Who pays the bill? The coming deluge of pandemic litigation
Lawyers are counting the cost of the lockdown, but public compensation funds might prove more useful
When disaster and tragedy strike America, Ken Feinberg is usually the man left holding the purse. As a so-called “special master” of compensation funds, the 74-year-old has distributed more than $20bn over his unique career, somehow putting a dollar price on incalculable loss and suffering.
Soldiers exposed to toxic Agent Orange, victims of the September 11 2001 terror attacks, the BP oil spill in the Gulf of Mexico, the Sandy Hook massacre, sexual abuse cases in the Catholic church, VW emissions scandal — when the stakes seem high enough, politicians turn to Mr Feinberg to offer a form of justice, some restitution and an alternative to court.
Today, like many in America, he is largely stuck at home. He sometimes sneaks out to his small law office in Washington (alone in the car, alone in the building). And, once in a while, he fields calls from staffers and politicians in Congress. They are curious to know whether the Feinberg magic — and a hefty compensation fund — might best serve the victims of coronavirus America, and spare the legal system a deluge of litigation.
“Listen. Agent Orange: settlement. Tobacco: settlement. 9/11: settlement through an alternative compensation programme. BP: the same,” Mr Feinberg declares, with the twang of the Boston suburbs. “One thing I have learnt over the last 40 years with mass disasters: the rule is some sort of creative resolution mechanism rather than resorting to the courtroom, judges, juries and trials.”
It raises a profound question for policymakers around the world. Coronavirus has wrought untold damage, both economic and physical. Almost a quarter of a million people have died prematurely. Whole cities have come to a standstill. Businesses have withered. The toll rises daily. But is anyone at fault? And should somebody pay?
For some, litigation offers redress, a means to recoup losses, or make good on contracts. Trial lawyers are mobilising, seeing an almost bottomless well of negligence cases against employers, and businesses big and small. Stricken companies are turning to insurers desperate for the cash. Others are trying to shed obligations. All, in theory, have equal protection under law.
“While we hate the idea of trading on human misery, the reality is that the world post-Covid is going to be a world with an awful lot of disputes and less corporate liquidity to pursue those disputes,” said Christopher Bogart, chief executive of Burford, one of the world’s biggest funders of litigation, in a recent call with analysts.
But such a welter of suits may bring considerable costs. Parts of the legal system in America and Europe are semi-comatose, with courts shut and trials delayed. Even more importantly, the vast potential liabilities will greatly exceed the ability of many defendants to pay them. Once lockdowns are lifted, fear of costly suits alone could hamper the recovery.
“Once you go off to court it may be too late to help the economy,” says Malik Dahlan, professor of international law and public policy at London’s Queen Mary University.
Jointly with several academics and former top judges, Mr Dahlan has called for legal reforms around the world to offer companies breathing space, encouraging pre-litigation settlement to avoid a barrage of aggressive coronavirus suits. “What we have in western societies is the rule of law — a rules-based system where at the end of the day rules are informed by a certain level of morality and ethics,” he says. “The legal system is about justice and you can’t have justice without compassion.”
Various governments are exploring options. Republicans in the US Congress are demanding companies be shielded from litigation. Singapore has already legislated to do so, encouraging disputes to be resolved through mediation or reconciliation. Britain, meanwhile, is paying £60,000 to the families of health workers who lost their lives after contracting coronavirus. It is a small echo of the 9/11 fund, set up in the weeks after the attacks on the World Trade Center to compensate victims.
Ever the mediator, Mr Feinberg can see both sides. “Here’s the argument. Coronavirus is like 9/11, it’s unique. We’ve never had anything like this, so come on! This is a horrible community-wide national disaster and it is worthy of some kind of creativity, a one-off compensation programme.”
“But,” he says, pausing. “If you set up a programme, no good deed goes unpunished. They are ripe for criticism. If you decide that something special is needed, then brace yourself. Who is considered special? You are opening up a hornets’ nest of issues.”
Schulmerich Bells is a company that understands the toil of litigation. The world’s biggest manufacturer of handbells spent decades waging legal war against Malmark, the world’s second largest handbell maker. Their two workshops are 11 miles apart in Bucks County, Pennsylvania.
After countless lawsuits, the 36-year bell war came to an end in 2012. But today both factories have fallen silent — and Schulmerich is again petitioning federal courts, this time for an allegedly “arbitrary and capricious” Pennsylvania state policy decision over coronavirus. “Our governor ordered foundries closed, but beer distributors were left open,” says Jonathan Goldstein, a lawyer who owns Schulmerich. “That struck us as somewhat arbitrary.”
The suit was one of the first in an expected torrent of litigation in the US and beyond. The list of defendants and allegations is fast growing: China for the cover-up, cruise ship operators for negligence, airlines over refunds, hair salons for failing to pay stylists, universities for allegedly pocketing tuition fees. Thomas Keller’s French Laundry restaurant in Napa Valley took aim at its insurer for an alleged failure to cover coronavirus-related business losses.
So far the numbers remain modest, even in the hyper-litigious US. Lex Machina, a legal data provider, found that while total US case filings fell by around a quarter in the first half of April, there were double-digit increases in areas such as insurance and employment. It said 215 suits mentioned the virus in complaints.
Many more are expected. At law firm Morrison Cohen in New York, chairman David Scharf is already swamped with phone calls from clients. “We are preparing the lawsuits, the litigation budgets and the strategic analyses for those who are prepared to litigate. And they want to launch as soon as the court system is open,” Mr Scharf notes.
In some cases, they do not want to wait — and so Morrison Cohen has been busy looking for venues outside New York where it might file sooner. Some companies will ultimately balk at the costs of litigation. For those who will go forward, he divides them into two broad categories: those who expect some sort of commercial settlement but want to use litigation as leverage; and those who feel they have no alternative to try to protect their business.
Mr Scharf is awestruck at the breadth of possible litigants — from real estate to manufacturing. “Just name it,” he says. “Everyone’s been ravaged. Everyone’s been impacted.”
US executives are already complaining of “frivolous” suits hurting the battered economy; Alan Schnitzer, chief executive of Travelers insurance, said last month that America was already facing “the highest tort tax in the world” and could hardly afford the “distraction” of more litigation.
In practice, tort lawsuits in the US have dramatically declined since the mid-1980s. Some experts are also sceptical, given the lengthy gestation of coronavirus, that there will be an avalanche of negligence suits against businesses or healthcare providers.
These cases are not slam dunks. Far from it,” says Nora Freeman Engstrom, a professor at Stanford Law School. “Proving negligence is going to be hard. Proving exposure is going to be hard. Proving causation is going to be hard. Even confirming the diagnosis could be hard. These cases will be scientifically complex and doctrinally challenging.”
Lawyers expect legal battles over “force majeure” clauses, which enable companies to get out of contracts if “act of god” events like hurricanes prevent them from fulfilling obligations. Such clauses have already been invoked by Indian groups, such as Adani Ports, protecting it from penalties for delays in cargo delivery, and Chinese conglomerates debilitated by coronavirus. Many such suits over global supply chain issues may end up in London’s High Court, where around two-thirds of cases are brought by non-UK litigants.
During the financial crisis, judges tended to show little sympathy for such petitioners, often concluding the problem was more a case of buyers’ remorse than divine intervention.
None other than Donald Trump invoked force majeure in a 2008 lawsuit against Deutsche Bank, in which he sought to avoid repaying a $40m construction loan for the Trump International Hotel and Tower in Chicago. The future US president blamed the bank for helping to create a financial crisis that made it impossible to sell condominiums and repay the loan. The gambit failed — although it was a source of some amusement in the legal community.
But in other circumstances — particularly after the 9/11 terror attacks and natural disasters like Hurricane Katrina — the courts have shown more leniency over obligations. That will be critical to insurance groups; Lloyd’s of London chief executive John Neal has warned the pandemic is on track to be the most expensive event ever to hit the industry. “You’re into tens of billions, if not hundreds of billions of loss that will be discussed over time,” he said in April.
Facing a cavalcade of potential claims, insurance groups have taken a conservative reading of what is covered by the “business interruption” clause that is included in most commercial policies. A common argument being heard from the industry is that such insurance protects businesses that suffer damage to their buildings, not closure costs arising from a pandemic. It remains to be seen whether the interpretation is driven by sound law, or self-preservation. Britain’s financial regulator has sought a “declaratory judgment” from courts on a sample of policy wording, so there is clarity on exactly what is covered by business interruption insurance.
Some lawyers and academics say the scale of the problem calls for a government-backed solution.
“This is one of those unique cases where what you need is more like a compensation fund like the kind used in 9/11,” says Rick Swedloff, vice-dean at Rutgers Law School. “We’re looking at potentially tens of thousands of claims worth hundreds of billions of dollars and I’m not sure that the insurance industry is the right place to look for compensation.”
Governments could also step in to backstop insurance claims as the US did through the Terrorism Risk Insurance Act after 9/11. The 2002 law addressed the problem of insurers refusing to offer policies to cover terrorism because they struggled to obtain reinsurance to cover their own risks.
Ravi Nayer, partner at law firm Brown Rudnick, argues business disruption insurance should be treated in the same way. “We’ve reached a point where business interruption insurance is mission critical and there is a risk that just at that point, it will be withdrawn from the market,” he says. “If that is the case then shouldn’t the government pay into a structured reinsurance position so that all the [insurance companies] can easily insure with fair policies that pay out?”
Such policy dilemmas over the legal system are starting to be confronted by politicians around the world. Singapore was one of the first countries to act, swiftly passing legislation in early April to give businesses and individuals temporary protection against suits. The six-month relief covered everything from pre-crisis contracts on hotel bookings, to factory leases and weddings.
Singapore realised it was “a situation where you simply can’t leave things to market forces”, says Sim Kwan Kiat, head of restructuring and insolvency at Rajah & Tann, one of the city state’s biggest law firms.
In Washington, such litigation waivers are fast-becoming one of the most contentious issues dividing Congress as it negotiates the next US economic relief package. Republican senate majority leader Mitch McConnell has insisted measures against “a second pandemic of opportunistic litigation” would be an “absolutely essential” element of any deal. For their part, Democratic senators described it as a “non starter”.
Even some advocates of reform see potential risks. “There needs to be a careful balance here,” says Victor Schwartz, a lawyer and veteran tort reformer. “Coronavirus shouldn’t be a honeypot for trial lawyers looking to shake down businesses, but if companies engage in reckless practices — no sign for masks, don’t space people properly — they shouldn’t be let off the hook.”
Who is going to be able to fund a giant 9/11-type fund? Back then the US economy was going strong
Alexandra Lahav, University of Connecticut
One option to achieve liability protection could be some kind of special, no-fault fund such as that overseen by Mr Feinberg after 9/11; those receiving payouts waive their right to pursue litigation. But the sheer scale of losses suffered during the pandemic may give politicians pause.
“Who is going to be able to fund a giant 9/11-type fund? Back then the US economy was going strong,” says Alexandra Lahav, a professor of tort at the University of Connecticut. She suggests an alternative hybrid model, where exposed companies pay premiums in exchange for legal protection, which could supplement public funding. “The government could act as a kind of insurer as it has done after some natural disasters,” she says.
Alongside measures to constrain liability or offer compensation there is a third option: encouraging early settlement of disputes. Several litigators raised the idea of English courts introducing new ground rules for Covid-19 litigation, requiring parties to mediate before filing lawsuits.
While unconvinced by measures to offer legal immunity from employee lawsuits to companies, Charlie Falconer, a former UK justice secretary, says he is sympathetic to the case for mediation in corporate disputes. “I could see more attempts to bring about sensible resolution rather than relying on black letter [rules-based] law,” says Lord Falconer, who now speaks for the Labour opposition on justice issues.
To Mr Feinberg the advantages of settlement are clear: certainty, timeliness, cost effectiveness. “The real challenge with a mass disaster like a pandemic is the nature of that settlement,” he says. “Will it be lawyers talking with other lawyers, will it be a settlement under the umbrella of a court, or will it be a standalone fund like 9/11 or BP?”
The answer, he says, will be entirely down to “the creativity and generosity and the wisdom of the policymakers.”
Additional reporting by Josh Chaffin, Stefania Palma, Lauren Fedor and Patti Waldmeir