Since 1991, United Policyholders has been a voice for policyholders and an organization that has taken action in legislative, judicial, and consumer venues to assist policyholders and promote policyholders’ best interests. One example is their Amicus Project. They have written appellate briefs in 42 states and in more than 450 cases. United Policyholders briefs have been cited by numerous state supreme courts and the United States Supreme Court. Last week, United Policyholders filed an amicus brief in the Mama Jo’s case. The case and the Petition for review to the United States Supreme Court was recently discussed by Iris Kuhn in, Restaurant Asks U.S. Supreme Court to Hear Appeal of Eleventh Circuit’s Ruling on “Direct Physical Loss.”

In the summary of its argument, United Policyholders states:

The issues that Mama Jo’s raises in its petition present federal questions of national importance. The Eleventh Circuit below failed to adhere to two fundamental precepts of federal jurisprudence: the requirement that federal courts sitting in diversity apply the substantive law of the forum state and the right of civil litigants to a trial.

In its first error—the Erie error—the Eleventh Circuit failed to make any genuine attempt to apply Florida policy-interpretation law and to predict how Florida courts would decide the coverage question. It ignored pertinent authority from Florida state courts and instead relied on federal authority and out-of- state cases.

In its second error—the Daubert error—the Eleventh Circuit imposed the novel and erroneous requirements that causation experts categorically exclude all alternative causes and that they conduct strict scientific testing. This new standard usurps the role of the trier of fact.

Federal courts nationwide are making these same errors in cases seeking coverage for losses arising from the COVID-19 pandemic. These courts are making critical coverage decisions—in the context of motions to dismiss—without making serious efforts to determine and apply the coverage law of their forum states and predict how those states’ courts would decide the issue. Instead, despite sometimes acknowledging their duty to apply state law, these federal courts are nevertheless determining coverage by following federal courts in other jurisdictions that have made the same Erie error. This amounts to the development of a federal general common law of insurance coverage, a result outlawed since 1938 when Erie overruled Swift v. Tyson, 41 U.S. 1 (1842).

Federal courts are also usurping the role of the fact finder and inappropriately making factual determinations on motions to dismiss. Instead of applying the Twombly-Iqbal plausibility standard, federal courts are routinely disregarding factual allegations that COVID-19 causes direct physical loss of and/or damage to the insureds’ property. By making factual determinations different from the allegations in a complaint, these courts are commandeering the jury’s role.

The Eleventh Circuit’s decision is perpetuating and deepening these errors. Its decision has led many federal courts to neglect Erie on an issue that is preeminently one of state law and regulation, and also to bypass their fundamental duty to leave factual questions to the trier of fact. The result is certain to be hundreds of thousands of additional small-business failures, loss of jobs, and pain for families across the country. (footnotes omitted)

In its analysis, United Policyholders severely criticized the Eleventh Circuit’s conclusions about Florida insurance law, saying that the Eleventh Circuits analysis was so bad that a longstanding Constitutional doctrine requiring federal courts to apply state law had been violated:

“Federal courts are bound to consider the numerous sources of state law thoroughly before turning for inspiration to decisions of other federal courts: they must do not what they think best but what the state supreme court would deem best….This methodology—scouring state sources for state high court intent—preserves Erie’s underlying objective that federal courts sitting in diversity operate as neutral forums that follow their forum states’ laws.

This is not what happened here. The Eleventh Circuit did not engage in any serious Erie analysis when it concluded that an “item or structure that merely needs to be cleaned” does not give rise to direct physical loss to property. It cited two Florida cases, from which it drew conclusions about what key policy terms, including “loss,” “direct” and “physical” mean….

First, the Eleventh Circuit erroneously equated “loss” with “damage.” To be sure, the court did cite two Florida cases, but each addresses policy language, and facts, not at issue here. The policy language at issue in both cases specifically required “physical loss,” with the insurer agreeing to pay for “direct loss to property … only if that loss is a physical loss.” The first rejected coverage under that language and the facts at issue. Vazquez v. Citizens Prop. Ins. Corp., 304 So. 3d 1280, 1284 (Fla. Dist. Ct. App. 2020) (rejecting coverage to replace non-damaged cabinets to match replacements for damaged cabinets). The other upheld coverage. Homeowners Choice Prop. & Cas. v. Maspons, 211 So. 3d 1067, 1069 (Fla. Dist. Ct. App. 2017) (upholding coverage for failure of drain pipe to perform its function). Mama Jo’s policy is materially broader, covering “loss of” property, not just “loss,” and also “damage to” property—critically different language. Florida law requires that “loss of” in these policies mean something different from “damage.” Foremost Ins. Co. v. Medders, 399 So. 2d 128, 130 (Fla. Dist. Ct. App. 1981). By equating “loss of” with “damage,” the Eleventh Circuit violated the Florida legal principles that policy terms not be rendered superfluous and that words in a policy be construed in context, not in isolation. Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000).

Second, even if “direct physical loss of or damage to” required that the loss of or damage to property be “actual” (as the Eleventh Circuit stated despite the policy not so requiring), a significant mental leap is needed to conclude that coverage does not apply to items that “merely need[ ] to be cleaned.” The court filled this gap not with Florida law and the policy analysis that Florida law requires, but with federal precedent and decisions from other states….

Third, the Eleventh Circuit ignored pertinent Florida precedent requiring that the phrase “direct physical loss of or damage to” be given a broad construction. Azalea, Ltd. v. Am. States Ins. Co., 656 So. 2d 600, 602 (Fla. Dist. Ct. App. 1995). In Azalea, a policy covered “direct physical loss of or damage to” certain property—the same policy language issued to Mama Jo’s. The question was whether the policy covered loss of or damage to the facility resulting when a chemical killed the bacterial colony in a sewage-treatment plant. The appellate court reversed the trial court, holding that, by adhering to the interior of the facility and destroying the bacterial colony that was an integral part of the facility, the chemical caused direct damage to the plant….

Structural damage was not required. It was “common sense” that the policy not be construed to deny coverage for a structure “rendered completely useless.”…This was so even though all that was necessary was that the plant be cleaned so it could be reseeded. Id.; see Three Palms Pointe, Inc. v. State Farm Fire & Cas. Co., 250 F. Supp. 2d 1357, 1364 (M.D. Fla. 2003) (Azalea shows that, “under Florida law ‘direct physical loss’ includes more than losses that harm the structure of the covered property”).

In this way, the Eleventh Circuit’s result was driven not by Florida law but by federal precedent, in contravention of Erie.” (footnotes excluded)

The amicus brief by United Policyholders is an important read to study Mama Jo’s unpublished opinion, coverage issues raised regarding “physical loss,” the exclusion of expert witnesses, and the important role of and analysis by federal courts of state court insurance law. Policyholder attorneys with active business interruption claims involving COVID must read this brief.

Thought For The Day

I realized that people had an unreal image of me, that somehow I was a god on Mount Olympus. I decided that if I were going to make use of my role as a Supreme Court Justice, it would be to inspire people to realize that, first, I was just like them and second, if I could do it, so could they.
—Sonia Sotomayor