Insurable Interest

Maybe the courts were actually serious about those Covid-19 insurance coverage cases?

Thu, 20 Mar 2025 22:07:00 GMT

Just over five years have passed since governments began issuing stay-at-home orders to attempt to curtail the spread of the COVID-19 virus. Those early days of quarantines and social distancing offered an interesting glimpse into human nature . There has been much written on how the world has changed since then, but rather than join that cacophony of commentary, here at Insurable Interest our focus will remain the same as it has been since March 2020: on insurance coverage and stockpiling toilet paper .

The abrupt shut down of businesses in 2020 spawned numerous insurance claims for financial losses under commercial property insurance policies. Two recent cases demonstrate how the long-term impact of those lawsuits is now starting to emerge.

Before discussing the legacy of COVID-19 insurance coverage litigation, let's start with some statistics that demonstrate just how thoroughly the insurance industry was able to turn back claims for coverage related to COVID-19. Penn Law School's COVID Coverage Litigation Tool ("CCLT") is the indispensable resource for data regarding COVID-19 insurance lawsuits from around the country. According to CCLT data, in 971 federal and state court cases where a motion to dismiss was filed, the court granted 900 of them. In other words, 93 percent of the time that an insurer immediately challenged a COVID-19 lawsuit, the court agreed to throw out the case without giving the insured the opportunity to conduct any discovery or present any evidence beyond the allegations in the complaint. CCLT has uncovered exactly one trial verdict in favor of the policyholder. Insurable Interest is prepared to call it: the official winners of the COVID-19 coverage litigation were defense lawyers with boat payments.

How was the insurance industry able to achieve such a resounding victory? In the technical legal sense, by convincing courts to dismiss lawsuits based on the argument that COVID-19 did not directly cause damage to insured property. In California and many other jurisdictions, to trigger insurance coverage, an insured must prove its property sustained a "direct physical loss or damage".

In insurance cases before 2020, the mere allegation that property had been damaged would have been sufficient to allow the plaintiff to get past a motion to dismiss and into the discovery stage of the litigation. Not so in COVID-19 cases, where judges were routinely making determinations at the initial stage of the lawsuits, before any evidence had been presented, that COVID-19 could not damage property as a matter of law.

It is not clear what caused courts to be so willing to make these types of factual determinations at the pleading stage of the cases, before any actual evidence had been presented. On one hand, it is a scientific fact that everyone who learned of the existence of COVID-19 was instantly transformed into an expert on virology and epidemiology. Surely this same mentality empowered some judges to opine on a virus's capacity to inflict damage to property without hearing testimony from so-called "experts".

But that explanation does not satisfactorily account for the near universal reaction of judges across the country to immediately dismiss most of these cases. The decision to eschew normally liberal pleading standards, which would have ordinarily permitted mere allegations of property damage to allow insureds to get to the discovery phase of the lawsuits, was particularly surprising given the case law precedents that the mere presence of substances such as e coli bacteria , gasoline vapors , smoke , ammonia , and carbon monoxide could cause property damage. There was also the practical consideration that in response to the SARS virus outbreak in the early 2000s, the industry responded by adopting virus exclusions that precluded coverage for losses "resulting from any virus, bacterium or other microorganism". As insureds pointed out, not unreasonably, when trying to fight motions to dismiss: Why would such virus exclusions be necessary if the mere presence of viruses could never trigger coverage under the policies in the first place?

Something was going on here beyond mere technical legal arguments. Watching the cases unfold in real time, Insurable Interest came to the conclusion that the judiciary decided it was going to sit this one out, allowing the political process to decide how to handle the financial devastation inflicted by the virus and the reaction to it. That political process effectively socialized the losses, with trillions of dollars of taxpayer money widely distributed to those who really needed it , and those who very much didn't .

But when presented with a lawsuit, the courts cannot just lock down and send everyone home, declining to decide the case before it. Even though they clearly did not want to, the courts had to actually make rulings that somehow reconciled their past decisions, which almost certainly would have allowed these cases to survive a motion to dismiss, and their desire to quarantine the judiciary from involving itself in the type of policy-making processes that distributed billions of dollars to places like farms in the middle of Miami , a single gas station in Houston that purported to operate 150 different business, and this couple , who abandoned their children to flee to Montenegro when the FBI questioned their use of millions in pandemic relief loans.

In California, that judicial process culminated in the state Supreme Court's 2024 decision of Another Planet Entertainment, LLC v. Vigilant Ins. Co . 15 Cal.5th 1106, 1117 (2024) , where the court held that there mere allegation of “the actual or potential presence of COVID-19 on an insured’s premises does not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy.” Calling it the first time it had been asked to decide the question, the Supreme Court held that "physical loss or damage" required "a distinct, demonstrable, physical alteration to property." The court said the physical alteration "need not be visible to the naked eye, nor must it be structural, but it must result in some injury or impairment of the property as property." Another Planet Entertainment, LLC , 15 Cal.5th at 1117. The court held that, based on the allegations before it, COVID-19 did not cause such property damage as a matter of law.

It's worth noting that the Supreme Court's decision contained an important qualification: The court claimed it was not deciding that COVID-19 could never cause covered property damage. Instead, the court claimed to be bound to its result by the factual allegations contained in the insured's lawsuit before it. However, the court did not afford the insured an opportunity to amend its lawsuit to include new factual allegations, and the court then went on to render a highly fact-based decision based on the purported characteristics of the COVID-19 virus without any predicate evidentiary record developed in the trial court. Nevertheless, the language employed by the decision at least opened the door to the possibility that the reasoning of the COVID-19 decisions would not spread to future cases.

But it is not clear that is happening. For example, in the recent case of Gharibian v. Wawanesa Gen. Ins. Co. , 108 Cal.App.5th 730 (2025), a California appellate court upheld the denial of a claim for insurance coverage for damage to the insured's home allegedly caused by falling debris from a nearby wildfire. The court, citing Another Planet exclusively and at length, held that the ash from the wildfire "did not alter the property itself in a lasting and persistent manner" and was "easily cleaned or removed from the property". Therefore, no coverage existed under the homeowner's insurance policy for the costs associated with cleaning up the fire ash and debris. In reaching this conclusion, the Gharibian court expressly said that nothing in the analysis or conclusion of Another Planet suggested that it was limited to claims related to COVID-19. (Numerous motions to depublish Gharibian were pending at the time of this newsletter.)

By contrast, in Bottega, LLC v. National Surety Corporation - Chicago, IL , 2025 WL 71989 (N.D. Cal. 2025), an insured restaurant made similar claims for property damage insurance coverage after its property was impacted by smoke and ash from a wildfire. In that case, the federal court judge rejected the insurer's arguments that the COVID-19 insurance coverage cases established a precedent applicable to wildfire cases, saying a virus "is more like dust and debris that can be removed through cleaning" whereas "smoke is more like asbestos and gases that physically alter property". The judge in Bottega allowed the insured to try to prove to a jury that the property had been damaged in a way that triggered insurance coverage.

Both Gharibian and Bottega make clear that in the post-COVID era, insureds will need to be prepared to present evidence to demonstrate a degree of physical alteration of their property, even if the claims have nothing to do with viruses.

And as for the insurance industry, it is now clear the victory of the COVID cases may extend well beyond pandemic-related claims. But one word on virus claims: missing SARS was one thing, but any carrier that really does not intend to cover virus-related losses and still does not manage to include a virus exclusion in its policies after COVID-19 needs to overhaul its underwriting department or perhaps pivot to selling pet wellness programs .

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When an employee crashes a personal vehicle on the job, which insurance policy applies?

Fri, 07 Feb 2025 23:43:00 GMT

When Insurable Interest was young, someone who got into a crash while delivering marijuana would do his best to keep the purpose of that trip quiet. But now that humanity has entered the era of app-based drug delivery, these accidents are little more than mundane fodder for insurance coverage disputes.

That brings us to the latest California insurance coverage court decision, which presents a variation of a common question: When an employee crashes his own car while on the job, whose automobile insurance applies, his personal policy or his employer's policy?

Most personal automobile insurance policies tolerate some degree of incidental business use of personal vehicles, such as occasional use of a personal car to drive to business meetings. So when an employee crashes his vehicle while on the job, it generally raises the question of whether his employer's insurance should pay for the damage.

Here's how most employees think this scenario plays out: "Hey, boss, I just smashed into a family of four in minivan on the way to pick up potato salad for the company picnic. Since I was on the clock, can your turn this into the company insurance to repair my $1,900 windshield and take care of that nice family's ambulance bills? Cool, thanks."

In reality, thanks to California Insurance Code section 11580.9(d) , it is generally the employee's insurance policy that is required to respond first to any damages resulting from an accident caused by an employee's vehicle. Any coverage that might be available under an employer's policy usually stacks on top of the employee's policy.

But what if the employee's policy does not provide any coverage, possibly due to an exclusion? After all, while occasional business use of a personal automobile is tolerated under most personal policies, routine business use of the vehicle (think driving for Uber or delivering weed) frequently is not.

This was the outcome in Murphy v. AAA Auto Ins. of So. Cal. (G063742 January 31, 2025), where the court addressed the "compensated carrying exclusion" in a personal automobile insurance policy. While not always referred to as the "compensated carrying exclusion", this type of coverage carve-out is a common feature of most personal auto insurance policies. The "compensated carrying exclusion" basically says that if you are getting paid to transport people or property with your personal vehicle, the coverage available from your personal automobile insurance policy no longer applies.

In Murphy , the insured crashed his 2012 Toyota Corolla while making a delivery for his employer, Grassdoor, an app-based cannabis delivery service. The insured sought coverage from his personal auto insurance, arguing that because he was an "employee" of Grassdoor (he worked nine hours a day, five days a week, and received a regular weekly paycheck), the compensated carrying exclusion did not apply. The insured said the exclusion could only apply if he had been acting as an "independent contractor" at the time of the accident.

The insured, who represented himself, focused his arguments less on legal nuance and more on practicalities. He told the court that because he was categorized as an employee of Grassdoor, he was unable to obtain a commercial automobile insurance policy for his vehicle, which would have been available if he was an independent contractor. The insured thought the applicability of the exclusion should turn on the availability of insurance in the commercial marketplace based on his employment classification.

Insurable Interest lacks sufficient familiarity with the underwriting standards of all of California's auto insurers to know if this argument reflects how the insurance market actually works, but, if true, this potential market gap should certainly factor into the personal risk analysis for the employees of app-based cannabis delivery services who are not assigned company vehicles. In any event, the court found this practical "independent contractor" vs. "employee" classification argument had no bearing on the applicability of the language of the compensated carrying exclusion. The court ruled the exclusion was "clear and explicit" and precluded coverage for damage occurring while the car was "being operated to transport property in exchange for compensation." Therefore, no coverage.

The court also pointed out that the employee's recourse in this situation is to seek compensation from his employer, which is obligated to make its employee whole under Labor Code section 2802 . The insured, again citing to the practicalities of his situation rather than technical legal jargon, pointed out that his employer, Grassdoor, had gone out of business, thwarting his ability to easily obtain reimbursement. The court was also unmoved by this practical argument, pointing out an insurer's obligation to provide coverage under the insurance contract "is not triggered by the financial condition of an insured's employer".

One interesting part of the Murphy decision is that it never mentioned if Grassdoor had its own commercial auto insurance policy that could have survived the company's insolvency. In the end, employee vs. employer insurance disputes get complicated , there is no single rule that can be said to apply to every situation, and sorting through coverage requires review of all potentially applicable insurance policies. Other than for the true insurance coverage sickos, it the would probably be more interesting to read about the Fall of Grassdoor in the Cannibas Business Times.

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Uninsured motorist rates will be driven higher by California's new liability insurance limits

Tue, 28 Jan 2025 17:18:00 GMT

We are past the "Happy New Year" cutoff, but it is not too late for Insurable Interest to take a look at the changes in California insurance law for 2025.

Actually, we are just going to examine the insurance law change likely to impact the most Californians: the increase in mandatory policy limits for motor vehicle liability insurance. I will leave it to others to break down California's new pet insurance requirements . (Well, okay, just one: Stop trying to pass off your "pet wellness program" as pet insurance, you monsters. Insurance Code section 11880.8.)

The new bodily injury liability limits for motor vehicle insurance are $30,000 per person/$60,0000 per accident, doubling the prior minimums of $15,000 per person/$30,000 per accident. California Vehicle Code sections 11580.1(b) and 16056. The property damage liability limits are tripling from $5,000 to $15,000.

The limits had not been increased since 1974, and, I mean, it seems like a good thing to update at least once every half century? Lots of inflation can happen over the course of 50 years, particularly in the realm of emergency health care. Before this change, only Florida had lower limits in each category.

I looked for data on how many drivers carry the minimum limits, but could not find anything reliable. ChatGPT says 15% to 20%, but it also volunteered, unprompted, that California's minimum insurance liability limits for bodily injury are $15,000/$30,000 so who knows where it is pulling data on this topic. (Lest your faith in our forthcoming AI overlords be shaken, know that it totally redeemed itself by nailing "one week" as the appropriate cutoff for offering "Happy New Year" as a greeting after January 1.)

I did find some seemingly reliable data from the Insurance Information Institute on the number of completely uninsured drivers on California roadways. The estimates are troubling, with California estimated to have a 17% uninsured driver rate according to this data from 2022:

Setting aside the fact that no one knows with any actual precision how many uninsured drivers are out there, as a simple matter of economics their numbers are likely to rise in California as a result of the new liability insurance mandates. Increased liability limits means increased premiums , which means more people who chose to forego coverage and exacerbation of the uninsured motorist problem.

That's not to say I'm advocating for another five decades to pass before the limits are increased again. (And it won't as Insurance Code section 16056 has another increase already built in starting in 2035.) $15,000/$30,000/$5,000 was way too low, and the new higher limits do not really feel high enough in a world of $1,900 windshields and pricey emergency room visits.

I think while the Legislature was updating insurance policy limits, it should have also taken a look at the consequences for failing to maintain motor vehicle insurance, which have also failed to keep up with inflation. The penalty for a first offense is no less than $100 and no more than $200. California Vehicle Code section 16029(a). A second conviction within three years increases the potential penalty to no less than $200 and no more than $500. California Vehicle Code section 16029(b). A judge may, upon good cause, also impound the offender's vehicle, which is probably the real threat, to the extent anyone is actually considering consequences when getting behind the wheel in these circumstances. California Vehicle Code section 16029(c)(1). Vehicle Code section 16029 has not been updated since 1997.

Another penalty for uninsured drivers was enacted by voters with Proposition 213, "The Personal Responsibility Act of 1996". Prop 213 prohibited an uninsured driver who was injured in an accident from recovering pain, suffering and other "non-economic" damages in a subsequent lawsuit against the at-fault driver. California Civil Code section 3333.4(a)(3). A few years back there was a trend where injured plaintiffs who were uninsured would, after an accident, post a bond with the DMV , which is an alternative way to demonstrate financial responsibility under California Vehicle Code sections 16021 and 16054.2. They then tried to argue their (lawyer's) posting of this bond brought them into compliance with the financial responsibility laws and eliminated the effect of Prop 213.

I cannot say this tactic never worked, but I am not familiar with a case where an injured driver's post-accident cash deposit with the DMV was found to constitute compliance with California's financial responsibility laws so as to permit recovery of non-economic damages under Prop 213. More often courts found that these post-accident DMV deposits could not "absolve them of their law-breaking" and "render them financially responsible for purposes of Proposition 213". Figueroa v. United States , 2015 WL 11438605 (C.D. Cal. 2015). This result arguably better upholds the whole "take personal responsibility" message that the voters of Prop 213 were presumably trying to send. Though, again, I must question how much Prop 213 is factoring into the decision-making process those who decide to drive without insurance.

On balance, increasing the requirements for liability insurance limits is almost certainly a net positive, but more should have simultaneously been done about the inevitable downstream effects on uninsured motorist rates. Most Californians are also going to want to take this opportunity to also consider the limits of the Uninsured Motorist ("UM") coverage in their own automobile insurance policies.

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LA fires will be major test of new disaster claims-handling rules

Wed, 22 Jan 2025 13:33:00 GMT

Prior to 2021, various wildfires in California led the Insurance Commissioner to issue a series of regulatory notices addressing how insurers were to handle certain matters fundamental to core homeowners' policy coverages. The language of these notices began as requests to insurers for voluntarily accommodations to assist wildfire victims, and, over time, evolved to take on a more compulsory tone. The vibe shift can be illustrated with a few examples:

I could go on . Any ambiguity regarding the obligatory nature of these notices was removed once many of the proclamations ended up being codified in various statutes and regulations, which are now being put to the test with the January 2025 Los Angeles fires.

Here is an overview of just some of the new rules that insurance carriers should keep in mind as they address claims arising from this and any future disaster scenario. Note the following rules are triggered by the declaration of a state of emergency under California Government Code section 8558.

Loss of Use/Additional Living Expenses

Personal Property

Dwelling payments

Premium payment grace period

Requirements after assignment of multiple claims handlers

The following requirements have been around since 2019, but a reminder can't hurt when things get busy after a disaster:

These are just some of the new rules and regulations insurance carriers will need to reconcile with existing policy language as we continue in this era of mass disaster claims events.

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Agent's use of Farmers logo did not make it FAIR

Thu, 16 Jan 2025 22:55:00 GMT

When an underinsured home burns down, the owner's options to fund rebuilding are usually limited. If the homeowner had enough money to just build a new home herself, she may have foregone fire insurance altogether. This was always the advice of Charlie Munger , the late former vice chairman of Berkshire Hathaway, the insurance and See's Chocolates conglomerate: "In my own life, I'm a big self-insurer and so is Warren," he explained. "So why would I want to bother fooling around with the claims process and all kinds of things?"

Underinsurance is not a new problem , and, of course, the vast majority of homeowners do not have enough chocolate money lying around to simply cut a check for the difference between the cost of rebuilding and their insurance policy limits. Some underinsured homeowners without the resources to rebuild are forced to sell their land . Another option may be to sue the person who sold them their insurance policy for failing to obtain limits high enough to rebuild the home.

But what if the insurance seller is also underinsured? This could be a particular concern in disaster events that result in numerous claims in the same geographic area where the insurance seller works. For one reason or another, claims against insurance sellers are frequently coupled with claims against the deep-pocketed insurance carriers themselves, seeking to hold the carriers responsible for the alleged misconduct of the agent.

An insurance carrier is vicariously liable for an insurance seller's acts when the seller acts with actual or ostensible agency. An actual agency relationship is generally more easy for a plaintiff's lawyer to sift out, as there is typically a written contract that establishes the scope of the agency relationship.

Whether an agent has acted with ostensible agency is more complicated, as recently addressed in Erin Hughes v. Farmers Insurance Exchange (107 Cal.App.5th 73). There, homeowner Erin Hughes purchased two insurance policies with the assistance of Maritza Hartnett. One policy was issued by Farmers Insurance Exchange; the second was issued through the California FAIR Plan Association. The Farmers policy excluded coverage for fire damage to the dwelling. The FAIR Plan policy afforded fire coverage subject to a limit of $1.2 million. A fire in December 2020 caused $3 million in damage to the home.

Litigation ensued over the nearly $2 million gap between the available insurance and the cost to rebuild. Hartnett was sued on standard theories of professional negligence related to her purported failure to procure high enough limits for the FAIR Plan policy. But Farmers was also sued based on its alleged vicarious liability for Harnett's actions in assisting Hughes in obtaining both policies.

Hughes presented the following evidence of Harnett's ostensible agency with Farmers related to her procurement of the FAIR Plan policy:

The appellate court ruled this evidence was not enough to establish Harnett acted as a Farmers agent when selling the FAIR Plan policy. The court said Harnett's "mere use" of the Farmers logo was insufficient to suggest ostensible agency "that would encompass Harnett's procurement of the FAIR Plan policy". Use of the logo, the court reasoned, was to advertise Hartnett's agency for the purpose of Farmers insurance products, not those offered by other carriers.

Hartnett's use of the Farmers software to generate a quote for the FAIR Plan policy also did not constitute evidence of ostensible agency. The court said its inquiry must focus on "conduct or omissions by Farmers that could have contributed to a reasonable belief by Hughes that Hartnett was acting as Farmers' agent in procuring the FAIR Plan policy, as opposed to the Farmers policy." The court said Hartnett's use of the Farmers replacement cost estimating software could not constitute such evidence of conduct by Farmers.

The takeaway: If you pulled someone off the street and asked them to understand that an agent with a Farmers sign on the door who used a Farmers email address and Farmers software while simultaneously selling them multiple policies was actually acting as a Farmers agent for purposes of only one of those policies, I'm pretty sure the response would be along the lines of: "Wait, what, I'm sorry, I was watching a video on my phone."

But if you responded, "No, please, focus here for a moment on the words I am saying. The same insurance saleswoman sold you a package of insurance policies at the exact same time to provide coverage for a single home, and even though you walked into what looked very much like a Farmers office, the agent only acted as a Farmers agent for purposes of selling one of the policies, even though Farmers software was (allegedly) responsible for generating the total insufficient collective limits that ultimately caused your damages."

Summary judgment is a good result for the carrier here.

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