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Plaintiffs and Lawmakers Raise Bad Faith Issues in COVID-19 Claims

Posted on: April 3rd, 2020

By: Adrianna Michalska and Eric Retter

Every American is reminded daily that Coronavirus spreads easily and quickly. So has the impact on the insurance industry. How fast? Less than a month after the first U.S. death attributed to the virus on February 29, an insurer already faces a coverage and bad faith lawsuit over a COVID-19-related claim.

While the speed with which the first bad faith case arrived may be unexpected, there was little doubt such cases were coming. Other lawsuits hinted at such claims weeks ago, and state efforts to require carriers to pay business interruption claims—regardless of whether their policies actually cover such claims—may also lead to extra-contractual claims.

Restaurants are leading the charge

Several restaurants have sued their insurers, seeking declaratory judgments for potential business interruption claims in the wake of COVID-19. But Big Onion Tavern Group, LLC et. al. v. Society Insurance, Inc., filed March 27 in the Northern District of Illinois,features the first actual denial of such a claim, which prompted the boilerplate bad faith claim.

On March 15, 2020 Illinois Governor Pritzker ordered all restaurants, bars, and movie theaters to close. Executive Order 2020-07 posits that “frequently used surfaces in public settings, including bars and restaurants, if not cleaned and disinfected frequently and properly, also pose a risk of exposure.” One of the plaintiffs in the Big Onion case, Legacy Hospitality, operates a Chicago restaurant called The Vig. On March 20, Legacy asked Society Insurance to pay a claim resulting from the shutdown. Society denied the claim three days later. The denial stated that there was no direct physical loss or damage to property triggering either a business interruption or civil authority claim (Society also denied claims for spoilage and contamination in the denial letter, attached as an exhibit to the Complaint).

The other restaurant owners who are plaintiffs in the Big Onion do not attach denial letters as exhibits, but each alleges that its claims were similarly denied. All of the plaintiffs rely on an email from Society’s CEO and President dated March 16, averring that it indicates the insurer’s intent to deny all such claims without investigating them. (The last page of the email states that it is a “TEST EMAIL ONLY,” sent for the purpose of testing a draft message.)

Suits seeking declarations that these types of losses are covered have been filed in other jurisdictions. On March 30, our colleague Katie Cusack  reported on a declaratory judgment action that was filed in mid-March in a Louisiana state court by a New Orleans restaurant seeking a declaration of prospective coverage under a business interruption policy based upon events and losses that are not alleged to have occurred. [Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana].

Political pressure mounts

On the same day the Cajun Conti suit was filed, New Orleans TV station WWL4 reported that  Mayor LaToya Cantrell filed an emergency declaration in the same court. That order states that COVID-19 “caus(es) property loss and damage in certain circumstances.” If there were any doubt about her intentions to influence insurance payments, Mayor Cantrell announced that “[w]e have also been very aggressive as it relates to business interruption support and … insurance. We understand pandemic infections are not included in their insurance coverage, which makes this a priority for my administration to push for these reasons at the state and federal level.”

Mayor Cantrell is not the only politician aggressively pressuring insurers. New Jersey introduced a proposed bill in mid-March that would force insurers to cover business interruption insurance even if they expressly excluded virus and bacteria losses in their commercial property policies. Several states have proposed similar legislation, including New York, where Assemblyman Robert C. Carroll planted the notion that it would be “unconscionable” for insurers to rely on such exclusions after they received bailouts in 2008.

Massachusetts has also proposed such a law. Bill SD.2888 would construe any business interruption policy to include among the covered perils loss of use and occupancy, and business interruption directly or indirectly resulting from COVID-19. The bill would require this construction even when the policy contains express language excluding any losses “on account of (i) COVID-19 being a virus . . . ; or (ii) there being no physical damage to the property of the insured or to any other relevant property.”

Proponents of the Massachusetts bill go a step further by trying to tie the bill to Chapter 176D of the General Laws. Chapter 176D concerns Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance. Along with Chapter 93A, it provides relief for bad faith handling of insurance claims. Together, the statutes allow for possible recovery of attorneys’ fees and even double or treble damages for knowing and willful violations.

To date, no state has yet passed bills into law that seek to override policy provisions precluding coverage for business interruptions claims associated with COVID-19. FMG will continue to monitor these bills along with other political efforts that impact the insurance industry and the construction of such provisions in particular.

The FMG #Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis. Topics include employment issues, the real-world impact of business restrictions, education claims and more.

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis. Topics include employment issues, the real-world impact of business restrictions, education claims and more. Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**

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