On February 22, 2021, an Illinois federal court ruled in favor of policyholders seeking coverage under their insurance policies for their business losses due to the COVID-19. In a consolidated ruling, District Judge Edmond Chang in the Northern District Court of Illinois denied motions to dismiss filed by Society Insurance (“Society”) in three lawsuits related to business interruption coverage. Those lawsuits were Big Onion Tavern Group, LLC et al v. Society Insurance, Inc. (1:20-cv-02005), Rising Dough Inc et al v Society Insurance (1:20-cv-05981), and Valley Lodge Corp v. Society Insurance, a Mutual Company (1:20-cv-02813). While Judge Chang denied the motions on the issues of coverage, he ruled in favor of the plaintiffs’ mutual insurer, Society Insurance, on other significant issues, which are detailed below.
Ruling on Business Interruption Coverage
Judge Chang’s analysis focused on interpreting the common policy language at issue—in particular analyzing whether the policy’s coverage for “direct physical loss of or damage to covered property” arose from a “covered cause of loss.” As defined by the policy, a “covered cause of loss” means “Direct Physical Loss unless the loss is excluded or limited under this coverage form.”
When considering the issue of causation, Judge Chang held that a reasonable jury could find that the COVID-19 pandemic was the cause of the policyholders’ business interruptions. Judge Chang continued “[e]ven if the government shutdown orders (and not the pandemic itself) played a causal role in the Plaintiffs’ losses, and even if those orders cannot be construed as a “direct physical loss,” the shutdown orders were proximately caused by the pandemic.”
Judge Chang further held that the policyholders alleged losses constitute a “direct physical loss” under the policy, holding that because “coverage extends to direct physical ‘loss of’ property,” the policyholders did not need to demonstrate that the COVID-19 pandemic caused a “change to the property’s physical characteristics.”
Judge Chang went on to hold that a reasonable jury could find that the policyholders suffered a direct “physical” loss of property, because even though many of the restaurants could continue to operate at reduced or limited capacity, “the pandemic-caused shutdown orders do impose a physical limit: the restaurants are limited from using much of their physical space.”
The court did acknowledge that Society’s argument “did give the Court some pause.” In particular, Society argued that when construing the policy as a whole, other policy language strongly supported the conclusion that property at the described premises should be “repaired, rebuilt[,] or replaced,” thus implying that tangible physical damage was necessary to trigger coverage. Judge Chang concluded that, as a result, “the scope of the term ‘direct physical loss’ is genuinely in dispute,” and that “a reasonable jury could find for either side based on the arguments and factual record presented so far in the litigation.” Accordingly, Judge Chang denied Society’s motion to dismiss the policyholder’s claims on these grounds.
Ruling on Other Claims
- Civil Authority Coverage
Although the cases are permitted to move forward, Judge Chang dismissed several of the other claims and legal theories asserted by the policyholders. Judge Chang held that the Plaintiffs’ policy’s Civil Authority coverage part—which provides coverage for loss of income caused by an action of civil authority that “prohibits access” to the insured’s premises—does not support an independent basis for coverage because plaintiffs failed to allege “that employees are outright prohibited from accessing the premises” or its immediately surrounding areas.
- Contamination Coverage
Judge Chang also dismissed a claim pursuant to the policy’s Contamination coverage part. That coverage part provides coverage when “operations” are “suspended” due to contamination. Judge Chang held that because the policyholder restaurants continued to operate their businesses, and none of the plaintiffs alleged that their operations were suspended as a result of contamination, these claims also failed.
- Sue and Labor Coverage
Judge Chang also rejected a claim alleged by a policyholder under the policy’s Sue and Labor coverage part, holding that that provision does not independently provide coverage, but rather specifies conditions of coverage.
- Bad Faith Settlement Practice Claims
Illinois policyholders’ claims under Section 155 of the Illinois Insurance Code for bad faith settlement practices survived dismissal. Judge Chang held that although such claims are subject to dismissal if there is a “bonafide dispute of coverage,” a genuine dispute of material fact existed as to whether such a dispute existed.
- No Virus Exclusion
Finally, Judge Chang noted that the Society policies at issue did not contain a specific exclusion of coverage for losses due to a virus or pandemic—another issue that is being heavily litigated in business interruption coverage cases nationwide. As such, the court left open the possibility that such similar exclusions could be dispositive in other cases.
Nationwide Trends on Business Litigation
Judge Chang’s decision contrasts with the developing nationwide trend in favor of insurers. According to the University of Pennsylvania’s Litigation Tracker of business interruption litigation, approximately 90% of motions to dismiss brought in federal court by insurers against policyholders seeking coverage for pandemic-related business losses have been successful (the decisions have been more balanced at the state court level, with just 53% of motions being granted). As a result of the early success of insurers at the pleading stage, cases like the ones pending against Society will serve as a useful litmus test to determine whether adequate factual support exists to support policyholders’ claims.
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Although insurers have generally been successful at dismissing the claims asserted by policyholders, some cases have survived preliminary motions to dismiss and are moving forward. As such, this matter continues to develop as policyholders in those cases continue to pursue their claims.