Celeste Bott | March 24, 2021
Society Insurance Co. asked an Illinois federal judge Tuesday to allow it to immediately appeal his February refusal to dismiss policyholders’ claims for COVID-19 business interruption losses, saying the question of whether a loss of use of property constitutes a “direct physical loss” is a pressing legal question that warrants quick appellate review.
Ruling in three bellwether cases in multidistrict litigation over the insurer’s widespread denial of pandemic-related coverage, U.S. District Judge Edmond E. Chang last month allowed a slew of restaurants, bars and theaters to pursue claims that Society wrongfully denied them coverage, but his decision on “direct physical loss” is a minority position, increasing the likelihood that it won’t stand on appeal, the insurer argues.
The majority of courts applying Illinois law have found that a loss of use or function of property does not constitute a direct physical loss “of” or “to” that property, Society said. And of 69 dispositive motions filed by insurers in COVID-19 business interruption lawsuits involving policies that do not contain a virus exclusion, 58 insurer motions have been granted and only 11, including the three decisions issued by Judge Change, have been denied, it said.
“Clearly, there is a substantial ground for difference of opinion, as well as a substantial likelihood that the question will ultimately be resolved in a manner that is inconsistent with this court’s ruling,” Society said in its bid for interlocutory appeal.
Should the Seventh Circuit reverse, the plaintiffs would need to show they suffered a “direct physical loss of or damage to covered property” through different means, changing the scope of discovery and increasing the chances of resolving the litigation prior to trial, the insurer said.
And resolving whether “direct physical loss of” covered property encompasses a loss of use would materially advance the litigation, Society said. Letting the appellate court address the matter now, before too much time and money has been spent, would be more efficient, the insurer said.
“A reversal of this court’s order will either end the litigation or, at a minimum, significantly limit the number of plaintiffs whose claims will go to trial and the scope of any discovery and damages,” Society said. “Finally, even if the Seventh Circuit affirms this court’s opinion, it will provide the parties a much clearer picture of the value of the case.”
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.
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.
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.