Federal Courts Shifting Away From Determining Commercial Insurance Disputes Arising From COVID-19

The University of Pennsylvania Carey Law School’s “Covid Coverage Litigation Tracker” (last visited Mar. 5, 2021) tracks roughly 200 cases concerning COVID-19 filed in state and federal courts in Pennsylvania. These cases are increasingly monopolizing federal court dockets, with many cases being initially filed in federal court and with many insurers removing cases from state court on diversity grounds. One wonders, however, whether it is appropriate for the federal judiciary to make the novel, impactful and precedent-setting decisions necessitated by an avalanche of state-law driven insurance coverage litigation.

Insurance is a creature of contract, traditionally the unquestioned realm of state law. Thus, federal courts must apply state law when deciding insurance coverage disputes. This happens frequently, and there are reams of coverage decisions issued by federal courts that cite mixtures of state and federal precedent. Many of these decisions interpret insurance forms that have been used for decades, and they apply settled rules of construction that have driven this type of analysis for, in some cases, a century.

State appellate courts have not, however, defined the contours of COVID-19 related insurance coverage. Consequently, federal courts determining the availability of coverage for business losses suffered during the pandemic are doing so largely without any meaningful guidance from state courts. Many attorneys, and many more state regulators, would argue that state courts, rather than federal courts, should be developing the legal landscape of COVID-19 related insurance coverage litigation. Most insurance carriers, on the other hand, appear to have a preference for federal court, apparently based on a belief that federal judges are more likely to disclaim coverage by rigidly applying the rules of construction with a focus on process rather than consequence. Whether policyholders’ seeming preference for state court or carriers’ apparent preference for federal court is actually grounded in sound logic may soon be a moot analysis.

A growing number of federal judges have concluded that federal courts should “permit state courts to resolve unsettled state law matters arising out of the language in commercial property insurance policies.” This trend is based on the principle that the state appellate courts are better suited to address the “singular challenges” posed by COVID-19 and the resulting legal challenges that implicate state insurance law and by extension, public policy. See e.g., Jul-Bur Assocs., Inc. v. Selective Ins. Co. of America, 2021 WL 515484 (E.D. Pa. Feb. 11, 2021).

The most recent example of this trend presented, somewhat unusually, in a case in which the policyholder, rather than the insurer, initially filed in federal court (Eastern District of Pennsylvania). In Jul-Bur Associates, Inc. v. Selective Insurance Company of America, the plaintiffs/policyholders, a women’s apparel boutique and its owner, sought a declaratory judgment that its all-risk insurance policy covered business income losses incurred during the COVID-19 pandemic and amid related government shutdowns. The insurer moved to dismiss, arguing that a virus exclusion barred coverage. The court, however, declined to address the dispute on the merits. Instead, it exercised its discretionary authority to decline jurisdiction and sua sponte dismissed the case. In rejecting jurisdiction, the court noted that it was being asked to predict how the Pennsylvania Supreme Court would interpret insurance policy provisions in the context of the COVID-19 pandemic — a decision with wide-ranging and immediate public policy implications and equally significant precedential consequences. Instead of trying to predict how the highest court of the Commonwealth would rule on these novel issues, the court took a “step back” and refrained from adding a “square to an already disjointed patchwork of decisions that may be inconsistent with state court decisions.”

If federal courts increasingly follow the ruling in Jul-Bur, state courts will be poised to develop a body of state law that could change the landscape of coverage law for years to come. And, maybe, that is entirely appropriate. As the Third Circuit previously found in the insurance context, the “proper relationship between state and federal courts requires district courts to ‘step back’ and allow the claims to proceed through the state courts.” Reifer v. Westport Ins. Corp., 751 F.3d 129, 141 (3d Cir. 2014). Moreover, “[t]he desire of insurance companies and their insureds to receive declarations in federal court on matters of purely state law has no special call on the federal forum.” State Auto Ins. Companies v. Summy, 234 F.3d 131, 136 (3d Cir. 2000). Litigants’ desire for a strategic advantage derived from forum shopping should not dictate the development of an important body of state law. Rather, state courts should decide how state law will evolve in this unprecedented context.

As the court in Jul-Bur opined, state courts’ familiarity with state law and public policy makes them better equipped to adjudicate this first wave of business interruption lawsuits on the heels of the COVID-19 pandemic. Without state appellate, or even trial, court precedent, federal court rulings that contradict state court rulings will muddy the water for litigants and courts while severely undermining litigants’ abilities to evaluate the impact of prior decisions on the likely outcome in particular cases. Therefore, in this time of unprecedented uncertainty, federal courts should reduce the potential for confusion or contradiction by first permitting state courts to chart the previously uncharted waters in which the current tidal wave of business interruption coverage litigation will proceed. While this may not be the strictly required result in many cases, it is a result that federal courts have discretion to, and should, affect.

The COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.

Author Craig Rushmore is an associate in the litigation department at Klehr Harrison.