CHICAGO — A federal appeals panel upheld rulings in favor of an insurance company that denied coverage to three businesses that either closed or scaled back their business, losing much money, as a result of COVID-related restrictions imposed by Gov. JB Pritzker.
The U.S. Seventh Circuit Court of Appeals issued an opinion Dec. 9 on appeals from Sandy Point Dental, Bend Hotel Development and TNJB, which each sued Cincinnati Insurance Company, on their own behalf and as attempted class action. The U.S. District judges who had ruled in favor of the insurance company in those cases were Robert Gettleman, Elaine Bucklo and David Dugan.
Seventh Circuit Judge Diane Wood wrote the panel’s opinion; Judges Daniel Manion and David Hamilton concurred. Wood explained the Seventh Circuit is the fifth federal appeals court, after the Sixth, Eighth, Ninth and Eleventh circuits, to answer essentially the same question in favor of the insurer.
Illinois Gov. JB Pritzker
“No one doubts that the COVID-19 pandemic has inflicted enormous losses on businesses, large and small, throughout the country,” Wood wrote, adding that each plaintiff “was required to close or dramatically scale back its operations in response to a series of executive orders” from Pritzker.
However, because the policy language in each business’ contract with Cincinnati Insurance included coverage for lost income connected to “direct physical loss” to the covered property, the judges determined the company was within its rights to deny coverage absent proof that COVID-19 directly caused a physical loss.
Sandy Point Dental, of suburban Lake Zurich, suspended elective and routine dental procedures, which constituted 95 percent of its business, Wood said, while TNJB, of downstate Belleville, closed its two s 4202 Main Street Brewing Company restaurants to in-person dining. Bend Hotel, of East Moline, limited restaurant services to delivery and takeout and, the panel presumed, suffered a reduction in room rental.
When Gettleman ruled in favor of the Cincinnati Insurance against Sandy Point, he said the legal question boils down to an interpretation of policy language:
“The critical policy language here — ‘direct physical loss’ — unambiguously requires some form of actual, physical damage to the insured premises to trigger coverage,” Gettleman wrote in September 2020. “The words ‘direct’ and ‘physical,’ which modify the word ‘loss,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons extraneous to the premises themselves, or adverse business consequences that flow from such closure.
“Plaintiff simply cannot show any such loss as a result of either inability to access its own office or the presence of the virus on its physical surfaces…”
The Seventh Circuit agreed with that position, rejecting the businesses’ “competing (and more expansive) interpretation,” Wood wrote. The businesses attempted to distinguish between physical damage and loss of access or use, and while the panel agreed it is possible to read the terms as such, the word “direct” in the policy language is “most sensibly read” as an adjective modifying both “loss” and “damage” in favor of the insurer.
“Cincinnati proposes, and many courts have adopted, a reading that better accounts for both the disjunctive and the word ‘physical’: the word ‘loss’ may refer to complete destruction while ‘damage’ connotes lesser harm that may be repaired,” Wood wrote. “But because the businesses’ properties were neither destroyed nor damaged in a way that called for repairs, this option does not help them.”
The businesses also argued their policies expressly include incidents like nuclear reactions or radioactive contamination, a list that doesn’t include viruses, which they said means “direct physical loss” is a broader term than Cincinnati insists. They also pointed to other legal decisions involving things like asbestos and termites, all of which failed to persuade the panel.
“The problem with this argument lies in its premise,” Wood wrote. “Every exclusion to which the businesses can point does involve something that causes a physical alteration to property.”
Ultimately, the panel said the most the businesses could show is that Pritzker’s orders limited their preferred use of their buildings, and partial loss of use isn’t a “direct physical loss.”
Turning to each plaintiffs’ individual claims, the panel said Sandy Point failed to support its allegation the presence of the virus altered the building’s physical structure. It said Bend’s “complaint suffers from many of the same deficiencies” and rejected TJBC’s argument that COVID-19 altered the “premises” because that term incorporates the air in its restaurants and not just the physical components.
The panel affirmed dismissal of all three complaints and also denied Sandy Point’s motions for a reconsideration and leave to amend its complaint.
Charles Silverman, of Skokie, represented Bend Hotel.
Attorney Jonathan Lubin, of Skokie, represented Sandy Point.
TNJB was represented by attorneys Ted N. Gianaris, Eric S. Johnson and G. Michael Stewart, of Simmons Hanly & Conroy, of Alton.
Attorney Brian M. Reid, of the Chicago firm of Litchfield Cavo, defended Cincinnati Insurance.