Presented by the Insurance Services Practice Group

Federal Court Remands COVID-19 Business Interruption Case to State Court

Commercial property policyholders seeking coverage for COVID-19-related losses are filing declaratory judgment actions and complaints in courts across the country. Traditionally, carriers would rather a federal court decide the coverage issues and would routinely remove cases to federal court, when appropriate. However, in Dianoia’s Eatery, LLC, d/b/a Dianoia’s and Pizzeria Davide v. Motorists Mutual Insurance Company, No. 2:20-cv-00706-NBF (W.D. Pa. May 19, 2020), the federal court determined that COVID-19-related coverage issues should be decided in state court.

The plaintiff filed suit seeking a declaration that it was entitled to business interruption coverage under its commercial property policy. As would be expected, Motorists filed a notice of removal on the basis of diversity jurisdiction. The court determined that the defendant failed to meet diversity jurisdiction requirements by failing to meet its burden in conducting a reasonable investigation to determine the citizenship of the parties (plaintiff is a limited liability corporation). Arguably, this technical defect could have been remedied by the parties. Notwithstanding, the court went further and determined that even assuming diversity jurisdiction existed, it would decline to retain the matter pursuant to its authority provided under the Declaratory Judgment Act (DJA), 28 U.S.C. § 2201(a).

Under the DJA, federal courts have discretionary jurisdiction over declaratory judgment actions and can decline jurisdiction. In relying on several factors articulated by the Third Circuit in Kelly v. Maxum Specialty Ins. Group, 868 F.3d 274, 282, and State Auto Ins. Cos. v. Summy, 234 F.3d 131, 135-36 (3d Cir. 2000), the court declined to exercise jurisdiction under the DJA. Of note is the court’s reliance on Summy; “It is counterproductive for a district court to entertain jurisdiction over a declaratory judgment action that implicates unsettled questions of state law.” Summy, 234 F.3d at 135.

Interestingly, the court’s rationale in Summy in support of remand focused on the fact that the state court had jurisdiction over two pending matters involving the same parties as the federal court claim. Moreover, a vigorous objection to the removal action was present in Summy. The present case records no such objection to the removal and no underlying state court claim involving the same parties. Nonetheless, the court determined that the plaintiff’s complaint raised “novel insurance coverage issues” and it is anticipated that that there will be a “high volume” of these cases. The court concluded that such decisions are best left to state courts to decide since there is no body of case law developed by Pennsylvania courts on these issues.

In further support of this rationale, the court cited the Supreme Court of Pennsylvania’s recent denial of a King’s Bench petition seeking to consolidate all COVID-19 business interruption litigation before the Supreme Court. Joseph Tambellini, Inc. d/b/a/ Joseph Tambellini Restaurant v. Erie Ins. Exchange, No. 52 WM 2020 (Pa. May 14, 2020). The plaintiffs in Tambellini were asking the Supreme Court to utilize its “King’s Bench” and “extraordinary jurisdiction” powers to assume control over all Pennsylvania COVID-19 business interruption cases and develop a system for resolving them. The Pennsylvania Supreme Court’s “King’s Bench” power is rooted in Pennsylvania’s state constitution and 42 Pa.C.S. § 502, it allows the Supreme Court of Pennsylvania to assume plenary jurisdiction over any issue, even in cases where there may not be an underlying matter before the court. Additionally, the court has “extraordinary jurisdiction” pursuant to 42 Pa. C.S. § 726, over matters of immediate public importance. While the plaintiffs were swift in seeking the state’s highest court’s intervention on these issues, the court declined to intervene, without opinion.

While the allegations raised in Dianoia’s complaint are novel due to the pandemic, the issues involved in insurance policy interpretation have long been addressed by state courts. We suggest that, while not specific to COVID-19, issues of what constitutes a direct physical loss and the scope of civil authority coverage have been analyzed by state courts for years. Federal courts are tasked with and apply existing law to new sets of facts every day. As we continue to defend these cases, there is no doubt that this opinion could be a hurdle in removing such cases to federal court--yet another side effect of COVID-19. 


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