Mo. Effort Nixed, but Calif. Policyholders Pushing for COVID Premium Refunds

By Jim Sams | February 4, 2022

Policyholder attorneys have had little success persuading most courts that commercial property insurers owe coverage for business interruptions caused by COVID-19 shutdowns.

How about premium rebates instead?

A panel of the 8th Circuit Court of Appeals on Thursday shut down a lawsuit in Missouri that sought to require commercial property insurers to refund a portion of premium payments, but that won’t be the end of it. Two similar lawsuits were filed in California; one against State Farm and another against a unit of the Hartford Financial Services Group. Both have made more progress than the Missouri action.

The 8th Circuit panel affirmed a trial court ruling that dismissed a lawsuit filed by a Missouri flower shop against State Farm Fire & Casualty Co. that sought to recover “overpayments” on behalf of itself and similarly situated businesses.

“The district court properly determined that Alissa’s Flowers was required to exhaust administrative remedies because the ‘claims, in essence, constitute a challenge to State Farm’s rates, rating plan, rating system and underwriting rules,'” the 8th Circuit opinion says, citing a district court order in another case.

Attorneys for Alissa’s Flowers argued that “virtually every” major auto insurer reimbursed policyholders for a potion of their premiums after COVID-19 restrictions on non-essential businesses drastically reduced miles driven, and therefore auto accident claims. After all, commercial property owners faced a similar “change of circumstances” because of the same government orders. Alissa’s Flowers, based in Independence, said it lost $100,000 from in-store sales when Missouri shut down non-essential businesses from March 16 to May 11, 2020.

The flower shop’s argument isn’t as simple as what’s good for the goose is good for the gander. The brief filed by its attorneys takes pains to assert that the business is not challenging the rate that State Farm charged — which was approved by the Missouri Department of Insurance — but the premiums it collected.

Missouri law forbids excessive premiums, but “explicitly and clearly” does not reserve the Department of Insurance’s authority to review premiums paid for commercial insurance policies, the flower shop’s attorneys said in a brief filed with the court.

Nonetheless, District Court Judge Brian C. Wimes, with the Western District of Missouri in Jefferson City, found that Alissa’s Flowers was required to exhaust all administrative remedies before taking its case to court. Wimes said rates and premiums are “inextricably linked.”

“Missouri provides an exclusive administrative remedy for rate complaints,” the judge’s order states, citing a 2007 decision.

The 8th Circuit panel said it agreed with Wimes that the flower shop, “in essence,” was challenging State Farm’s rates and was required to take its complaint to the Department of Insurance.

Two Northern California coffee shops are hoping for better luck under California’s unfair competition law. Like Alissa’s, they assert that their insurers owe them refunds because government shut-down orders greatly reduced exposure under their insurance policies.

The coffee shops may have had a little help from the state’s elected insurance regulator.

Boobuli’s, which does business in the distant San Francisco Bay-area suburb of Walnut Creek, notes in its lawsuit against State Farm that California Insurance Commissioner Ricardo Lara issued a bulletin on April 13, 2020 stating that the COVID-19 pandemic had curtailed activities and caused projected loss exposures to become “overstated or misclassified.” The commissioner directed insurers to make premium refunds for March and April “to all adversely impacted California policyholders.” Lara issued two bulletins later that extended and clarified that directive.

District Court Judge William H. Orrick granted State Farm’s motion to dismiss Boobuli’s lawsuit last October because of a technical issue with the pleading, but he gave the coffee shop leave to amend its complaint.

Boobuli’s did so. Orrick has scheduled a Zoom case-management conference for next Tuesday.

The role of the state Department of Insurance is also an issue in Rejoice! Coffee Co.’s lawsuit against The Hartford’s Sentinel Insurance Co. The coffee shop, based in the Bay Area suburb of Danville, seeks class action status to include other businesses that did not receive adequate premium refunds and states that damages amount to at least $5 million.

District Court Judge Edward M. Chen asked the Insurance Department to provide its view on whether the state’s ratemaking statutes provide immunity to insurers from civil actions seeking premium refunds. An attorney for the department said in September that the law provides no such protection except in the context of antitrust violations.

Chen denied the insurer’s motion to dismiss Rejoice’s lawsuit on Dec. 9. He said in his order that California statutes do not allow legal challenges to insurance rates, but do allow policyholders to challenge how those rates are applied.

Chen noted that the series of bulletins that Lara issued warning carriers that their loss exposures may be overstated and misclassified because of the COVID-19 pandemic.

“Rejoice has relied on these bulletins in its amended complaint to show insurance carriers have been put on notice of the adverse effect of the COVID-19 pandemic on policyholders,” the order says.

Policyholder attorney K. James Sullivan, with the Calfee law firm in Cleveland, Ohio, said in an email that the Alissa’s Flowers lawsuit was based on sound logic. He noted that several insurance commissioners required auto insurers to refund a portion of premiums because of reduced exposure during COVID-19 lockdowns.

“Because insurance premiums are underwritten in relationship to the value of the risks being insured, coupled with the fact that states treat and regulate insurance as having the quasi-public functions of spreading, pooling, and mitigating risks, it stands to reason that insurance pricing is a special form of contracting that should be adjusted when the risks actually being insured are no longer the same as what was underwritten,” he said.

Sullivan said the flower shop’s attorneys took a unique and intriguing approach. The 8th Circuit’s ruling was “somewhat underwhelming,” he said, because the court did not rule on the substantive merits of the claim, only that Alissa’s took the wrong procedural approach.

Sullivan said he’s still holding out hopes that the outcome for COVID-19 business-interruption claims will take a different direction, despite numerous federal court appellate court decisions upholding the denials of such claims. The Ohio Supreme Court has not yet ruled in a case that asserts the presence of SARS-CoV-2 on a property constitutes a direct physical loss. Sullivan expects it to be the nation’s first state supreme court ruling on the subject.

“While some may say that the series of Sixth Circuit cases ruling against policyholders has sounded the death knell for Ohio policyholders, in fact the Sixth Circuit has merely been predicting what Ohio law would say about these claims, when in fact it will be the Ohio Supreme Court that has the power to say definitively what Ohio law actually is,” he said. “Put differently, the Ohio Supreme Court owes no deference to the Sixth Circuit on these matters of state insurance law. If anything, the opposite is true.”

About the photo: Eliene Blundell, owner of Alissa’s Flowers and daughter of the flower shop’s founder, is shown in this photo posted on the flower shop’s website.

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