Losses Not Covered as Physical Loss or Damage  

The Seventh Circuit, in an opinion by Judge Scudder, applying Wisconsin law, affirmed the district court’s holding that a Wisconsin healthcare system failed to state a claim for coverage beyond the $1 million it received under an additional coverage provision for communicable disease response for its COVID-19 losses. The insured, Froedtert Health (“Froedtert”), a Wisconsin-based healthcare system, made substantial investments during the start of the COVID-19 pandemic, spending around $85 million on COVID related costs while also pausing its non-emergency elective procedures. Froedtert sought to recoup the costs it incurred to maintain business operations. Factory Mutual Insurance Company (“Factory Mutual”) denied coverage under its general coverage policy provision, arguing the COVID-19 related losses did not constitute a direct physical loss that triggered the $2 billion limit of the all-risk policy. However, Factory Mutual did provide partial coverage of $1 million under an additional coverage provision for losses from “Communicable Disease Response.” 

Froedtert filed a declaratory judgment action seeking coverage for the entire amount of its losses. The United States District Court for the Eastern District of Wisconsin agreed with Factory Mutual that COVID-19 did not cause physical damage or loss to Froedtert’s insured facilities, which the all-risks policy required. On appeal, the Seventh Circuit applied a three-step process to interpret the insurance policy. Judge Scudder analyzed whether the policy provided an initial grant of coverage, whether any exclusions applied, and determined whether any portion of the policy would reinstate coverage otherwise left out by the initial grant or an exclusion.  

The policy’s grant of coverage insured Froedtert’s property up to $2 billion “against all risks of physical loss or damage, except as hereinafter excluded.” While the policy did not define physical loss or damage, the Seventh Circuit relied on a recent Supreme Court of Wisconsin case that interpreted “physical loss” requirements to exclude coverage for losses from COVID-19. See Colectivo Coffee Roasters, Inc. v. Socy. Ins., 974 N.W.2d 422 (Wis. 2022). The Seventh Circuit held that the COVID-19 losses were generally not covered because these losses did not amount to a physical loss within the meaning of Factory Mutual’s all-risk policy for “physical loss or damage.” Next, the Seventh Circuit found that the policy excluded any cost due to contamination, which the policy expressly defined to include a “virus.” Therefore, costs arising from changed property conditions caused by COVID-19, a virus, fell within the exclusion.  

The main issue in the case revolved around the policy’s “additional coverages for insured physical loss or damage,” which included a provision for “Communicable Disease Response.” This provision covered up to $1 million for the insured’s reasonable and necessary costs associated with the actual presence of communicable diseases. The paradox of the policy was that the general provision did not include COVID-19 losses as physical losses, but the policy’s additional coverages included communicable diseases as a physical loss or damage. The Seventh Circuit interpreted the additional coverage provisions not to affect the covered losses in the general grant of coverage. By practical sense approach, the Seventh Circuit read the additional coverages to “add coverage for losses not covered elsewhere within the policy.” Even if the general coverage provision alone picked up losses from COVID-19, Froedtert’s claim would still have to overcome the policy’s broad contamination exclusion, which it did not. In the end, the Seventh Circuit found that Froedtert’s erroneously relied on the additional coverage provision in isolation without reading the policy as a whole. Froedtert Health, Inc. v. Factory Mut. Ins. Co., 69 F.4^th 466 (7th Cir. June 2, 2023).