Clausen Miller Secures Dismissal in Illinois Northern District COVID-19 Coverage Suit

Clausen Miller president Dennis D. Fitzpatrick, shareholder Margaret Hupp Fahey and partner Charles W. Deutsch successfully secured a dismissal on behalf of their insurer client in a pandemic-related loss claim brought by an aircraft supplier.

On April 30, 2024, in American Aero Group, LLC, v. Zurich American Insurance Company, No. 23 CV 1861, the U.S. District Court for the Northern District of Illinois, Eastern Division, granted Zurich American Insurance Company’s (Zurich’s) motion to dismiss American Aero Group’s (AAG’s) claim for physical loss or damage to airplane parts from loss of access due to COVID-19 after finding the company did not sufficiently allege direct physical loss.

During the COVID-19 pandemic in 2020, worldwide shutdown orders resulted in disruptions for many businesses’ operations, including those of VAS Aero Services, a leading aviation parts supplier and AAG’s predecessor-in-interest.

AAG alleged that VAS’ employees were barred from accessing its stock by the shutdown orders and that the supplier’s inability to access aviation parts due to these shutdown orders constituted a “loss” under an insurance policy issued by Zurich. VAS filed a corresponding claim.

Under the policy, Zurich is required to insure the “direct physical loss of or damage to covered property caused by a Covered Cause of Loss to Property,” with a “Covered Cause of Loss” defined as “[a]ll risks of direct physical loss of or damage from any cause unless excluded.”

Zurich denied VAS’ claim, arguing that COVID-19 had not caused physical damage to the supplier’s property, and, even if it had, recovery was barred by two policy exclusions: the “Contamination Exclusion,” which bars coverage for loss or damage caused by “any cost due to Contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy[.]; and the “Law/Ordinance Exclusion,” which bars coverage resulting from “[l]oss or damage arising from the enforcement of any law, ordinance, regulation or rule regulating or restricting the . . . occupancy, operation or other use.”

AAG subsequently filed a complaint seeking a declaratory judgment in favor of coverage, which Zurich filed a motion to dismiss.

In a December 2021 decision, the U.S. Court of Appeals for the Seventh Circuit ruled that loss of use due to pandemic-related closures does not constitute “direct physical loss or damage,” with an exception for complete physical dispossession (Sandy Point Dental PC v. Cincinnati Insurance Co.).

Accordingly, the Northern District determined that, because the government shutdowns “did not completely bar VAS’ employees from accessing its facilities” and allowed employees in certain states to enter the supplier’s facilities in order to maintain the value of its inventory, AAG’s allegations were “belied” and did not constitute an exception. The court subsequently rejected AAG’s complete physical dispossession and physical alteration arguments.

The court also held that the Law/Ordinance Exclusion in the policy barred coverage because the governmental shutdown orders fell within the plain meaning of “law” and “ordinance.”

The court granted Zurich’s motion to dismiss and allowed AAG to submit a proposed amended complaint including at least one viable federal claim by May 20, 2024.