 A. 3d at 1173). The jury’s finding of violation of the Unfair Trade Practices Act amounted to “some evidence” supporting the Bergs’ claim of insurance bad faith which precluded entry of a directed verdict.

On March 31, 2007, in a dramatic and fatal twist of events, Lanigan was racing at the Mercer Raceway Park in Mercer, Pennsylvania when his throttle stuck and he lost control of his car while turning. Crashing into the catch-fence near the pit, his car struck Steven Guthrie, Jr. and Samuel Ketcham, who were standing behind the fence. Mr. Guthrie died as a result of the injuries incurred, and Mr. Ketcham was seriously injured.

Lanigan sued T.H.E. Insurance for a declaratory judgment and bad faith after being denied a defense in the lawsuit brought by the victims in December 2009, and upon receiving a written explanation of the reasons five months later in May 2010, which stated that, “Bodily injury… to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured” was not covered under the insurance policy. (Emphasis added). Both sides moved for summary judgment. The trial court granted summary judgment in favor of the insurer based on its finding that the victims were “participants.” The trial court based its finding on the evidence discovered during the discovery process.

In reversing the trial court’s order granting summary judgment in favor of the insurer, the Superior Court first differentiated between the duty to defend from the duty to indemnify. The court said, “an insurer’s duty to defend is broader than the duty to indemnify.” Quoting from the Pennsylvania Supreme Court’s earlier decision, the court said “the duty to defend is not limited to meritorious actions; it even extends to actions that are groundless, false, or fraudulent as long as there exists the possibility that the allegations implicate coverage.”

In making a determination whether there is a duty to defend, “a court must compare the four corners of the insurance contract to the four corners of the complaint” and nothing more. According to the court, this is where the trial erred: the trial court considered facts obtained during discovery in finding that the victims were “participants.” The court said, the question the trial court should have addressed was “whether, examining only the underlying complaints and the insurance policy, the claims of negligence against Mr. Lanigan were potentially covered under the policy, giving rise to a duty to defend.” (Emphasis added). In answering this question, the trial court “was limited to the four corners of the complaints and the insurance contract.”

The court then remanded the case for entry of summary judgment in favor of Lanigan on the duty to defend issue and for further proceeding on Lanigan’s bad faith claim.

This case is significant for one main reason: that the insurer’s duty to defend is triggered based on the allegations set forth in the complaint (even in those actions that are groundless, false, or fraudulent) as long as there exists the possibility that the allegations implicate coverage.

In the world where many insurance companies are too quick to deny claims, this case serves as a reminder that they should think again before making their quick (and sometimes, unreasonable) decisions.