Illinois Lawsuits Challenge Society Insurance’s Coronavirus Claim Denials

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Two lawsuits have been filed in federal court in Illinois by a group of businesses — who were forced to close their operations by government authorities as a result of the COVID-19 pandemic — over the denial of business interruption claims by a Wisconsin-based insurer. Both were filed in the U.S. District Court for the Northern District of Illinois, Eastern Division.

The plaintiffs in Big Onion Tavern Group LLC et al. v. Society Insurance Company (No. 1:20-cv-02005) are separate businesses. However, they all operate in the Chicago area and they all purchased business interruption insurance from Society Insurance. The plaintiffs are Big Onion Tavern Group LLC; Beercade LLC; Machine 1846 LLC; The New 400 LLC; Harper Theater LLC; Welcome Back LLC; Legacy Hospitality LLC; McBrides Aurora Inc.; McBride’s Pub Inc.; McBride’s on 52 Inc.; Homeslyce Is Where The Heart Is LLC; 3458 Norclark Restaurant LLC; Happy Camper Pizzeria LLC; and 1913 Northco LLC.

The plaintiffs in Billy Goat Tavern I et al. v. Society Insurance (No. 1:20-cv-2068), which also purchased business insurance from Society Insurance, are Billy Goat Midwest Llc; Billy Goat North Ii Inc., Billy Goat Vi Inc., Billy Goat Inn Inc., Billy Goat Tavern West Llc, all doing business as Billy Goat Tavern. The Billy Goat operations are affiliated, but the suit also is pursuing class action status seeking to represent all similarly situated businesses in Illinois.

The lawsuits are similar to those previously filed by Thomas Keller, owner of the French Laundry and the Bouchon Bistro in Napa Valley, California, against a unit of The Hartford, and by the Oceana Grill in New Orleans against a Lloyd’s of London insurer. Those actions challenge the argument by insurance defense attorneys that business interruptions in reaction to the coronavirus are not covered losses under most business insurance policies.

Society Insurance is a Fond du Lac, Wisconsin-based insurer that has a focus on bars, taverns, hospitality, restaurants, entertainment venues and other specialty niches.

Closures

Illinois Gov. J.B. Pritzker on March 15 ordered all restaurants, bars, movie theaters, etc. closed to help prevent the spread of COVID-19. On March 20, he ordered the closure of all nonessential businesses.

Both the Big Onion and Billy Goat suits seek coverage under commercial business insurance policies, “which provide coverage for losses incurred due to a ‘necessary suspension’ of their operations, including when their businesses are forced to close due to a government order,” as stated in the Big Onion lawsuit. They claim breach of contract, among other things, and seek declaratory relief.

The suits maintain that the Society Insurance policies promise to cover their losses when the government forces closure interruption of their businesses.

Both suits also point out that the plaintiffs’ Society Insurance policies do not exclude contamination due to communicable diseases and/or viruses. “If Society Insurance had wanted to exclude pandemic-related losses under the Plaintiffs’ policies — as many other insurers have done in other policies — it easily could have attempted to do so on the front-end with an express exclusion,” the Big Onion lawsuit states.

The Big Onion lawsuit additionally alleges that Society Insurance issued blanket denials of plaintiffs’ claims for business interruption losses that have resulted from the governor’s closure orders “often within hours of receiving Plaintiffs’ claims — without first conducting any meaningful coverage investigation, let alone a ‘reasonable investigation based on all available information’ as required under Illinois law.”

Attorney Christopher J. O’Malley, who represents the Chicago plaintiffs, told Insurance Journal affiliate, Claims Journal, that one of his clients received notice that his claim was denied even before he filed it. O’Malley said the business owner’s insurance agent filed the claim on his customer’s behalf and Society called the policyholder directly.

According to the Big Onion lawsuit, Society’s CEO Rick Parks issued a memorandum to “agency partners” saying that under Illinois law the policies would likely not cover such stoppages. That memo, obtained by Insurance Journal, advises agents that “while the current circumstances are unlikely to result in facts that support first-party coverage under our policies, or liability to a policyholder, we encourage any policyholder or third-party claimant who wishes to present a claim to do so.”

The memo also states: “Whether it be a full shutdown of business, a partial suspension of operations or an alteration in business operations that remain open, Business Income coverage must be due to a suspension caused by direct physical loss of or damage to covered property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. Extra Expense coverage also requires the same coverage triggers. In general, a quarantine of any size, or brought about by a governmental action without a Covered Cause of Loss, would likely not trigger Business Income or Extra Expense coverages under our policies.”

Big Onion, however, challenges Society Insurance’s conclusion that the “actual or alleged presence of a substance like COVID-19 does not result in property damage,” a condition for triggering coverage for business interruption under the commercial insurance policies. The Big Onion suit maintains that “Illinois courts have consistently held that the presence of a dangerous substance in a property constitutes ‘physical loss or damage.’”

The Problem

The problem for the restaurants and taverns is that the vast majority of business interruption policies sold by insurers do not cover business income losses unless the insured premises are physically damaged by an event precipitating the claim. While the Big Onion and Billy Goat suits say their policies don’t have one, most BI policies do exclude communicable diseases.

Thus, the restaurants and bars are asking the industry to pay for losses their contracts do not cover.

Industry experts say it would be highly unusual for a business to have a custom policy that waives the physical damage requirement, or lacks a customary communicable disease exclusion. The court filing by Oceana Grill, however, also claims that its policy does not exclude viruses and that it covers shutdowns caused by civil authorities.

Insurance Journal sister organization, Carrier Management, reported on one policy exception: PathogenRX, a parametric insurance product developed by Marsh, Munich Re and Metabiota and launched in May 2018. It was designed to provide business interruption insurance in the event of a pandemic. But, as Carrier Management reports, no company bought the policy. Demand is soaring now.

The nation’s restaurants stand to lose at least $275 billion and shed as many as 7 million jobs over the next three months due to the coronavirus, the industry told lawmakers recently in appealing for help.

Before the giant relief measure, the $2.2 trillion CARES Act, was passed last week, the National Restaurant Association wrote to President Trump and congressional leaders outlining steps it hoped Washington would take to provide aid for the nation’s one million restaurants and 15.6 million employees.

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