Mr. Trouble never hangs around,
When he hears this mighty sound,
“Here I come to save the day!”
That means that Mighty Mouse is on the way!
Yes sir, when there is a wrong to right,
Mighty Mouse will join the fight!
On the sea or on the land,

He’s got the situation well in hand!

Theme from “Mighty Mouse” (1958)

For many years in New Jersey, insurance policyholders were blessed with pro-consumer judges who carefully scrutinized the business practices of insurance companies. Justice Stein’s opinion in Morton Intern. v. General Acc. Ins. Co., 134 N.J. 1 (1993) comes to mind, in which the Court refused to allow the insurance industry to apply the “sudden and accidental” pollution exclusion broadly. The Court held that carriers were bound by representations that the industry had made to the New Jersey Department of Insurance about the narrow meaning of the exclusion. Man, did insurance companies hate that ruling.

Times have definitely changed, especially in the Federal Court, as more and more judges with civil defense or prosecutorial backgrounds have been appointed. Now when I read insurance coverage decisions from the perspective of a policyholder lawyer, I sometimes think of the Mighty Mouse theme song (quoted above). The typical scenario goes like this:

  1. An insurance company sells a policy with broad, undefined language, leading policyholders to believe they have broad, undefined coverage.
  2. A claim happens.
  3. The carrier denies coverage.
  4. The carrier tells the Court that if coverage is found, Western democracy as we know it will crumble, and there will be crying in the streets.
  5. The Court finds a dictionary definition that supports the claim denial (and ignores any definitions that support the policyholder). In other words, the Judge essentially tells the carrier: “Here I come to save the day!”

This scenario recently played out in a Third Circuit case involving insurance coverage for COVID-19 losses, Wilson v. USI Services, LLC, which you can read here.

The facts of Wilson (which involved numerous insurance claims and policyholders) are straightforward. In 2020, the pandemic hit. People got sick and died. The CDC said that COVID-19 could be transmitted by touching an infected surface, as you can see here. Governments ordered all non-essential businesses to close. Many small businesses (like restaurants and gyms) were destroyed.

Businessowners affected by the pandemic naturally turned to their insurance policies. And just as naturally, the carriers denied coverage.

For property insurance coverage to exist for a loss, there generally must be “direct physical loss of or damage to” covered property. The problem is that insurance policies are an impenetrable thicket of cross-referenced and sometimes contradictory definitions, conditions, exclusions, and coverage limitations, and the key terms “direct physical loss” and “damage” are never defined. Businessowners whose properties were shut down by the pandemic typically argued that their properties had suffered “damage” because the properties were unable to be used due to the presence of the virus and the resulting government shutdown orders.

Now, it’s important to understand how insurance policies are supposed to work. Under the long-accepted rules of construction, the policyholder is supposed to get every benefit of the doubt. Insurance companies know that. And, if there’s a reasonable definition supporting coverage, the Court is supposed to apply it. Insurance companies know that, too.

So: Can “damage” reasonably be defined as “loss of use”?

Well, broadly defines “damage” to include “injury or harm that reduces value or usefulness” and “to reduce the value or usefulness of.” The Third Circuit itself has held that “property damage” can include “loss of use,” writing: “[The] majority view [holds] that the term property damage does not require actual physical damage but can include intangible damage such as the diminution in value of tangible property.” McDowell-Wellman Eng. v. Hartford Acc. Indem, 711 F.2d 521, 526 n.7 (3d Cir. 1983).

Given the pro-policyholder rules of construction, that would seem to put the insurance industry in a serious pickle. Ah, but never fear, insurance industry, exclaimed the Third Circuit! Here we come to save the day!

In affirming the denial of coverage for COVID-19 losses, the Court wrote: “The businesses…must show that the functionalities of their properties were nearly eliminated or destroyed, that the structures were made useless or uninhabitable, or that there was an imminent risk of either of those things happening.”

Question: Do the policies themselves contain any such requirements?

Answer: No. This is what we might charitably call “judicial underwriting.”

Question: If the insurance companies had really wanted the term “damage” to be construed in such a narrow way, could they have easily inserted such a definition into their standard-form policies?

Answer: Of course. But they didn’t.

Legitimate issues with respect to these claims exist, of course. For one thing, if a loss of business income claim is involved, property policies generally measure the loss by the “period of restoration” –  usually defined as beginning when covered damage forces a business to suspend its operations, and ending when the covered damage is, or reasonably could have been, repaired. The carrier argument is, if the property doesn’t actually have to be repaired, then there’s no way to measure the loss. The counterargument is, the property should be deemed “repaired” when the government removes the shutdown order. Webster’s, after all, defines “repair” in part to include “remedy,” and the definition of “remedy” includes the term “counteract.” The cancellation of the shutdown order counteracted the original order.

There may also be issues with respect to the application of virus exclusions. That is to say, many property policies contain exclusions for loss or damage “caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” (This leads to two questions. First, isn’t the cause of loss in these cases the government shutdown order, and not the virus itself? And second, if the presence of a virus can’t be property damage, as the carriers contend, then why is the exclusion necessary at all?)

Legitimate issues aside, the mental and logical gymnastics that many judges apply to hold that “damage” cannot include “loss of use” are remarkable. It’s ironic, because back in the day, insurance companies used to complain loudly about activist judges. But not so much now, when judges invent and insert language into policies that supports a claim denial.

In tough cases like those in the COVID-19 arena, all policyholders can do is continue to hammer on how the rules of construction are supposed to work.

Some judges actually listen.