Commercial litigation slowed to a crawl this spring after courts in New York and elsewhere went into varying degrees of lockdown, but as courts resume normal operations they will be confronted with the wave of litigation relating to the COVID-19 pandemic. Insurance coverage litigation, in particular, has hardly been on a hiatus—numerous lawsuits over business interruption claims have been filed, and other insurance lines will also likely be drawn into pandemic-related litigation.

Recently filed insurance coverage lawsuits reveal a trend: A significant number of putative class actions filed by commercial insureds, often restaurants seeking coverage for revenue lost when government closure orders halted or curtailed their operations. In some actions, the plaintiffs purport to represent a nationwide class of all entities with business interruption claims under the same alleged "standard all-risk" commercial property insurance policy. One plaintiff seeks to represent all entities with policies issued by the same defendants, apparently without regard to policy terms. In others, the scope of the proposed class is more limited, though still ambitious—for instance, a statewide class of restaurants and bars allegedly insured under the same policy form.

Historically, class treatment has been sought on behalf of individual policyholders to address large numbers of small-value claims arising out of personal insurance lines. Even those actions have found varying degrees of success. Class actions involving commercial insurance coverage have been rare.

By all accounts, there will be numerous disputed insurance claims for lost business income relating to the pandemic. But are class actions the right mechanism to resolve large numbers of commercial insurance disputes, even where claims involve the same kinds of losses under the same or similar policy language?

Commercial claims tend to have higher values and involve more complex and differentiated facts. Nevertheless, if courts are overwhelmed by a tsunami of coverage litigation due to the COVID-19 crisis, they might be motivated to embrace class actions to resolve commercial insurance claims. At first blush, class actions might seem an attractive option for courts to efficiently manage the burden the claims may impose on their dockets.

But below the surface, there are significant doubts that these claims are suitable for class adjudication. The same procedural hurdles that have made class litigation of commercial insurance claims ill-advised and uncommon in the past still pose obstacles to class treatment for such claims even in the current extraordinary circumstances.

Class action requirements vary among jurisdictions but most are comparable to those in the Federal Rules of Civil Procedure. Under the Federal Rules, a named plaintiff must have standing, be a member of the proposed class, and satisfy the four requirements of FRCP 23(a): numerosity, commonality, typicality, and adequacy of representation. Specifically,

(1) the class must be so numerous that joinder of all members is impracticable,

(2) there must be questions of law or fact common to the class,

(3) the claims or defenses of the representative parties must be typical of the claims or defenses of the class, and;

(4) the representative parties must be able and willing to fairly and adequately protect the interests of the class.

The action must also satisfy at least one requirement of FRCP 23(b). For example, under FRCP 23(b)(1), class treatment may be appropriate if prosecuting separate actions would risk establishing incompatible standards of conduct for the defendants, or impede the ability of non-party class members to protect their interest—a so-called "limited fund" class action (FRCP 23(b)(1)). Alternatively, under FRCP 23(b)(2), a class may be certified if the defendant "has acted or refused to act on grounds that apply generally to the class" such that injunctive or declaratory relief as to the class is appropriate.

More commonly, putative class action plaintiffs invoke FRCP 23(b)(3), which permits class treatment if questions of law or fact common to the class "predominate" over questions affecting individual members, and a class action is "superior" to other methods to resolve the controversy. In making those determinations courts may consider whether class members have an interest in controlling their own separate actions; whether there is already litigation involving class members; whether it is desirable to concentrate the claims in one forum; and potential difficulties in managing the proposed class action.

The commercial insureds named as plaintiffs in recent class filings presumably have standing—they typically allege that they have business interruption coverage, suffered losses from pandemic-related shutdowns, and submitted claims that insurers have not accepted. They seek declaratory relief and damages, alleging that numerous other policyholders are similarly situated with purportedly identical policy wording. Because they seek damages in addition to declaratory relief, they invariably seek to proceed under Rule 23(b)(3), although some also invoke Rules 23(b)(1) and (2).

Although policyholders often allege that operative insurance terms are "standard," there are wide variations in business interruption policy language. Commercial insureds are often represented by sophisticated brokers and may have significant influence over the terms of coverage. Even where key phrases are identical—which policyholder plaintiffs tend to emphasize—a policy must be read as a whole, and differences in definitions and endorsements, or interplay of terms within different coverages or with policies issued by other insurers, could significantly alter the meaning or application of policy language to the claims in question.

Even where policy wording is identical, which state's law governs can be pivotal to coverage. For this reason, complaints seeking relief on a nationwide basis may be particularly ill-suited for class treatment. The same policy language may be interpreted and applied very differently under the laws of different states. This is underscored by the host of recent commentaries indicating that what constitutes "physical damage" to property may vary among jurisdictions. While a court may certify subclasses to address this issue, the potential presence of 51 subclasses (for the 50 states and the District of Columbia) would undercut the efficiency that is supposed to be the hallmark of class actions.

Moreover, recent class filings typically seek relief, at least alternatively, under separate "civil authority" coverage of a policy. "Civil authority" orders concerning the pandemic have varied not only by state, but often within a state. Some claims of lost income allegedly arise from closure orders predicated on damage to property, and others from shutdown orders focused on personal safety without reference to property damage. Thus, even a class limited to policyholders within a state could be subject to differing orders. Such variations further undercut the manageability of the class action proceeding.

Also significant, the critical facts underlying lost income claims inevitably differ, even though all may relate in some way to the consequences of the pandemic. Some claims may involve alleged contamination of an insured location by an employee or visitor who was contagious; others may allege contamination of common areas in a building but not the insured's own space; still others may allege closure of a location due to fears of contamination but no documented exposure. With the early focus on physical damage as a requirement under many coverages, such factual differences in individual claims could be pivotal to coverage and militate against class treatment.

Then there is the individualized nature of damages, which may further tip the scale against a finding that common issues predominate. Quantification of business interruption losses do not appear susceptible to class treatment on the basis of easily applied formulas, statistical analyses, or other standardized methods. Rather, each commercial insured must establish the quantum of its own lost income. The amount that would have been earned absent the shutdown, and whether the insured properly acted to mitigate its losses, can be both complex and highly specific to each business. In that respect, "test cases" are unlikely to offer much guidance to resolve the damage claims of other class members.

There also may be issues of whether a specific policyholder provided adequate notice and documentation of its claim and otherwise cooperated with the insurer—typical conditions precedent to recovery. Thus, even if there are common coverage issues, resolution of individual claims could require a multitude of mini-trials heightening manageability concerns even further.

Still other considerations may militate against class treatment for commercial insurance claims. Would it be appropriate, for instance, for a single judge to rule on the interpretation of policy language under potentially every state's law, and for a single panel of lay jurors to apply that construction to claims occurring nationwide? Moreover, although the sizable dollar magnitude of many commercial claims does not necessarily militate against class treatment, the amounts that may be sought by specific insureds, and the proliferation of business interruption complaints that do not seek class certification, suggest that significant numbers of commercial policyholders may prefer to litigate their claims independently and do not view a class action as a superior method of adjudication.

Courts will carefully weigh these factors in considering whether to certify broad classes of commercial policyholders. But when closely examined, class actions in the commercial insurance setting are not necessarily the answer for over-crowded dockets that they might appear to be at first glance.

Mark J. Leimkuhler, Jack B. Gordon and Erika B. Levin are partners at Lewis Baach Kaufmann Middlemiss PLLC.