(Article from Insurance Law Alert, December 2021)
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This month, the Seventh Circuit dismissed four policyholder suits seeking coverage for business losses incurred in the wake of government shutdowns aimed at slowing the spread of COVID-19. The Seventh Circuit is the fifth federal appellate court to rule in insurers’ favor in such suits.
In Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 2021 WL 5833525 (7th Cir. Dec. 9, 2021), a consolidated opinion resolving three separate appeals, the Seventh Circuit ruled that a dental group and hotel operators failed to allege direct physical loss or damage to property and were therefore not entitled to coverage under Cincinnati’s commercial property policies.
Noting the absence of state law precedent, the court predicted that the Illinois Supreme Court would not find that a loss of use of property sufficed to meet the “direct physical loss” policy requirement. The court emphasized that the policies were “replete with textual clues that reinforce the conclusion that ‘direct physical loss’ requires a physical alteration to property,” such as clauses referring to “restoration” of property.
The policyholders alleged that the virus rendered the property unsafe or unfit for its intended use and therefore caused physical property damage. The court ruled that these allegations were insufficient to allege direct physical loss, emphasizing that the policyholders were able to perform some business operations during the shutdown period. The court also ruled that amending the complaint would be futile because even if the policyholder alleged that the virus was present and physically attached itself to surfaces, the complaint would still fail to allege that the virus altered the physical structures to which it attached.
The court distinguished decisions in which courts ruled that the presence of other substances at insured property (e.g., asbestos or harmful gas) satisfied the physical loss requirement, noting that those cases “led to more than a diminished ability to use the property.” The court explained that in those cases, “the contamination made the premises ‘uninhabitable’ or ‘unfit for normal human occupancy’ . . . thus barring all uses by all persons.” In the COVID-19 context, however, the policyholders’ preferred uses of insured premises were “partially limited” at most.
In two other decisions, the Seventh Circuit affirmed dismissal of coverage suits based on the reasoning set forth in Sandy Point, but also held that policy exclusions provided a second basis for dismissal. In Cresent Plaza Hotel Owner, L.P. v. Zurich Am. Ins. Co., 2021 WL 5833485 (7th Cir. Dec. 9, 2021), the court also held that coverage was unavailable based on a microorganism exclusion. The exclusion applied to loss “directly or indirectly arising out of or relating to: mold, mildew, fungus, spores or other microorganism of any type, nature, or description, including but not limited to any substance whose presence poses an actual or potential threat to human health.” The court ruled that the exclusion was unambiguous and that the virus qualified as a microorganism. In so ruling, the court noted the broad exclusionary language (“of any type, nature or description”) and its application to any substance that poses a potential threat to health. The court rejected the assertion that the inclusion of a specific communicable disease exclusion in a later policy amounted to a “tacit admission” that the policy at issue did not exclude losses caused by viruses.
Similarly, in Bradley Hotel Corp. v. Aspen Specialty Ins. Co., 2021 WL 5833486 (7th Cir. Dec. 9, 2021), the court held that exclusions relating to “loss of use” and “ordinance or law” provided independent bases for upholding coverage denials, separate and apart from the Sandy Point reasoning. One exclusion barred coverage for loss or damage caused by “[d]elay, loss of use or loss of market.” The other applied to loss caused directly or indirectly from “[t]he enforcement of or compliance with any ordinance or law: (1) Regulating the construction, use or repair of any property.” The court concluded that both exclusions applied, noting that the insured hotel’s COVID-19-related losses stemmed precisely from “loss of use” and that the local executive closure orders were “ordinances” or “laws” that regulated the “use” of property. Declining to address the “difficult and esoteric” question of what actions qualify as “law” in the abstract, the court explained that the “executive orders here had the force of law and could be enforced with coercive sanctions against private businesses and persons.”
Finally, in Mashallah, Inc. v. West Bend Mutual Ins. Co., 2021 WL 5833488 (7th Cir. Dec. 9, 2021), the Seventh Circuit upheld dismissal of a COVID-19-related coverage suit involving two policies based on virus exclusions. One policy barred coverage for loss or damage “caused directly or indirectly” by “[a]ny virus . . .that induces or is capable of inducing physical distress, illness or disease.” The exclusion in the other included similar language, but omitted the phrase “directly or indirectly.” The district court bypassed the issue of whether the complaints alleged direct physical loss or damage, ruling that the exclusions foreclosed any possibility of coverage.
On appeal, the Seventh Circuit rejected the policyholders’ argument that the losses were caused by the orders rather than the virus, stating:
The complaint’s attempt to decouple the government COVID-19 orders from the COVID-19 virus itself [is] untenable. . . . [T]here can be no honest dispute that the coronavirus was the reason these orders were promulgated. It was, so to speak, the prime mover. The causal relationship between the novel coronavirus, the COVID-19 pandemic, the government orders, and the alleged losses and expenses “is not debatable.”
The court also rejected the assertion that the virus must be physically present on the insured property in order for the exclusion to apply, noting that the policy language did not support such an interpretation.