Illinois Judge Dismisses Class Action Lawsuit against Insurance Company over Denial of COVID-related Lost Income Claims

Insurance company State Farm is breathing a little easier after a Cook County judge recently dismissed a putative class action lawsuit filed against the insurer by the owner of an Evanston restaurant over the insurer’s denial of loss of income claims. In the complaint, the restaurant alleged that it and other restaurants suffered hundreds of thousands of dollars in lost income, resulting from state-ordered closures in response to COVID-19. The restaurant alleges that it filed a business interruption claim with State Farm who denied coverage.

Following denial of the claim, the restaurant filed suit against the insurer. In response, State Farm asked the court to dismiss the claims against it. In arguing for dismissal, State Farm asserted two arguments. First, it argued that an “accidental direct physical loss” to the covered property, required for coverage, had not occurred. Second, it argued that coverage was excluded by the “Fungi, Virus or Bacteria” Exclusion to the plaintiff’s policy, which excluded from coverage losses due to “[v]irus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

In arguing that the physical loss trigger to coverage had not been met, State Farm relied on the 2001 Illinois Supreme Court’s opinion in Travelers Insurance Co. v. Eljer Manufacturing Inc. that a “physical” loss must include alterations in “appearance, shape, color or in other material dimension.” As a result, State Farm contended, economic losses from COVID-19 are legally distinct from physical losses and not covered by the plaintiff’s policy. In other words, simply being deprived of physical access to a restaurant building is insufficient to trigger coverage, even if the closure was by order of the Governor.

The restaurant argued that coverage should be extended because the policy is an “all-risk” policy, meaning State Farm was obligated to cover all risks of loss not specifically excluded by the policy. This specific loss was not excluded, the plaintiff contended. The restaurant further argued that the phrase “accidental direct physical loss” was not defined in the policy and thus subject to its plain, ordinary meaning. According to the plaintiff, the “loss” of the use of its in-restaurant dining areas was undoubtedly “physical” as the dining rooms are composed of square footage and material, physical, tangible objects (like chairs, tables, dispensers, and utensils) that are perceptible to the senses and interactive. The plaintiff also attempted to persuade the Court that reliance on the Illinois Supreme Court’s opinion in Travelers Insurance Co. was misplaced as the case interpreted the term “property damage” rather than a “physical loss.” The restaurant opposed dismissal arguing that the “Fungi, Virus or Bacteria” Exclusion did not apply because the losses were not caused by the coronavirus itself but by the governor’s closure orders.

The Court found these arguments unpersuasive. The Court found that the Travelers Insurance Co. ruling applied and required an alteration in “appearance, shape, color or in other material dimension” to the covered property. This, the Court held, excluded purely economic losses such as those suffered by the plaintiff. The Court also rejected the argument that the loss was not caused by a virus pointing out that the Governor’s orders came in response to the COVID-19 virus. No COVID-19, no closure orders, no losses, the Court reasoned. As such, the Court found that State Farm met its burden of establishing that the exclusion applied under the plaintiff’s policy. The Court also sided with the trial court’s denial of leave to amend the complaint reasoning that amendment could not overcome these obstacles. It remains to be seen whether State Farm’s win will last as the plaintiff has appealed the Court’s dismissal.

The Court’s order granting dismissal can be found here.

We have previously covered the ongoing developments in lawsuits concerning insurance companies’ denials of COVID-19-related losses here, here, and here. We will continue to monitor and report on these cases as further developments unfold. We are assisting a number of businesses across a wide range of industries by reviewing their policies to see whether coverage is available for business interruption losses arising out of COVID-19. If you are a business owner who is considering filing a business interruption claim or has already filed a claim and been denied, please contact us for a free consultation.

Super Lawyers named Chicago and Elmhurst business litigation and insurance dispute attorneys Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago commercial litigation lawyers have over thirty-five years of experience litigating complex commercial litigation, declaratory judgment, and bad faith disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenants not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits in addition to disputes involving breaches of fiduciary duty. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. From offices near Naperville and Wheaton, we serve clients throughout Illinois and the country. To set up a consultation with one of our Chicago class action attorneys and Chicago business trial lawyers, please call us locally at 630-333-0333 or contact us online.

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