Judge Rules in Favor of 3 Policyholders With COVID-19 Claims in Consolidated Case

A federal judge denied Society Insurance’s motions to dismiss three “bellwether” lawsuits filed by hospitality businesses that were denied coverage for revenue lost because of COVID-19 public health orders.

U.S. District Judge Edmond Chang in Chicago, who was assigned a consolidated case by the Judicial Panel on Multidistrict Litigation, rejected an argument that government orders that restricted the use of commercial property could not be considered a direct physical loss covered by the policies. None of the three insurance policies contained a virus exclusion, as most commercial property policies do.

“Here, the scope of the term ‘direct physical loss’ is genuinely in dispute,” Chang said in the opinion released Monday. “A reasonable jury could find for either side based on the arguments and factual record presented so far in the litigation.

The decision allows lawsuits filed by Big Onion Tavern Group, Valley Lodge Corp. and Rising Dough Inc. to proceed to discovery, but is not the final word in the cases. All three of the plaintiffs were forced to modify their business operations because of government orders.

Big Onion and Valley Lodge operate in Illinois, while Rising Dough did business in Wisconsin, Minnesota and Tennessee.

Chang said that Society Insurance “preemptively and en masse” denied COVID-19 business interruption claims by circulating a memorandum with is agents on March 16, 2020 that stated a “quarantine of any size” would not trigger business income or extra expense coverages. Society then denied the plaintiffs’ separate claims, saying that a suspension of business because of a government order is not direct physical loss.

Valley Lodge and Big Onion filed suit in Illinois. Rising Dough filed in Wisconsin. The multidistrict litigation panel assigned the three cases to Chang, who is assigned to the Northern District of Illinois in Chicago.

In its motion to dismiss, Society argued that the policy language clearly did not contemplate government closure orders as a cause of covered loss because it restricts coverage to a “Period of Restoration” that ends when the property is “repaired, rebuilt or replaced.”

Chang said the argument did give him “some pause.”

“But too many textual clues point the other way,” he said in the opinion. “First and foremost, the ‘Period of Restoration’ describes a time period during which loss of business income will be covered, rather than an explicit definition of coverage.”

Chang did grant Society’s motion to dismiss the suits under grounds that coverage is owed by the civil authority and contamination provisions in the Valley Lodge and Big Onion policies and under the “sue and labor clause” of the Rising Dough policy. Those arguments cannot be brought before the jury.

Policyholders have lost most of the COVID-19 business interruption lawsuits filed so far in initial rounds. As of late Tuesday, insurers have won 174 motions to dismiss or for summary judgment while policyholders have won 42 of those motions, according to a litigation tracker maintained by the University of Pennsylvania’s Carey Law School. State and federal judges in Illinois have ruled against policyholders in 11 other cases so far, the litigation tracker shows.

A total of 1,468 lawsuits have been filed so far.

About the photo: The Valley Lodge’s Glenview, Ill. restaurant is shown. Photo courtesy of Valley Lodge.