Breaking News: MDL Panel Hears COVID-19 Arguments


Adam H. Fleischer examines this morning’s JPML arguments for and against consolidation of all federal COVID-19 business interruption claims.

Policyholder counsel across the country have coordinated a strategy to file COVID-19 business interruption suits in such volume that the sheer number of suits manufactures momentum, gravitas and a façade that insurers must pay for the policyholders’ business income lost due to the world-wide health and safety restrictions governments have promulgated. With over 1,000 such suits now pending against over 100 insurers, there arises a glaring issue:

First-party property policies generally insure business repercussions caused by direct physical loss of or damage to property within a specific insured location.

By contrast, the COVID-19 business losses are caused by world-wide health concerns and interpersonal restrictions, unrelated to any precarious physical condition of insured property at any specific locations.  The policyholder effort to obscure proof of individual coverage prerequisites behind a morass of conglomerated claims came to a head today before the Judicial Panel on Multidistrict Litigation (JPML) when some policyholders asked for a single judge to oversee hundreds of federally filed COVID-19 business interruption claims, including over 200 putative class actions, impacting tens of thousands of different insureds, different policies and differing business circumstances.  In some sense, the very breadth of the vastly different arguments for consolidation actually demonstrated that the differences between the cases in fact far outweigh their similarities, as discussed below. 

The COVID-19 Insurance Claims

The COVID-19 business interruption claims, at their heart, seek coverage under two main provisions.   The first is typically a “business income” provision, which generally states that a policy only pays for lost business income if a business is forced to shut down due to the direct physical loss of or damage to property at the specified insured address.   Policyholders have argued that, because government orders have restricted full operation of their businesses, this constitutes a “direct physical loss.”  Insurers have responded by noting that the government COVID-19 orders exist irrespective of any property condition at any insured premises, and they are in fact not promulgated to address any direct physical condition or loss presented at the policyholder’s insured premises.  

The second argument for coverage is typically a “civil authority” provision.  Civil authority provisions generally provide coverage when there is direct physical loss or damage to property in the immediate vicinity of the insured’s premises, which then causes a threat of immediate precarious harm to the insured’s location, which then causes a civil authority to order a prohibition of all access whatsoever to the insured premises.  Of course, in the context of COVID-19, the governmental restrictions, while differing from city to city and state to state, generally are not prompted by any property damage at any specific location.  It is also true that the government orders generally do not prohibit all access to any insured premises, but in fact allow access to the insured premises, although under various restrictions, usually with respect to the number of customers allowed at one time.  The press has referred to these civil orders as a “hodgepodge”(USA Today), a “mishmash” (CNN), and a “jumble of half measures” (New York Times).

The policyholders’ effort to create a single massive multidistrict litigation (MDL) to manage over 400 federal lawsuits (and counting) is really an effort to heighten focus on the tragic business consequences of COVID-19 such that  concentrated pressures and postures may be created that could lead to findings of coverage within those arguments and issues set forth above.

Policyholders’ Arguments for Consolidation

During JPML arguments, the policyholder theme was clear.  A goal of an MDL is to allow for a quick economic resolution to unfavorable business conditions created by COVID-19, without necessarily steering the claims through the detailed requirements of individualized insurance disputes.  For example, policyholder counsel reminded the panel repeatedly that “time is of the essence,” that the “world economy is in play here,” that “America needs to speak with one voice on these issues,”  and that “the mom and pop stores we represent really need this.”   While there is no debating that the COVID-19 pandemic has devastated all sectors of the world-wide economy, these factors are not determinative of whether an MDL is to be created. 

Under 28 USC § 1407, a consolidated MDL can be created where (1) the actions “involv[e] one or more common questions of fact”; (2) transfer “will be for the convenience of parties and witnesses”; and (3) transfer “will promote the just and efficient conduct of such actions.”   As the policyholders argued these factors before the JPML, the arguments often highlighted the lack of commonality among the claims, and demonstrated the disparate interests, law and geographical circumstances at play.

For example, different policyholder counsel spoke of the individualized circumstances of their respective clients, meriting consolidation in a court of geographic prominence and efficiency for their clients.  By the end of the hearing, these arguments had requested consolidation in the Eastern District of Pennsylvania, the Northern District of Illinois, the Southern District of Florida, the Western District of Washington, and the Northern District of California.  The panel twice put the question to policyholder counsel as to what common questions of fact predominate across these claims and jurisdictions, with no common or direct answer forthcoming.  Instead, the policyholders gravitated back to the common issue of law, as to whether or not a pandemic shut down can constitute “direct physical loss or damage.”  Of course, even this point centers on a question of law rather than fact, and circumvents that the policy language to determine this legal question inevitably involves many more differing provisions than just the phrase “direct physical loss or damage.” 

The policyholders then presented an alternative means of consolidation.   They argued for insurer-specific MDLs that would be created against insurers that had a certain volume of federal cases pending against them.  The feature of this argument was the suggested creation of an MDL against Hartford, and a separate MDL against Travelers and one against Cincinnati Insurance Company.  The plaintiffs pointed out that over 35% of the COVID-19 business interruption cases filed in federal court were against these three companies.  It was also argued that an individual MDL should be established against State Farm in the Eastern District of Virginia, against Cincinnati in the Southern District of Ohio or in Kansas or in Missouri, and against Lloyds in the Northern District of Illinois. 

The policyholders suggested that, with respect to any insurers who don’t yet have enough cases pending against them to create an individualized MDL, an MDL could be created at a later date if enough new cases are filed.  In other words, if the JPML creates insurer-specific MDLs, it seemed that a new wave of suits were promised to then populate and formulate such MDLs. 

However, as pointed out by the insurers (and numerous policyholders who agreed), the creation of insurer-specific MDLs suffers from the same failings as would be presented by a national MDL, discussed below.

Arguments Against Consolidation

Insurers pointed out the differences in the claims sought to be consolidated, namely: 1) the policyholders have argued different theories as to whether or how the property at different locations caused loss or damage; 2) the wide range of differences in the government orders having allegedly caused such loss or damage, 3) the differences in types of policyholders, from restaurants to nightclubs to dental practices to marketing firms; 4) the differences in the insurance policy language issued to these diverse entities, and; 5) differences in state law governing the nuanced and differing coverage circumstances. 

More than 50 policyholders also actually opposed the creation of an MDL.  Together, these policyholders and their insurers explained that there are actually not common questions of fact between the pending claims.  There are important differences between what types of business is at issue, when did it close, why, was there a stay-at-home order, and what did it say?  The insurers argued that, even in a single-insurer context, the policies issued by any one insurer still have differences, still implicate different state law, and suffer from all of the same challenges as would a single, massive MDL. 

The insurers pointed out that 18 dispositive motions have been fully briefed and are awaiting determination in federal courts across the country.  Countless additional motions have been filed and will be moving forward in federal courts, if only the JPML allows those individual cases to move forward.   It was argued that, the creation of any MDLs would force inevitable constant maneuvering for a judge to differentiate at every stage of litigation countless differences in law, facts and policy provisions, which would all be avoided if courts were simply allowed to manage and resolve the individual cases pending in the courts in which they are pending.

The Landscape Moving Forward

While the JPML’s questions indicated a sincere search for efficiency within the permitted confines of 28 USC § 1407, much of the panel’s inquiry boiled down to a basic question it posed: “It seems that if we have one judge working on 17 different policy categories, with different state law, fact specific analyses with different policyholders . . . how in the world is a judge going to get through all of this with any type of efficiencies?”  The panel also noted, “COVID-19 is everywhere, but the same insurance policies with the same exclusions are not everywhere.”

Inevitably, the consolidation of volumes of unique insurance claims into one court setting is destined to result in two things: 1) an inefficient and endless process of debating the similarities and differences between claims, issues, facts and law--- which may ultimately create conflicts for policyholder counsel marshalling clients through those differences, and 2) a heightened temptation for courts to retreat to “one size fits all” coverage conclusions in a situation filled with policies and policyholders of differing shapes and sizes.   The use of an MDL to create a COVID-19 business interruption cottage industry, to then be filled with an increasing onslaught of suits, does not serve the undeniable common interest of both insureds and insurers in efficiently obtaining court guidance and resolution on individual claims as they arise.