Court Finds No Property Coverage for COVID Business Interruption

By Don R. Sampen, published, Chicago Daily Law Bulletin, January 7, 2025

The 1st District Appellate Court recently agreed with prior case law to find that a suspension of operations due to the COVID-19 pandemic did not give rise to coverage under a commercial property insurance policy.

The case is EBNB 70 Pine Owner Restaurant v. Fireman’s Fund Insurance Co., 2024 IL App (1st) 231863 (Nov. 22). The insured, EBNB, was represented by Reed Smith LLP of Chicago. DLA Piper LLP’s Houston, Texas, office represented the insurer, Fireman’s Fund.

EBNB owned and operated a restaurant in New York. Beginning in early 2020, the pandemic prevented the company from operating its restaurant as usual, resulting in financial losses. It sought to recover under its commercial property policy issued by Fireman’s Fund.

The policy provided coverage for property damage and loss of income resulting from direct physical loss or damage to the insured’s property caused by a “covered cause of loss.” That term was defined as “direct of physical loss or damage not excluded” by the policy. The policy excluded “air” as covered property.

The policy also contained “Communicable Disease Coverage” intended to pay for “direct physical loss or damage” to insured property caused by “a covered communicable disease event.” That provision covered the necessary costs to repair insured property that had been damaged by a communicable disease and costs to remediate or clean up, remove or monitor the effects of the disease.

Upon denial of its claim by Fireman’s Fund, EBNB brought suit alleging, among other things, that the presence of the COVID-19 virus caused direct physical damage to its property and ambient air, resulting in loss of use of the property without substantial physical alteration.

Fireman’s Fund moved to dismiss, which motion was granted by the circuit court applying Illinois law, and EBNB brought this appeal.

Analysis

In an opinion by Justice Michael B. Hyman, the 1st District affirmed. He observed initially that when EBNB first filed its claim with Fireman’s Fund, Illinois courts had yet to rule on whether COVID-19-related limitations on property use constituted covered physical loss or damage. Since then the Appellate Court had issued two decisions finding no coverage: Sweet Berry Café, Inc. v. Society Insurance, Inc., 2022 IL App (2d) 210088; and Lee v. State Farm Fire & Casualty Co., 2022 IL App (1st) 210105.

Sweet Berry, moreover, wrote Hyman, relied in part on Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill. 2d 278 (2001), which held that “physical” damage to property occurs when it is “altered in appearance, shape, color or in other material dimension.” A mere diminution in value, however, is not physical damage.

In this case, Hyman found that, while EBNB alleged the COVID-19 virus caused a physical alteration to property with which it came into contact, EBNB failed to demonstrate a physical loss because it did not allege that the property needed to be physically repaired or replaced. Nor did EBNB demonstrate an altered appearance, shape, color or structure of its property.

While he acknowledged that the virus’ impact on the world could not be overstated, the virus could be wiped off surfaces using ordinary cleaning material, and it otherwise disintegrates on its own in a matter of days. Further, to the extent EBNB alleged COVID-19 altered the air in its restaurant, the policy had a provision that excluded air as covered property.

Hyman also distinguished the presence of asbestos fibers, which the Illinois courts have held constitute property damage. He said unlike the COVID-19 virus, asbestos contamination, similar to gas and smoke, renders the property unsuitable for its intended purpose. Easy remediation, moreover, is relevant to whether an insured’s property has been altered, and the impact from asbestos is so extensive that it causes the property to be unusable. This was not so with the virus.

In addition, Hyman rejected EBNB’s contention that “direct physical” in the coverage requirement of “direct physical loss or damage” modified only “loss” but not “damage.” He found that both “direct” and “physical” functioned as prepositive modifiers giving meaning to “loss” and “damage” individually. Such an interpretation was consistent with Scalia & Garner, Reading Law, The Interpretation of Legal Texts (2012).

Finally, in response to an argument that one of the parties in the case evaded the 50-page limitation for briefs in Ill. S.Ct. Rule 341(b), Hyman urged that the Supreme Court modernize the briefing rules to eliminate page limits in favor of word count limitations.

The First District therefore affirmed the granting of Fireman Fund’s motion to dismiss.

Key Points

• The presence of the COVID-19 virus does not cause direct physical loss or damage to property such as is necessary to trigger coverage for business interruption caused by the virus.
• As a matter of contract interpretation, for a phrase involving all nouns or verbs in a series, a “prepositive” or “postpositive” modifier normally applies to the entire series.