US court rules coronavirus (COVID-19) pandemic a natural disaster—effect on insurance industry (Friends of Danny de Vito v Tom Wolf)

US court rules coronavirus (COVID-19) pandemic a natural disaster—effect on insurance industry (Friends of Danny de Vito v Tom Wolf)

Friends of Danny de Vito and others v Tom Wolf and another (68 MM 2020)

What are the practical implications of this case?

The first point to note is that this case concerned a challenge to an executive order in Pennsylvania and not a case concerning coverage under an insurance contract. However, the finding that coronavirus amounts to a natural disaster for the purposes of issuing the executive order may be used by policyholders whose cover is triggered by a natural disaster. Whether that argument succeeds will depend, among other things, on how ‘natural disaster’ is defined in the particular policy wording.

US decisions, while potentially persuasive, are not binding on the courts of England and Wales. There is no certainty as to how the English courts would deal with this point. Even if the English courts were prepared to conclude that coronavirus amounted to a natural disaster, whether that assists a policyholder will depend on the specific cover provided by the relevant policy.

We are not presently seeing English insureds arguing that coronavirus constitutes a natural disaster. That is because the standard property/ business interruption policies require damage to property and provide cover for the business interruption losses that flow from that damage. Categorising coronavirus as a natural disaster does not change that position because if cover is triggered by a natural disaster, a standard property policy will require damage to property caused by that natural disaster to trigger the business interruption cover. Instead, we are advising on and seeing notifications being made to insurers on the basis of ‘non-damage’ extensions to cover in business interruption policies such as denial of access to insured premises, occurrence of a notifiable disease or the act of a competent or governmental authority. These often do not require any physical damage to insured property for the business interruption cover to be triggered. A finding that coronavirus amounts to a natural disaster would not, in the policies we are seeing, change the policy response. Nonetheless, this decision of a US state court is of interest and could possibly have consequences beyond Pennsylvania.

Coronavirusand the action taken by the UK government has resulted in an unprecedented situation and insurers, policyholders and their advisers are all trying to assess whether losses flowing from the government action and/or coronavirus are covered. Broadly speaking, the insurance industry has adopted the position that most insurance policies will not cover losses resulting from coronavirusand they simply were not intended to cover the risk of a pandemic. In our view, there are certain property/business interruption policies, which we are seeing, which do cover this situation and individual policies need to be reviewed carefully. Insurance lawyers, legislators, regulators, insurers and policyholders are in unprecedented circumstances. There is a limited body of caselaw relevant to this situation and the guidance given by the government and the insurance industry on policy coverage is continually developing. Everyone is watching what is being done in other jurisdictions and, because it is a global issue, that comparative analysis can be done (at least to a degree). We, in advising our policyholder clients (and undoubtedly the insurers, in assessing which of their portfolios will be affected) are monitoring very closely any coronavirus-related judgments, guidance and legislation across the globe and considering the impact of the decisions on all classes of insurance. Therefore, a decision in one state in the US could be relevant to policyholders and insurance and reinsurance markets all over the world.

In theory, the finding of the Pennsylvania Supreme Court that the coronavirus pandemic constitutes a natural disaster could be cited in any policy coverage dispute where a policyholder needs to establish that coronavirus is a natural disaster, a catastrophic event or an act of God. The US court’s decision about the legitimacy of an executive order to shut down non-essential businesses to slow the spread of coronavirus could have much wider implications for the global insurance and reinsurance markets. It could be argued that coronavirus triggers any insurance policy which requires a natural disaster or catastrophic event, thereby broadening out the cover provided by such a policy. References to losses from a natural disaster can be found in business insurance, catastrophe, travel, home and sovereign natural disaster insurance policies.

Coronavirusand the actions taken by governments around the world could lead to interesting issues arising between insurers and their reinsurers. Frequently, a reinsurance contract provides the reinsurer must follow the settlements of the insurer. However, if the insurer is settling a claim due to political pressure or retrospective legislation, it is possible that it may not be able to recover from reinsurers who will say that the claim does not fall within the risks covered by the reinsurance policy. Depending on the reasons for the settlement, the terms of some reinsurance policies may limit a reinsurer’s ability to argue it should not also have to pay out to the reinsured. However, there may be scope to decline reinsurance cover in some cases.

There have been talks in some US states about introducing retrospective legislation to compel insurers to cover coronavirus-related claims which otherwise would not be covered by their policies. Even if this type of legislation is not replicated in other jurisdictions, it could still have a serious impact on the reinsurance market, as US insurance policies governed by the law of states which do implement retrospective legislation could be reinsured by large European reinsurers. Therefore, the insurance and reinsurance industry, and insurance lawyers, will be watching very closely what happens next across the US.

What was the background?

The petition was brought by four Pennsylvania businesses and one individual for emergency relief following an executive order issued by the Governor of Pennsylvania on 19 March 2020, ordering non-essential businesses to shut down physical operations in order to slow the spread of coronavirus. The terminology used in the US order is ‘non-life-sustaining business’ and the businesses of the petitioners in this case were classified as non-life-sustaining.

The petitioners sought to overturn the executive order so they could continue trading. The governor’s authority to issue the shutdown order derives from the Commonwealth of Pennsylvania’s Emergency Code, which is by triggered by man-made, war-related or natural disasters. The code defines a ‘natural disaster’, as one might expect, as events including ‘hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life’. The petitioners argued that the order was not valid because coronavirus was none of those things.

What did the court decide?

The Pennsylvania Court decided that the coronavirus pandemic constituted a natural disaster because it posed a serious threat to human life. This meant that the governor did have authority under the Emergency Code to issue the shutdown order.

Even though the other natural disasters in the non-exhaustive list in the Emergency Code are arguably quite different in character to coronavirus, the court found that the pandemic did share with them the quality of causing ‘hardship, suffering or possible loss of life’.

The petitioners ran other constitutional arguments but they were specific to US administrative law and, in any event, did not succeed.

Case details

  • Court: Supreme Court of Pennsylvania, Middle District

  • Judge: Saylor CJ, Baer, Todd, Donohue, Dougherty, Wecht, Mundy JJ 

  • Date: 13 April 2020

Sonia Campbell is Mishcon de Reya’s head of insurance disputes.

Interviewed by Robert Matthews.

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