It’s been said that the decades of asbestos claims and litigation resulted in the largest transfer of wealth in the U.S. and around the world. Covid-19 has the very real potential to, in effect, fold an asbestos-like wealth redistribution into one year.
In 2006, the Congressional Research Service estimated that legal expenses on asbestos litigation may exceed $200 billion to $250 billion, with asbestos producers and their insurers bearing the majority of those expenses. After deducting the legal expenses of both asbestos plaintiffs and defendants, the net recovery to claimants was only about 42% of the spending.
The magnitude of the litigation-related expenditures in the asbestos experience is incredibly inefficient, particularly when one considers the volume of bankruptcies caused by asbestos claims.
Now with the pandemic, we may have a collective opportunity to reimagine how we come to terms with an exposure of the magnitude presented by Covid-19, avoid mistakes made in the asbestos experience, and craft a model for resolution in which all stakeholders—policyholders, insurance companies and the government—spread the loss in an equitable fashion.
Insurers Spent Years in Litigation
In order to do so, however, the insurance industry will need to make some hard choices at these early stages of the developing exposure.
Although it’s been said that the purpose of insurance is to insure, make no mistake that the insurance industry is in the litigation business. Indeed, a standard provision in all policies is a subrogation clause that is specifically designed to allow an insurance company to press claims against third parties after it pays a policyholder’s claim.
Subrogation is the embodiment of litigation. So, even when an insurance company pays a claim, it still may litigate.
In the context of exposures that are widespread, the insurance industry often refuses to cover policyholders across the board unless and until it is ordered to do so by courts or juries. History provides examples of the insurance industry following a short-sighted litigation model where the exposure at issue impacts most industries/policyholders or a single industry in its entirety and the financial exposure is massive.
The insurance industry spent years seeking to eliminate or restrict coverage in asbestos-related disputes by litigating in courts around the country issues regarding:
- trigger-of-coverage (what has to happen to activate a policy);
- allocation (how can a loss that otherwise is covered be spread either to other insurance companies or the policyholder itself); and
- the scope of imprecise exclusions to name a few.
Similarly, in environmental litigation beginning with CERCLA legislation in 1980, the insurance industry turned to the courts again to attempt to defeat coverage on the premise that:
- so-called cleanup costs (the label used as the remediation remedy) did not constitute covered damages and, therefore, were uninsurable;
- imprecise pollution exclusions applied; and
- policyholders forfeited coverage on the premise that they knew they were harming the environment.
Recently in the context of the gasoline additive MTBE, the insurance industry told the oil & gas industry that claims arising out of that product are uninsurable again relying on imprecise exclusions or out-of-context applications of certain definitions. The insurance industry also has recently taken the position that claims related to climate change are subject to the same scrutiny, as the exposure begins to develop and pose a threat to industry.
Time to Change the Playbook
Currently, the insurance industry is relying on this same playbook to send a message to policyholders that Covid-19 is not the kind of insurable risk contemplated by the nature of insurance itself.
Alternatively, the insurance industry says that all Covid-19 related claims are not covered under the terms of any potentially relevant policy. The first test of the insurance industry’s hard line has arisen in the context of coverage litigation involving business interruption (BI) and contingent business interruption (CBI) insurance policies.
It is very likely that other types of polices such as general liability and D&O insurance will be implicated as well when personal injury or securities-related litigation surfaces.
However, history also tells us that the overall scorecard on coverage litigation favors policyholders and, over time, policyholders will succeed more often than not. We do not mean to imply that on a case-by-case basis policyholders always prevail. But we can say that the insurance industry does not succeed in its narrative that certain risks are per se uninsurable; policyholders have repeatedly defeated such notions.
Through litigation, settlement and other forms of dispute resolution, policyholders as a class have secured vast amounts of insurance that they paid for and that was designed to protect them from exposures that arise as part of the cost of doing business. Unfortunately, policyholders’ recoveries often come at a significant cost of resources and time.
These costs include litigation expenses paid by the insurance industry on top of claims they pay out, and the cost of time for policyholders whose coverage is delayed by litigation.
As a result, the insurance industry would be well served to eschew its litigation-focused strategy and come together with policyholders and the government to craft a mechanism that efficiently and expeditiously resolves insurance claims related to Covid-19 in a manner that spreads the risks and costs equitably.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert Shulman chairs the Insurance Recovery practice at Paley Rothman where he litigates complex disputes against insurance companies on behalf of corporations seeking coverage for all manner of claims involving every form of risk and exposure such as those arising out of products, securities, directors & officers, energy, automotive, financial institutions, medical devices and health, among others.
Cristen Rose is a principal in the Regulatory Law & Litigation practice at Paley Rothman, where she handles commercial & business litigation, including mass torts, class actions, product liability defense, environmental litigation, contractual disputes, regulatory compliance, and insurance recovery.