Did a Major Insurer Admit in Its Claims Manual Coding That Covid-19 Causes Physical Loss?

One of the craziest chapters ever written regarding insurance litigation involves Covid-19 first-party insurance cases. Judges, often without accepting any scientific evidence, simply ruled that Covid-19 does not cause physical damage. The Catch-22 issue is that the insurance industry wrote an endorsement to exclude Covid-19, and some insurers admitted that a covid type of scenario would be covered without a specific exclusion. 

A motion filed last week involving Affilated FM shows how some insurers set up claims processes designating Covid-19 losses as a “physical loss.”1 A casino in Las Vegas argued the following in a motion it filed last week:

AFM told the Court that evidence did not exist when that evidence not only did exist but directly contradicted AFM’s central positions in this case. AFM asserts that a communicable disease cannot cause physical loss or damage. This cannot be squared with AFM’s claims manual, which includes Loss Code 60, covering ‘Physical loss or damage which results from the actual presence of a communicable disease and the associated business interruption as defined in the policy.’ Email of Jason Wing to Richard Sunny (Mar. 4, 2020)…AFM assigned Loss Code 60 to Treasure Island’s claim. 

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The evidence that AFM hid plainly meets the relevance standard of Fed. R. Civ. P. 26(b)(1) because it is relevant to Treasure Island’s claim. AFM asserts that a communicable disease cannot cause physical loss or damage, but its claims manual contradicts that assertion. Loss Code 60 explicitly states that a communicable disease can cause physical loss or damage. That is exactly what Treasure Island has asserted. Some communicable diseases, such as AIDS, do not cause physical loss or damage to property because they do not use property as a transmission mechanism. Others, such as COVID-19, can cause physical loss or damage to property because they do use property as a transmission mechanism. Whether a communicable disease in the latter category does cause physical loss or damage to property is a question of science, depending on whether the severity of the virus in the transmission medium (insured property) makes that property unfit for its insured use. COVID-19 did exactly this, distinguishing it from the common cold. The extent and duration of the impact and damage is a matter of the quantum of damages, not the trigger of coverage. Treasure Island’s expert Dr. Joseph Lewnard will testify to exactly this.

The problem for policyholders is that the overwhelming majority of judges have ruled that Covid-19 did not cause “physical damage” without holding evidence-based hearings on the matter. They simply refused to hear and weigh the scientific evidence or allow discovery regarding what many of the insurers admitted may be covered before Covid-19 struck the world. Most cases were lost at a preliminary stage without discovery ever occurring. 

The instant cited matter is just a motion, and Affiliated FM will have its day to respond. We will keep you up-to-date on any developments. But no matter what the evidence shows, wins have been few and far between for policyholders regarding Covid-19 litigation. 

Thought For The Day 

Energy and persistence conquer all things.

—Benjamin Franklin

1 Treasure Island v. Affiliated FM Ins. Co., No. 2:20-cv-00965 [Doc. 266, Motion For Sanctions] (D. Nev. June 26, 2023).