Franchisee 101: McDonald’s Cooks Up COVID-19 Insurance Coverage

Lewitt Hackman

An insurance coverage case brought by McDonald’s and two of its franchisees (collectively, “McDonald’s”), raised a novel question in Illinois state court. The question was whether or not costs to comply with a mandatory injunction related to the COVID-19 pandemic are bodily injury damages triggering the insurance company’s duty to defend claims.

In the underling lawsuit employees claimed public nuisance and negligence for McDonald’s keeping its restaurants open during the pandemic without sufficient new health and safety practices. McDonald’s policy was that employees and managers could take off their masks and stand within six feet of each other but not in excess of 10 minutes. McDonald’s face covering and distancing policy conflicted with the Illinois governor’s executive order and CDC guidance. Some McDonald’s restaurants did not successfully enforce the policy, which resulted in employees wearing their masks below their nose and mouth or not at all, due to the “10-minute” rule.

Plaintiff employees sought an injunction requiring McDonald’s to provide adequate personal protective equipment, preclude reuse of face masks, supply hand sanitizer, require customers to wear face masks, monitor employee COVID-19 infections, and provide employees with accurate information about COVID-19. In June 2020, the court granted a partial preliminary injunction that required McDonald’s to train employees on social distancing and to enforce mask wearing policies.

McDonald’s claimed its general liability insurance policies covered increased compliance costs as damages due to bodily injury. The insurance company argued that McDonald’s claims did not equate to damages “because of” bodily injury. The court disagreed. The mandatory injunction plaintiffs sought would cause McDonald’s to spend money to prevent continuous exposure to the COVID-19 virus and McDonald’s would not have to pay such damages “but for” or “because of” employees contracting the virus which caused bodily injury. Under Illinois law, “exposure to potentially harmful contaminants” can be bodily injury “even without manifestations of sickness or disease.” The insurance company therefore had a duty to defend McDonald’s in the underlying case.

Government mandated closures and restrictions imposed on franchisors and franchisees to combat the pandemic led to economic losses to many businesses. That led to insurance claims on business interruption and other policies. In most cases, losses due to the pandemic were denied as policy exclusions. Franchisors and franchisees should be aware of the implications of this case, which may provide a roadmap to obtain insurance coverage for certain types of pandemic related expenses.

McDonald’s Corporation, McDonald’s USA, LLC, Lexi Management, LLC, and DAK4 LLC, Plaintiffs v. Austin Mutual Insurance Company, Defendant., U.S. District Court, N.D. Illinois, ¶16,820, (Feb. 22, 2021)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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