No Business Loss Coverage Because of Pandemic Closures

By Don R. Sampen, published, Chicago Daily Law Bulletin, December 15, 2020

The U.S. District Court for the Northern District of Illinois recently held that business interruption insurance coverage under an “all risk” policy issued to a Chicago tavern did not provide coverage for loss of business due to an order by the governor of Illinois closing “non-essential businesses” during the COVID-19 global pandemic.

The case is T&E Chicago LLC v. The Cincinnati Insurance Co., 2020 U.S. Dist. Lexis 217090 (N.D. Ill., Nov. 19). The insured tavern, T&E, was represented by Anderson & Wanca of Rolling Meadows. Litchfield Cavo LLP of Chicago represented the insurer, Cincinnati.

T&E, located in the Logan Square neighborhood of Chicago, was forced to close its business as the result of an order issued Gov. J.B. Pritzker on March 15, due to the COVID-19 pandemic, which order was extended several times. T&E claimed a substantial loss in revenue due to the closures.

Cincinnati had issued T&E all-risk insurance coverage including business interruption insurance in July 2019. T&E thus tendered its losses to Cincinnati, which denied coverage. Based on the denial, T&E filed this suit as a class action seeking coverage and claiming bad faith by Cincinnati.

Among other provisions, the policy required Cincinnati to pay for the loss of business income during a necessary suspension of T&E’s operations. The suspension, however, had to be caused by “direct ‘loss’ to property” resulting from a covered cause of loss. The term “loss” was defined as “accidental physical loss or accidental physical damage.”

The policy also covered business loss caused by civil authority where damage occurred to property other than the insured’s property but action by a civil authority prohibited access to the insured’s premises.

In response to T&E’s lawsuit, Cincinnati moved to dismiss based on the policy language.

Analysis

In an opinion by Judge Harry D. Leinenweber, the court granted the motion. He observed Cincinnati’s main position was that the business interruption coverage was tied to physical loss or damage to property and not losses incurred to protect the public from disease.

In response, T&E argued that the policy covered both physical loss and physical damage, which it contended should not be treated as synonymous. It further argued that the phrase “accidental physical loss” should be construed to include the insured’s loss of use of property that was previously useable.

In addition, T&E observed that the policy did not include an exclusion for virus or bacteria — which kind of endorsement came into general use in 2006 — and that, at minimum, the coverage provided should be regarded as ambiguous.

In reply, however, Cincinnati stressed that the policy language was never intended to apply to purely financial losses, required physical loss or damage to property, and, moreover, had been so construed by many cases, including two from Illinois.

Leinenweber indicated his agreement with Cincinnati and cited the two Illinois-based decisions as Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 2020 U.S. Dist. Lexis 171979 (N.D. Ill., Sept. 21, 2020), and It’s Nice, Inc. v. State Farm Fire and Casualty Co., No. 2020 L 547 (Ill. Cir. Ct., Sept. 29, 2010). He further cited a series of cases nationwide that agreed with Cincinnati’s interpretation.

In addition, Leinenweber pointed out that the specific wording of the policy — such as a suspension being caused by a “loss to” property versus a “loss of” property — supported the conclusion that loss of use without any physical change to the property could not constitute direct physical loss or damage to the property.

In light of the absence of coverage, the court granted Cincinnati’s motion to dismiss.

Key point

Business interruption coverage keyed to loss defined as “accidental physical loss or accidental physical damage” provides no coverage for business losses arising from governmental pandemic closure orders.