U.S. District Judge Edmond E. Chang refused to dismiss the claims for lost business income coverage asserted by several dozen Society policyholders in the three suits, while throwing out the policyholders' bids for coverage under a number of other policy provisions.
Judge Chang had selected dismissal or summary judgment motions filed by Society in the three cases to serve as bellwethers to address critical policy interpretation issues common to most of the 40-plus cases that have been folded into the MDL, which was formed by the Judicial Panel on Multidistrict Litigation in October.
Two of the bellwether cases were brought in Illinois federal court: one by a group of Chicago-area bars, theaters and restaurants dubbed the "Big Onion plaintiffs," and the other by an eatery in Glenview, Illinois, called Valley Lodge. The third was filed in Wisconsin federal court by a group of bars and restaurants known as the "Rising Dough plaintiffs," located in Wisconsin, Minnesota and Tennessee.
One key COVID-19 coverage question that has split courts across the country is whether a policyholder's inability to fully operate its business due to pandemic-related restrictions satisfies the threshold requirement that lost business income result from a suspension of operations caused by "direct physical loss of or damage to" property.
Society argued this phrase requires a tangible alteration to physical property, which, according to the insurer, has not occurred at any of the policyholders' premises due to the novel coronavirus or the various government stay-at-home orders. But Judge Chang was unconvinced, finding the policy wording indicates that "loss" is distinct from "damage." And it is possible the policyholders could convince a jury that their inability to use all or part of their properties is indeed a covered physical loss, the judge said.
"According to Society, these losses are not 'physical' because tables and chairs, walls and floors, stovetops and sinks remain in good working order; indeed, the plaintiffs have been able to use the premises to conduct some amount of business," Judge Chang wrote. "But a reasonable jury can find that the plaintiffs did suffer a direct 'physical' loss of property on their premises."
Accordingly, the judge allowed the plaintiffs in all three bellwether cases to proceed with their claims for coverage under the lost business income prongs of their policies. He also permitted the Big Onion plaintiffs and Valley Lodge to press their allegations that Society denied their insurance claims in bad faith, rebuffing the insurer's assertion that no bad faith can possibly exist here because there is still a "bona fide" dispute over whether the policyholders are entitled to coverage.
"Here, it might very well be that, ultimately, no reasonable jury could help but find that there is a bona fide dispute over coverage," Judge Chang found. "But no discovery has taken place and the case is, for purposes of this issue, at the pleading stage."
The district judge did, however, dismiss the policyholders' bids for coverage under an array of other policy clauses, including "civil authority" and contamination provisions invoked by the Big Onion plaintiffs and Valley Lodge and a "sue-and-labor" clause cited by the Rising Dough plaintiffs.
The civil authority coverage in the Society policies applies if the policyholder is unable to access its premises due to a government order issued in response to loss or damage to a nearby property, according to court documents. The Big Onion plaintiffs and Valley Lodge have argued the state and local stay-at-home orders in Illinois constituted civil authority actions under this provision.
But Judge Chang said that, even if that is the case, those plaintiffs still cannot tap into the civil authority coverage because they have not alleged the stay-at-home orders barred them from accessing their properties.
"The civil authority coverage is not triggered by mere 'loss of' property; there must be 'prohibited' access," the judge wrote.
The contamination provision, meanwhile, extends coverage for a policyholder's lost business income and cleaning costs if it is forced to suspend operations due to contamination to "premises, machinery, or equipment." Here, Judge Chang said, neither the Big Onion plaintiffs nor Valley Lodge made a "particularized factual argument that one or more of them has been closed due to actual COVID-19 contamination."
As for the sue-and-labor clause invoked by the Rising Dough plaintiffs — which states the policyholder must take "all reasonable steps to protect the covered property from further damage, and keep a record of ... expenses necessary to protect the covered property" — Judge Chang found it does not provide a separate grant of coverage, but rather "sets forth what the insured must do if there is coverage."
"Nothing about the clause sets forth a duty to pay on Society's part," he wrote.
Judge Chang set the next status hearing in the MDL for March 9, to "give the parties time to confer over the proposed next steps of the case, including an efficient and speedy discovery schedule."
Society spokeswoman Rebecca Kollmann told Law360 in an email that the order "correctly found no coverage under the civil authority, contamination and sue & labor provisions" but added that the insurer is "disappointed that the court allowed the claims for business-interruption coverage to survive early motions to dismiss and for summary judgment."
"The company is exploring its options," she said. "This is an early, preliminary ruling, and does not resolve the merits. Society will continue to vigorously defend its interests in the litigation."
W. Mark Lanier of The Lanier Law Firm PC, who serves as co-lead counsel for the policyholder plaintiffs, said in an email that "Judge Chang's well-reasoned opinion sustains critical causes of action that should drive insurance companies to resolve these cases."
"He also indicates judicial concerns that the cases move forward rapidly, which is vital to our clients' survival," Lanier said.
Adam J. Levitt of DiCello Levitt Gutzler LLC, who is also one of the plaintiffs' co-lead counsel, added that the ruling is significant both because it is the first decision on dispositive motions in the Society MDL and because it could prove influential in other business interruption cases.
"Judge Chang's comprehensive and well-reasoned analysis of each of the critical issues will not only facilitate the efficient progress of the Society MDL toward trial, but it should also assist judges across the United States who are presently dealing with similar issues," he said. "Indeed, we believe that Judge Chang's ruling should give any other judge pause before dismissing a COVID-19 [business interruption] case on the 'direct physical loss or damage' issue."
The policyholders are represented by co-lead counsel Adam J. Levitt of DiCello Levitt Gutzler LLC, W. Mark Lanier of The Lanier Law Firm PC, Timothy W. Burns of Burns Bowen Bair LLP, Shelby Guilbert Jr. of McGuireWoods and Shannon McNulty of Clifford Law Offices, as well as others.
Society is represented by co-lead counsel Thomas B. Underwood of Purcell & Wardrope Chtd. and Laura A. Foggan of Crowell & Moring LLP, as well as others.
The case is In Re: Society Insurance Co. Business Interruption Protection Insurance Litigation, MDL number 2964, in the U.S. District Court for the Northern District of Illinois, Eastern Division.
--Editing by Marygrace Murphy.
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