Potential Coverage if Not Faced with Virus Exclusion

The United States District Court for the Northern District of Illinois, in an opinion written by Judge Kocoras, applying Illinois law, denied Continental Casualty Company’s (“Continental”) motion to dismiss its insureds’ first amended class action complaint. The insureds sought coverage under policies issued by Continental for losses stemming from COVID-19. Specifically, the insureds sought coverage under the business income, extra expense, civil authority, and sue and labor provisions of the policies and alleged that Continental breached those policies when it denied coverage. In addition to lost income, the insureds alleged that they made substantial modifications to their business to prevent transmission of the virus and to allow for social distancing.

Continental argued that each of the insureds’ claims should be dismissed because there was no “physical loss of or damage to” the properties and any losses caused by the virus are excluded. The court disagreed, finding that the insureds alleged the requisite physical damage and alteration necessary for coverage. The court affirmed that “physical loss of or damage to property requires physical alteration or structural degradation of the property,” not mere loss of use. The court found that the insureds sufficiently alleged that their properties underwent “distinct, demonstrable, physical alteration” as the result of COVID-19 such that they suffered “physical loss or damage to property.” The court found that Continental failed to show that the insureds’ claims are excluded from coverage, in part, because its policies do not specifically exclude damage caused by viruses, but instead exclude from coverage damage caused by the “[p]resence, growth, proliferation, spread or any activity of ‘fungi,’ wet or dry rot, or ‘microbes.’” Thus, the court held that the insureds pled enough facts to proceed with discovery and accordingly denied Continental’s motion to dismiss. Legacy Sports Barbershop LLC v. Continental Casualty Company, No. 20 C 4149 (N.D. Ill. June 1, 2021).