The Franchise Memorandum

A federal court in Illinois has recently concluded that an insurer may have a duty to cover a franchisor’s costs of defending a COVID-19-related injunction. In McDonald’s Corp. v. Austin Mutual Insurance Co., (N.D. Ill. Feb. 22, 2021), McDonald’s claimed that Austin Mutual had a duty to defend McDonald’s in an ancillary case brought by employees of a McDonald’s franchisee alleging McDonald’s was liable for public nuisance and negligence as the result of its decision to allow its franchisee to remain open during the COVID-19 pandemic without enhanced health and safety standards. Austin Mutual moved to dismiss McDonald’s complaint.

The issue before the court was whether costs incurred by McDonald’s to comply with a mandatory injunction sought by the employees to protect against COVID-19 infection would constitute “damage” “because of” “bodily injury,” as those terms were used in the policy. In its motion to dismiss, Austin Mutual argued that the employees’ claims were not covered because the policy was intended to cover damages paid to a third-party — not expenses incurred by the insured. The court found that “[a]n insurer can only refuse to defend if the allegations of the underlying complaint preclude any possibility of coverage.” It then reasoned that if the employees were granted the sought-after injunction (resulting in necessary expenditures by McDonald’s), it would only be because the employees had contracted or would be exposed to COVID-19, both of which would constitute “bodily injury.” The court therefore determined that McDonald’s complaint raised “a potential and legally defensible interpretation” of the policy, and denied Austin Mutual’s motion to dismiss.