COVID-19 Litigation Roundup: Top 4 Developments

February 16, 2021

Top Developments in COVID-19 Litigation

Jason A. Levine, Ryan Martin-Patterson, and Stephen Tagert, Alston & Bird LLP

OVERVIEW

This week’s top developments in COVID-19 litigation include the Supreme Court’s injunction against California’s ban on indoor religious services, two insurance lawsuits that each present a new twist on typical “all risk” business-interruption claims, and another insurance coverage suit that alleges bad faith based on a supposed “smoking gun” internal memo.

1. Supreme Court Enjoins California Ban on Indoor Religious Services

Overview: In a 6-3 decision, the U.S. Supreme Court granted a church’s emergency application and enjoined California from enforcing a ban on indoor religious services, but permitted it to ban singing in those services and to enforce a 25% capacity cap.

Order: The Supreme Court issued a one-paragraph order enjoining Governor Newsom from enforcing a prohibition on all indoor religious services but denying the church’s motion with respect to the prohibition on singing and the 25% capacity limitation.

Concurrences: Chief Justice Roberts said that although he believes federal courts owe significant deference to politically accountable officials for matters of public health, California’s complete ban on indoor religious services did not “appear[] to reflect [] expertise or discretion, but instead insufficient appreciation or consideration of the interests at stake.”

Justice Gorsuch, joined by Justices Thomas and Alito, said that California was the only State to completely ban indoor worship and that it was targeting religion for differential treatment.  He noted further that the State’s conduct triggered strict scrutiny and that its reasons for treating religious worship differently were inadequate because religious services share traits with other activities that were not banned.  Justice Gorsuch also would have enjoined the singing ban, as there was some evidence that such activity was allowed in movie studios.

Justice Barrett, joined by Justice Kavanaugh, said that she did not believe that the applicants had demonstrated an entitlement to relief from the singing ban, as it was unclear whether the ban applied across the board (making it a neutral and generally applicable law) or favors certain sectors (triggering stricter review).

Dissent: Justice Kagan, joined by Justices Breyer and Sotomayor, dissented, saying the majority displaced the judgments of experts about how to respond to the pandemic, and comparing the restricted activity to lectures, movies, plays, and concerts, which are all currently banned.  The close physical proximity of participants for long periods of time, in Justice Kagan’s view, was a sufficient reason to allow the ban to stay in effect.

Our Take: As we previously noted when the Court enjoined New York from imposing a similar ban, this ruling could signal a new willingness for the Court to invalidate COVID-19-related restrictions.  But so far, the only cases have involved First Amendment Free Exercise Clause challenges. We will continue to watch to see if the Court takes up any other cases involving other constitutional rights affected by pandemic restrictions.

2. Additional Suits Filed Claiming “All-Risk” Insurance Coverage for COVID Losses

Overview: Two lawsuits were filed this week by businesses – one a manufacturer of products and components, the other a hotel management company – against their “all-risk” insurers.  Both suits make similar allegations as suits for “all-risk” coverage that have been previously dismissed by multiple courts

Complaints: The first complaint was filed by ITT, Inc., a manufacturer of products and components for aerospace and other manufacturers, against its “all-risk” insurer, Factory Mutual Insurance Company.  Notably, ITT’s “all-risk” policy allegedly includes coverage for losses caused by “communicable diseases,” which ITT argues give it coverage for losses caused by COVID-19.  ITT seeks a declaratory judgment that under the “communicable disease” provision, COVID-19 constitutes “physical loss or damage” sufficient to trigger coverage.  ITT also seeks damages for breach of contract, which allegedly occurred when Factory Mutual denied the initial claim.

The second complaint was filed by Ram Hotel Management LLC, alongside 21 affiliated single-entity limited liability companies that each own one hotel in Alabama.  Plaintiffs sued their “all-risk” insurer, Hartford Fire Insurance Company, seeking a declaratory judgment that the “all-risk” policy covers COVID-19, and claiming damages stemming from the denial of claims.  In an interesting twist, Plaintiffs also sued the City of Birmingham, Alabama, where many of the hotels are located, alleging that they were negligently harmed by the city’s shutdown orders and that those orders violated city ordinances.

Our Take: Despite many denials of claims for coverage of pandemic-related claims under “all-risk” insurance policies, which we’ve covered previously, companies continue to file such lawsuits.  The Ram Hotel case will demonstrate whether it is fruitful to sue the municipality whose orders reflected and compounded the risks of the pandemic along with the insurer that denied coverage, although most suits against local governments have failed as well. 

3. Lawsuit Claims Insurer Issued a Memo on How to Deny COVID-19 Claims

Overview: Keystone PF Acquisition, LLC, owner of Planet Fitness, sued Affiliated FM Insurance Co. (“AFM”) in the Pennsylvania Court of Common Pleas of Philadelphia County, claiming that AFM issued an internal memorandum to AFM’s claim handlers on how to deny policy claims.

Complaint: Plaintiff alleges that although insurers started using policy language to exclude virus-based damages since at least the SARS epidemic of 2003, AFM chose not to include similar language in its policy.  Plaintiff contends that fitness facilities incurred significant losses covered under AFM’s policy, and that AFM denied claims in bad faith and devised a scheme to deny coverage under the pandemic, regardless of the facts giving rise to each policyholder’s loss.  The complaint asserts that AFM issued an internal memorandum containing guidance on how to deny claims under various parts of the policies without conducting a claims investigation.

Our Take: The COVID-19 pandemic has resulted in losses for many businesses, and the fitness industry has been hit particularly hard.  We will be watching whether this case, which alleges bad faith by the insurer based on unusual circumstances, is more successful than similar lawsuits that have been dismissed at the pleading stage.  If so, this may spur claimants in other insurance cases to demand early discovery in an effort to find a “smoking gun” supportive of a bad faith argument.

Jason Levine is a commercial and antitrust litigation partner in the Washington, D.C. office of Alston & Bird LLP.  Ryan Martin-Patterson and Stephen Tagert are litigation associates at the firm.