7th Cir. Affirms Dismissal of Six Claims

The United States Court of Appeals for the Seventh Circuit, applying Illinois law, joined four other U.S. circuits in dismissing various insureds’ claim for coverage for losses stemming from the COVID-19 pandemic. In doing so, the Seventh Circuit held that the plaintiffs failed to adequately allege physical damage or loss caused by the coronavirus and that several exclusions, discussed below, would nonetheless apply to any loss. The insureds, comprising two restaurants, three hoteliers, one retailer, and one dentist’s office, each suffered severe loss of income due to the Illinois governor’s shutdown order at the outset of the COVID-19 pandemic. In each case, the Seventh Circuit upheld the lower court’s dismissal of the claims.

First, in an opinion written by Judge Wood, the Seventh Circuit joined several other courts in holding that the insureds failed to adequately allege physical damage or loss as a result of the COVID-19 pandemic. Acknowledging that Illinois’ shutdown order limited each insured’s optimal use of their property, the Seventh Circuit reminded the insureds that their policies “insured its property, not its ideal use of that property,” saying that the loss of a property’s primary use is not akin to a complete dispossession of that property. As such, the Seventh Circuit affirmed the District Court’s dismissal of the insureds’ claim for coverage. Sandy Point Dental, P.C. v. Cincinnati Ins. Co., No. 21-1186, 2021 WL 5833525 (7th Cir. Dec. 9, 2021).

The Seventh Circuit, in an opinion written by Judge Hamilton, then extended that analysis to three other cases, while also holding that certain exclusions also applied in each case. In examining a “microorganism exclusion,” which bars coverage for losses arising out of “microorganisms of any type, nature, or description… whose presence poses an actual or potential threat to human health,” the Seventh Circuit held that the virus that causes COVID-19 is indeed a microorganism as contemplated by the exclusion. Crescent Plaza Hotel Owner, L.P. v. Zurich Am. Ins. Co., No. 21-1316, 2021 WL 5833485 (7th Cir. Dec. 9, 2021).

Next, the Seventh Circuit, in an opinion also written by Judge Hamilton, found that loss of income due to government shutdown orders fell squarely within both a loss of use exclusion and a law or ordinance exclusion. The former excludes coverage for losses caused by mere loss of use, unless that loss results from a covered cause. Here, there was no covered cause of loss, so the exclusion applied. In holding that the latter exclusion applied, the Seventh Circuit found that a governor’s executive order, issued under statutory authority to protect public health, is a “law or ordinance” as used in the exclusion. Bradley Hotel Corp. v. Aspen Specialty Ins. Co., No. 21-1173, 2021 WL 5833486 (7th Cir. Dec. 9, 2021).

Finally, the Seventh Circuit, in an opinion written by Judge Manion, found that an exclusion for losses stemming from any virus that induces or is capable of inducing physical illness, distress, or disease applied in the present case. Additionally, the Seventh Circuit held that analyzing the application of exclusions prior to a determination of the scope of coverage is an acceptable method of analysis, that the insurers did not violate either public policy or the Illinois Consumer Fraud and Deceptive Business Practices Act in collecting premiums despite reduced risk resulting from the shutdowns, that a claim of unjust enrichment against the insurers was improperly pleaded, and that insurers are not required to provide a rebate of premiums. Mashallah, Inc. v. W. Bend Mut. Ins. Co., No. 21-1507, 2021 WL 5833488 (7th Cir. Dec. 9, 2021).

With these four opinions, the Seventh Circuit joined the Sixth, Eighth, Ninth, and Eleventh Circuits in finding in favor of insurers regarding COVID-19 coverage claims.

2nd Cir. / COVID-19: No Business Income Coverage for Art Gallery and Dealership

The United States Court of Appeals for the Second Circuit, applying New York law, affirmed the District Court’s dismissal of a claim for coverage made by a brick-and-mortar art gallery and dealership, holding that the art gallery suffered no direct physical harm as a result of New York’s statewide shutdown orders at the outset of the COVID-19 pandemic. The Second Circuit delineated between physical loss and loss of use, citing separate provisions in the same policy issued to the art gallery by Sentinel Insurance Company, and held that loss of use of the insured’s property was not a covered cause of loss that might trigger the policy’s business income and extra expense provisions. Additionally, the Second Circuit held that the policy’s civil authority provision was also inapplicable because the state government’s shutdown orders related to the risk of harm the COVID-19 pandemic posed to humans, not a risk of physical damage to property, which the provision requires. Finally, the Second Circuit declined to certify the question for the state appellate court, despite the fact that several similar cases are currently pending in the state court system. 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd., 21-80-CV, 2021 WL 6109961 (2d Cir. Dec. 27, 2021).

5th Cir. / COVID-19: Barbeque Restaurants Failed to Allege Direct Physical Damage

The United States Court of Appeals for the Fifth Circuit, applying Texas law, affirmed the District Court’s dismissal of two insured restaurants’ claims for coverage in the wake of government shutdowns resulting from the COVID-19 pandemic. The Fifth Circuit instead held that the insureds, Terry Black’s Barbeque L.L.C. and Terry Black’s Barbeque Dallas, L.L.C. (collectively, “TBB”), had not suffered any tangible or physical damage or loss that would trigger coverage based on the business income and extra expense provisions in their identical but separate policies with State Automobile Mutual Insurance Company. Moreover, the Fifth Circuit held that the policy’s restaurant extension endorsement, which provides coverage for suspension of business due to the order of a civil authority resulting from actual or alleged exposure of the business’ premises to a contagious disease was inapplicable, because the Texas government issued its shutdown orders as a result of the COVID-19 pandemic generally, as opposed to any actual exposure to the insureds’ specific premises. As a result, the Fifth Circuit became the eighth United States circuit to hold that the COVID-19 pandemic did not cause physical or tangible alteration or deprivation of property. Terry Black’s Barbecue, L.L.C. v. State Automobile Mut. Ins. Co., 21-50078, 2022 WL 43170 (5th Cir. Jan. 5, 2022).