Defendants call plaintiffs’ business interruption coverage win an outlier

A federal judge’s denial of Society Insurance’s attempt to throw out three pandemic related business interruption lawsuits in a multidistrict litigation will have a major impact on similar cases nationwide, plaintiffs’ attorneys said Thursday. But for defense attorneys the ruling is an outlier.

In it’s dismissal motion, Society argued business interruptions due to a government ordered closure should not be considered a “direct physical loss.”

However U.S. District Judge Edmond Chang in Chicago, ruling Monday on the three bellwether cases consolidated by the Judicial Panel on Multidistrict Litigation, said the motion failed primarily because of a two-letter word in the policy: “or.”

“Remember here that the operative text is ‘direct physical loss of or damage to covered property,” Chang wrote in his opinion. “The disjunctive ‘or’ in that phrase means that ‘physical loss’ must cover something different from ‘physical damage.’”

Like all insurers during the pandemic, Society denied coverage arguing the coronavirus did not cause tangible physical damage to the properties like a fire or flood would.

Chang said it was important to note the policies in question did not include virus exclusions that would preclude a policyholder from coverage in the event of a virus-induced business closure.

Plaintiffs’ attorney William M. Shernoff of Shernoff Bidart Echeverria LLP said he thinks the ruling will have a major impact on the thousands of business interruption lawsuits nationwide.

“[Insurers] don’t want to admit that the language says ‘physical damage or loss.’” Shernoff said in an interview Thursday. “And like this court said, they don’t define ‘loss’ in their policies, so the courts are defining ‘loss’ as the loss of use of the space, as this judge did.”

“I think, because it’s an MDL proceeding, that it carries more weight with other states and other federal districts, and even state courts,” Shernoff added. “I think this is a turning point in the policyholders’ favor, because the reasoning and the logic of the decision is so compelling.”

Defense attorney Andrea Warren of Sheppard Mullen said although the ruling was disappointing, it is unlikely to have a significant impact on future pandemic-related business interruption lawsuits.

“The vast majority of courts across the nation — and certainly courts in California — continue to dismiss insureds’ pandemic-related BI suits at an early stage in the litigation,” she said in an email Thursday. “Courts continue to predominantly hold that ‘direct physical loss of or damage to ‘property requires some physical, tangible alteration to property or permanent dispossession of property.’”

Warren said Chang’s opinion is in the small minority and is distinguishable from most lawsuits because among other things, Chang’s interpretation of the phrase “physical loss of” may connote something other than permanent dispossession of property, such as temporary “loss of use” of property, she said.

“California courts, and many others across the nation, have specifically rejected this concept — holding that ‘physical loss of’ unambiguously requires permanent dispossession of property,” Warren said. “Judge Chang’s ruling, therefore, would have very little impact in these jurisdictions.”

Nevertheless, Chang’s ruling opens the door for lawsuits filed by Big Onion Tavern Group, Valley Lodge Corp. and Rising Dough Inc. — restaurant groups in Illinois, Minnesota and Tennessee — to proceed to discovery. While Chang noted Society filed an interlocutory appeal, he seemed reluctant to grant it. In re: Society Insurance Co. COVID-19 Business interruption protection Litigation. MDL No. 2964 (U.S. MDL., filed Oct. 2, 2020)

“One topic of consideration is whether certification for interlocutory appeal is warranted, although the fact-bound nature of the key interpretive issue might prevent the propriety of certification,” he wrote.

Of the 1,468 business interruption suits filed thus far, policyholders have survived 35 dismissal or summary judgment motions, while insurers have succeeded in dismissing 167 suits, according to Penn Law’s COVID litigation tracker.