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Insurers Blamed for Department Store Closing…

Sep 10, 2020

Happy Thursday! Today we’re focusing on one COVID-19 related issue and one D&O issue. Before we get started, however, we have a footnote to our last entry on Tesla. Oh, how quickly the mighty can fall. This week, Tesla had its largest stock drop ever…falling 21% as a tech selloff took over the market. Tesla’s dramatic “sell-off was sparked by S&P Dow Jones Indices opting not to add Tesla to the S&P 500, despite widespread speculation that Elon Musk’s company would be placed in the large-cap index.” While the company’s stock has somewhat rebounded, the drop is a reminder of how quickly shareholder value can be wiped out.

Insurers Blamed for Department Store Closing:

Remember the “olden days” when those of us who don’t live on the east coast could travel to NYC for business? I would always try to sneak in some shopping after a day of meetings. While I would hit a number of the high-end stores to see the gorgeous displays (especially around the holidays), feel “fancy” for a moment and maybe buy some lipstick, I would do most of my purchasing at less elegant shops that had nice stuff (think Century 21, Zara, etc.) at more palatable prices. I miss those trips, and I hope that NYC continues to recover from the pandemic. (I loved Jerry Seinfeld’s op-ed in the NYT a few weeks ago. )

Virus-related closures have had a severe impact on the retail sector in NYC and around the country. While many commentators believe (and I think rightfully so….when was the last time you went to big department store and felt joy other than in the holiday displays) that large department stores were on the way out, the pandemic appears to have accelerated that process. Look at all of the store closings. Names like Lord & Taylor, Neiman Marcus, Nordstrom, JC Penney….all are either closing stores and trying to hang on (Neiman is set to emerge from bankruptcy lighter and more agile?) or closing all-together (this opinion piece on the closure of Lord & Taylor in the NYT was a well-written, nostalgic one

Add to the list Century 21, the predominately northeast-centered discount department store chain, that filed for bankruptcy this week. It is liquidating the 13 stores it has left. What is interesting in this case is that the company issued a press release that called out the failure of its property insurance to respond to its COVID-driven losses as the main reason for its decision to close. According to the release,

(t)he decision follows nonpayment by (Century 21’s) insurance providers of approximately $175 million due under policies put in place to protect against losses stemming from business interruption such as that experienced as a direct result of the COVID-19 pandemic.

“While insurance money helped us to rebuild after suffering the devastating impact of 9/11, we now have no viable alternative but to begin the closure of our beloved family business because our insurers, to whom we have paid significant premiums even year for protection against unforeseen circumstances like we are experiencing today, have turned their backs on us at this most critical time,’ said Century 21 co-CEO Raymond Gindi. ‘While retailers across the board have suffered greatly due to COVID-19, and Century 21 is no exception, we are confident that had we received any meaningful portion of the insurance proceeds, we would have been able to save thousands of jobs and weather the storm, in hopes of another incredible recovery.”


As all of you in the insurance industry are aware, there are two sides to the COVID-19 related property claims which, according to the Covid Coverage Litigation Tracker, totaled a whopping 1189 as of August 24th. To date, the insurance industry’s view that, with limited exceptions, these losses are not covered under property policies, is “winning” in the courts. That doesn’t mean that there isn’t a personal element to these claims. That’s what is so hard about them. The personal losses (to owners, their employees, their customers, their neighborhoods, etc.) are huge. But there are potentially catastrophic business losses on the insurance side as well. Someone has to “lose” in these claims, and we should all be prepared for the fallout.

Chipping Away at Cyan…Without Going to Congress

Last week, a California court handed down its opinion in Wong v. Restoration Robotics Inc. et al. The case is an important one, as it is the first one in California to opine on whether a corporation can, through its corporate documents, require shareholders to bring prospectus-related securities claims in federal court.

Restoration Robotics, Inc. is a Delaware Corporation doing business in the state of California. Prior to the company’s IPO in late 2017, it had adopted a Federal Forum Provision (“FFP”) in its corporate charter. The FFP required that all ’33 Act claims (following any type of offering) must be brought in federal court.

FFPs were originally thought to fly in the face of the Supreme Court’s 2018 Cyan decision which held that the ’33 Act did not limit offering-related claims to federal court, but instead allowed shareholders to sue under both federal and state law, in both federal and state courts. Earlier this year, however, the Delaware Supreme Court held that FFPs were facially permissible contents of a Delaware company’s certificate of incorporation. Specifically, the court held that FFPs were “not contrary to the laws of” Delaware nor did they “offend federal law and policy”. (Salzberg v. Sciabacucchi).

While the Sciabacucchi case was brought in Delaware, the Restoration Robotics shareholder class action was brought in California. The issue before the court was “whether the Federal Forum Provision is legal and enforceable under California law and/or under Federal law”. (The CA court was quick to point out that the Sciabacucchi statement that FFPs did not offend federal law as well as the suggestion that other states “consider finding them enforceable under the laws of their own state” were simply dicta.)

You know when you are waiting on an answer from someone, and they start with all the reasons why they shouldn’t do something you’d like for them to do? You say “here it comes, they aren’t going to do it”, and then they smile and agree to do it anyway? That’s the way the opinion is written in the Restoration Robotics case. In page after page of the opinion, the California judge bashed the Delaware decision, taking issue with almost all of the legal arguments the Delaware court gave as its rationale for holding that the FFPs at issue were facially valid under Delaware law. Ultimately, however, the California judge found that in California FFPs are “…akin to contractual forum selection provisions….and the California state judiciary has held that mandatory forum selection clauses are generally enforceable and that the burden rests with the opposing party to show such a clause would be unfair and unreasonable. Though a forum limitation clause pertaining to a Securities Act (’33 Act) claim would not be enforceable if it sought to create or select a jurisdiction ‘where none would otherwise exist,’ the Securities Act does allow for federal jurisdiction over those claims… ‘so, at first glance, there is nothing inherently unlawful’ about the FFP.”

The judge went on to observe that Restoration Robotics’ FFP was “’cautiously and narrowly drafted to only address the choice of forum, but leave intact all of the substantive rights and remedies’ provided to the investors by the Securities Act….adding that the FFP was approved as part of a broader shareholder vote and became effective before the filing of the state court suit.” As a result because the plaintiffs did not “demonstrate that the FFP is unenforceable, unconscionable, unjust or unreasonable….” the judge dismissed the case against Restoration Robotics.

This case is a win for the “FFP-solve” to the Cyan problem. Will this change underwriters minds about IPO D&O pricing/retention/limits? Doubtful. The D&O marketplace in general is a hard market…IPO risk or no IPO risk. If anything, the case possibly could help a little bit with the retention argument as now both Delaware and California have examined cases where well-crafted FFPs can serve to keep IPO- and other offering-related cases out of state court.


Pippa Stevens, Tesla jumps nearly 11%, rebounding from worst day on record,, September 9, 2020.

Lauren Thomas, Discount retailer Century 21 files for Chapter 11 bankruptcy and is closing all of its 13 stores,, September 10, 2020.

Century 21 Stores to Commence Wind Down of Retail Operations, CISION PR Newswire, September 10, 2020.

Covid Coverage Litigation Tracker,

Dean Seal, Calif. Judge Rules Cyan Loophole ‘Not Illegal’ Under State Law, Law360, September 4, 2020.

Wong v. Restoration Robotics Inc. et al., case number 18CIV02609, in the Superior Court of the State of California, County of San Mateo.

Carrie O’Neil

Senior Vice President, Legal & Claims,

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