by Amy Briggs
On March 16, 2020, six Bay Area counties issued “shelter in place” orders, which effectively brought many businesses to a grinding halt. Lawsuits against insurers who sold business interruption coverage are now rolling in, thus far led largely by restaurants. In California, for example, Thomas Keller’s Michelin-starred restaurant—The French Laundry—recently filed suit in Napa County seeking coverage for the shutdown of his restaurant. Similar suits have been filed in New Orleans and Chicago. As one CEO recently put it, “Shut the doors = shut down the revenue. If that’s not a property-based interruption, I’ll go light the [expletive] thing on fire myself.”
Many policyholders, however, are not ready for litigation, and instead are asking what they need to do simply to preserve their rights under their business interruption policies. Of course, it is critical for clients to read their insurance policies and know their terms and conditions. Generally speaking, however, there are three different steps to keep in mind.
First, many policies require a notice of loss within a limited time frame following awareness of either the event causing the loss or the loss itself. A notice of loss is a straightforward document that simply alerts the insurer to the fact of a loss. Even if the insured does not timely submit notice, failure to do so is not necessarily fatal. California generally follows a notice-prejudice rule, requiring the insurer to demonstrate that it was actually and substantially prejudiced by the late notice. Northwestern Title Security Co. v. Flack, 6 Cal.App.3d 134, 140 (1970). This can be a difficult burden for insurers to meet except in rare circumstances. Strict adherence may be required, however, in other jurisdictions.
Second, commercial property and business interruption coverage requires that the insured then submit a proof of loss. A proof of loss is a more detailed document that provides the insurer with information substantiating the claim that is being made. Generally speaking, it entails a sworn and notarized itemized statement that includes information such as (1) the date and cause of the loss; (2) documents that support the value of the property and the amount of loss claimed (i.e., estimates, inventories, receipts, etc.); (3) the identity of parties claiming the loss under the policy; (4) parties having an interest in the property, like the bank holding the mortgage; and (5) the policy under which coverage is sought.
Often—but not always—the time to submit a proof of loss runs from the date the insurer requests it. Be advised that it may be due within 60 days of the request, which, given the current situation, could be a challenging deadline for insureds to meet.
Submission of a proper and timely notice and proof of loss may be subject to a “substantial compliance” standard. McCormick v. Sentinel Life Ins. Co., 153 Cal.App.3d 1030, 1046 (1984). Accordingly, a defect in a notice or proof of loss, by itself, is rarely a sufficient ground to deny a claim. Moreover, the insurer is under a duty to specify any defects in the notice or proof of loss so that the insured can address them. If the insurer fails to identify the deficiency, the notice is waived. Cal. Ins. Code §§ 553, 554. However, the total failure to comply with the notice and proof of loss conditions could excuse insurer liability altogether. 1231 Euclid Homeowners Assn. v. State Farm Fire & Cas. Co., 135 Cal.App.4th 1008, 1018 (2006); Hall v. Travelers Ins. Cos., 15 Cal.App.3d 304, 308 (1971).
If your client is unable to meet the proof of loss deadline for logistical reasons, make sure it is in touch with its insurer to obtain an extension in writing.
Third, if the client receives a denial from its insurers, it may want to initiate litigation or arbitration. Many clients may have California’s four-year statute of limitations in mind and feel little pressure to move forward at this time. But that would be a mistake. Most property and business interruption insurance contains a different—and much shorter—contractual limitations period. For instance, the California Standard Form Fire Insurance Policy (codified in California Insurance Code § 2071) provides:
“No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss.”
There are three important aspects to understand about this provision.
The first is that the limitations period is significantly shorter than the four years allowed by statute. Cal. Civ. Code § 337.
The second is that this shorter, contractual limitations period is routinely upheld by California courts. Campanelli v. Allstate Life Ins. Co., 322 F.3d 1086, 1093 (9th Cir. 2003) (“Under this provision, any claim that is ‘on the policy’ must be brought within 12 months of the ‘inception of the loss’ or it is time-barred.”).
And third, the 12 months begins to run from “inception of the loss,” not the insurer’s denial of the claim. The California Supreme Court has clarified that “inception of the loss” is that point in time when appreciable damage occurs and is or should be known to the insured. Prudential-LMI Comm’l Ins. v. Superior Ct., 51 Cal.3d 674, 686-87 (1990). And, given the national emergency arising out of COVID-19 and the impact on businesses, many policyholders are well aware of the loss their businesses have sustained. This means that the 12-month contractual limitations period is likely well underway for many policyholders already.
The limitations period is tolled while the insurer investigates the claim. Prudential-LMI, 51 Cal.3d at 692-93 (equitable tolling applies from time insured gives notice to time insurer denies claim in writing). But clients are reporting that the denials they have received have been almost immediate. See, e.g., Complaint, Big Onion Tavern Group, LLC et al. v. Society Insurance, Inc., No. 20-02005 (D. Ill. Mar. 27, 2020), ECF No. 1 (alleging insurer prospectively circulated memorandum concluding no coverage due to COVID-19 shutdown). This means that your client’s claim may not have been tolled for very long.
Clients also may not be sure whether their policies afford coverage and need time to consult with their brokers or attorneys. In California, however, courts have generally rejected these reasons as a basis to extend the contractual limitations period. Abari v. State Farm Fire & Casualty Co., 205 Cal.App.3d 530, 535 (1988) (“It is the occurrence of some … cognizable event rather than knowledge of its legal significance that starts the running of the statute of limitations.”).
Amy Briggs is a litigation partner at Manatt, Phelps & Phillips, LLP where her practice focuses on insurance coverage and bad faith disputes.