Two Appellate Court Panels Reject Business Coverage For COVID-19

By Don R. Sampen, published, Chicago Daily Law Bulletin, April 5, 2022

Two Illinois Appellate Court decisions recently rejected insured restaurants’ claims for business interruption coverage based on Gov. J.B. Pritzker’s executive orders suspending on-premises consumption of food or beverages due to the COVID-19 pandemic.

The cases are Lee v. State Farm Fire & Casualty Co., 2022 IL App (1st) 210105 (1st Dist. March 21), and Sweet Berry Café, Inc. v. Society Insurance, Inc., 2022 IL App (2d) 210088 (2d Dist. March 15). In Lee, the insureds, Hyun Lee and Jaewook Lee, owners of the Evanston Grill in Evanston, were represented by Loftus & Eisenberg Ltd., of Chicago. Faegre Drinker Biddle & Reath LLP of Chicago represented the insurer, State Farm. In Sweet Berry Café, the restaurant, located in South Elgin, was represented by numerous counsel, including Michael Rathsack and Romanucci & Blandin LLC of Chicago. Purcell & Wardrope Chartered of Chicago represented the insurer, Society.

Lee v. State Farm

The Lees contended they suffered business income losses and incurred extra expense as the result of the governor’s March 16, 2020 closure order, in the amount of $100,000 in April 2020 alone. They submitted a claim for the loss to State Farm, which it denied the same day.

The property coverage policy issued by State Farm contained two main provisions relevant to the claimed loss. One was the “Loss of Income” section, which stated:

“We will pay for the actual ‘Loss of Income’ you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by accidental direct physical loss to property at the described premises. The loss must be caused by a Covered Cause of Loss.”

The “covered causes of loss” insured against were “accidental direct physical loss to Covered property.”

The second provision was an exclusion that excluded coverage for any “virus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Upon denial of their claim, the Lees brought suit for declaratory relief, breach of contract and bad-faith denial of coverage. The trial court dismissed for failure to state a claim, and the Lees brought this appeal.

In an opinion by Justice Mary Ellen Coghlan, the 1st District affirmed. She began her analysis by addressing the Lees’ main argument on appeal, which was that the loss of use of their property constituted a direct physical loss to covered property.

Coghlan observed that although “covered cause of loss” was defined in the policy to include “direct physical loss,” the term “physical loss” was undefined. She took note that an avalanche of insurance claims had been made in the wake of the pandemic, but said she was most persuaded by the reasoning in Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327 (7th Cir. 2021), which found against coverage under similar policy language.

In doing so, the Sandy Point court looked to Travelers Insurance Co. v. Eljer Mfg., 197 Ill.2d 278 (2001). In that case, the Illinois Supreme Court addressed similar language and concluded that “physical injury” meant “an alteration in appearance, shape, color or in other material dimension.”

So defined, Coghlan wrote that “physical injury” did not include intangible damage to property such as economic loss. She viewed the Evanston Grill loss, moreover, as an economic loss and not a physical loss to covered property. As such, she found that the trial court properly dismissed the complaint.

Moreover, said Coghlan, dismissal of the declaratory judgment action also was called for under the virus exclusion. She found unavailing the restaurant’s argument that the business losses arose from the governor’s orders, not the virus.

Sweet Berry Café v. Society

The Society policy contained a “Business Income” section very similar to State Farm’s “Loss of Income” section quoted above, and the 2nd District’s analysis of that language followed a similar approach. It did so despite the absence of a virus exclusion in the Society policy.

As in Lee, Society denied coverage under its Businessowners Policy issued to Sweet Berry Café, and the Café filed suit for coverage. The trial court granted Society’s motion for judgment on the pleadings, and Café appealed.

Justice Ann Brackley Jorgensen wrote the opinion affirming. She found that the Society policy requires a physical alteration or substantial dispossession, not merely loss of use, which is what the Café pleaded it experienced.

A covered cause of loss, moreover, contemplated a direct physical loss, and, under Travelers v. Eljer intangible damage, such as diminution in value, was not sufficient.

The Café nonetheless argued that its damage was akin to damage from asbestos or noxious gas, which some cases had found to constitute physical loss. Jorgensen disagreed, and relied on Sandy Point to find that, even if the virus was present at the Café, no property damage existed that needed to be repaired or replaced, because the virus could easily be removed by cleaning or disinfecting.

Jorgensen also relied on the “period of restoration” provision of the policy, which defined the time period during which business income losses would be paid. That provision likewise contemplated a physical alteration of the property, and not mere loss of use, because it referenced the repair, rebuilding or replacement of damaged property.

She further rejected the Café’s argument that the governor’s order itself caused tangible loss of use. The order, she wrote, was not connected to any change in the physical condition of the premises.

Finally, Jorgensen cited to many federal courts of appeals decisions that reached the same conclusion she did. While some federal district court cases did find coverage, she said they ignored the plain and ordinary meaning of the “direct physical loss” requirement.

Hence, both the 1st and 2nd District Appellate Court affirmed the trial court rulings in favor of the insurers and against COVID-19 coverage.

Key Point

Business interruption coverage keyed to “direct physical loss” does not extend to business closures resulting from gubernatorial executive orders limiting business operations due to the COVID-19 pandemic.