Since the pandemic began, most of the COVID-19-related business interruption disputes have not gone in favor of the policyholders, especially in federal court. More than 90 percent of motions to dismiss in federal lawsuits, in fact, have been upheld in cases heard.

Some legal experts are now wondering if that trend is about to bend in the other direction. In particular, one North Carolina federal court case, involving a major health care network, is far from adjudicated and has not made it to the appellate level. But it could turn out to be a chink in insurers’ armor and, perhaps, a blueprint for other COVID-damaged policyholders to follow, some say.

“I agree that this case is significant, especially in light of the favorable results for policyholders” in a similar, state-level lawsuit in North Carolina, said Tom Baker, an insurance law scholar and law professor at the University of Pennsylvania.

Because Novant is a major player—with 700 health care centers, including 15 hospitals, hundreds of outpatient and physician clinics, and more than 29,000 employees—and has asked for millions of dollars in insurance payments, the insurance industry is watching closely.

“I think Novant and the other cases out there that have gone the same way are harbingers of a change in the insurers’ fortunes on motions to dismiss these cases,” said attorney Andy Lundberg, managing director of Burford Capital, which finances a variety of insurance coverage lawsuits.

In Novant Health Inc. vs. American Guarantee and Liability Insurance Co., a Zurich subsidiary, U.S. District Judge Catherine Eagles last month declined to dismiss the lawsuit as American Guarantee had requested. The judge’s order highlights a number of evolving issues in COVID lawsuits – from conflicting policy language to the definition of physical damages to the role of federal courts in state-regulated insurance matters.

The suit also shows how COVID litigation has changed over the past 18 months, Lundberg pointed out. While many plaintiff-policyholders initially claimed physical damage to the property in an attempt to get around a virus exclusion, Novant and others are now taking a more nuanced approach, noting that the SARS-Cov-2 virus damages the very air that patients and employees must breathe.

“I think we’ll see further refinement of the ‘air-is-property-that-is-damaged’ argument, both through factual evidence and scientific expert opinion and through further legal analysis,” said Lundberg, who previously was head of insurance recovery practice at the international law firm of Latham & Watkins.

The initial success that insurers had in having suits dismissed, he added, was due in part to the fact that many of the cases may have been low-hanging fruit, with some lacking strong arguments by policyholders.

In the Novant case, though, American Guarantee may have hurt its own position because of a contradictory or even sloppily written policy. That’s something that other insurers have been guilty of and should scrutinize in policies going forward, attorneys said. The judge noted that while American Guarantee, also known as AGLIC, did not pay the claim, “direct physical loss” is not actually defined in the policy.

The insurer likely should have known that “even before the pandemic, courts struggled with defining physical loss in insurance policies where the policy left the term undefined, in cases involving asbestos, lead, bacteria, harmful gases and more,” Eagles wrote.

The Insurance Services Office, a subsidiary of Verisk Analytics, produced robust virus exclusion language as long ago as 2006.

“I sure wouldn’t like to be an underwriter who looked at the ISO exclusion and concluded ‘nah, we don’t need this, or I have an idea of how to do it differently,'” Lundberg said. “We’re going to be seeing prolonged battles over the drafting history and ultimate interpretation of these various non-ISO policy forms for years to come.”

Attorneys for American Guarantee declined to comment on the case. But the Insurance Information Institute isn’t worried that the case signals a potential change in heart by the courts.

“While we have occasionally seen an outlier where a court rules in favor of the insured, allowing a case to move forward, this has not become a trend or changed the direction of courts in other jurisdictions,” said Mark Friedlander, the Institute’s director of Corporate Communications. “The policy language is very clear. Courts across the U.S. have rejected these lawsuits outright, ruling that the presence of COVID-19 does not constitute direct, physical loss or damage to property, which is a requirement to trigger coverage under most business interruption policies.”

Novant lawyers argued in the complaint that the health care provider’s properties were left uninhabitable and dangerous because of the risk of spreading COVID-19. Lundberg compared that argument to the issue of carcinogenic radon gas, wondering whether courts would really hold that radon intrusion doesn’t constitute “physical damage” even if the radioactive gas does not cause structural damage to buildings.

But the biggest obstacle for AGLIC to overcome may be the fact that while the policy contains a virus exclusion, amendatory endorsements appeared to strike the exclusion. The insurer argued that an amendment to the policy applied only to claims connected to Louisiana, but the judge said that’s not spelled out in the wording. The carrier included 74 pages of contradictory, “irrelevant and immaterial” words in Novant’s policy, for no apparent reason, Eagles noted.

And when an insurer includes contradictory provisions in a policy, the general rule in North Carolina is that the matter must be resolved in favor of the policyholder, the judge wrote in her order.

“The court is not ruling that the virus exclusion does not apply, but in view of the contradictory language in the policy, AGLIC has not met its burden at this stage of the proceedings,” she said.

The judge also questioned another of AGLIC’s tactics. The carrier argued that while the policy does allow coverage when a business is interrupted by communicable disease, that issue is not yet ripe for resolution. Why? Because AGLIC has not yet denied that part of Novant’s claim, the insurer said.

Novant responded that the policy itself requires the policyholder to file suit within a year of filing a claim, which it did.

“AGLIC included the provision requiring that suit be filed within one year, and it cannot object when an insured follows the policy requirement,” the judge wrote. “The dispute is ripe.”

Lundberg noted that it’s not unusual for insurers to hold off on denying or paying a claim for tactical legal reasons and to continue to earn interest on premium revenue.

On a jurisdictional issue, the Novant case highlights the whole federal versus state court venue question, which has sparked debate among legal scholars. Of the more than 2,000 COVID-related business interruption lawsuits filed in state and federal courts, insurers have fared better in the federal arena, according to a litigation tracker maintained by the University of Pennsylvania Carey Law School.

As of Monday, 123 motions to dismiss had been heard in state courts and almost 75 percent have been dismissed after a hearing on the merits. That figure is up slightly from 69 percent reported a month ago. But in federal courts, 483 motions to dismiss have been heard and fully 93 percent have been fully dismissed. That ratio has remained the same in recent weeks.

At least three well-known law professors around the country have voiced concerns about the federal courts’ practice of reviewing—and then dismissing—suits that might best be suited for state courts, the University of Pennsylvania’s Baker noted.

Three insurance law professors have criticized “the federal courts for using their larger coterie of clerks and smaller caseloads to usurp ‘the primacy of state, rather than federal, courts in deciding highly consequential and contested questions of state insurance law,'” Baker wrote in a blog last month.

One professor, Daniel Schwarcz of the University of Minnesota, has recommended that states empower their regulators or attorneys general to request that federal courts should certify coverage disputes to the state supreme courts. After all, federal law makes it clear that states, not the federal government, should regulate the business of insurance.

Lundberg said it’s not entirely clear why federal judges have accepted so many COVID-related disputes against insurers, instead of certifying them back to state supreme courts. One reason may be that insurers have seen the track record in federal courts and have continued to move many business interruption cases to that venue.

But federal case law is still evolving in this area.

“I’m very concerned that a lot of policyholders will suffer final judgments against them and then wake up four or five years from now and find out that the federal courts made the wrong prediction about how the law would play out,” Lundberg said.

*This article was originally published by Insurance Journal, our sister publication