Government Shutdown for COVID-19 Not “Direct Physical Loss”

The U.S. District Court for the Northern District of Illinois Eastern Division, in an opinion by Judge Gettleman, applying Illinois law, dismissed a complaint brought by a dentist office against its insurer seeking a declaration that the insurer must provide coverage for losses due to the government-ordered closure because of the COVID-19 pandemic.

In March, Governor Pritzker ordered all Illinois non-essential businesses to close in order to slow the spread of COVID-19.  Sandy Point Dental, PC (“Sandy Point”) was allowed to perform emergency and non-elective dental work, but was prohibited from performing routine dental work.  Sandy Point’s main practice involves routine dental work, so the practice essentially shut down, which resulted in a substantial loss of revenue.  Sandy Point sought coverage for its loss of revenue under its insurance policy issued by  The Cincinnati Insurance Company (“Cincinnati”). The Cincinnati policy includes business income coverage and Civil Authority coverage, both of which are predicated on “direct physical loss.”  Cincinnati denied coverage.  Sandy Point then sought a declaration that Cincinnati must provide coverage for losses due to the governmental closure.

The essential issue before the court was whether the substantial closure of the dentist office due to the governmental orders constituted a “direct physical loss” under the policy. Sandy Point argued that the policy did not require “tangible, material loss,” but that the partial loss of use of the property could trigger coverage.  The court disagreed, finding that the policy language of “direct physical loss” meant “actual, demonstrable harm of some form to the property itself.”  Sandy Point did not plead any facts showing physical alteration or structural degradation to the property, and they did not need to make any repairs to the property.  Sandy Point could not and did not show any such loss as a result of either its inability to access its own office or the presence of the virus on its physical surfaces.  “The coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property.  Consequently, [Sandy Point] has failed to plead a direct physical loss—a prerequisite for coverage.”  The court noted that its holding is consistent with other courts that have evaluated whether the coronavirus causes property damage warranting insurance coverage.

Sandy Point also asserted that it was entitled to coverage under the policy’s Civil Authority coverage.  This coverage once again required “direct physical loss” to the property, which the court found was not present.  Further, even if there was direct physical loss, the court found that Sandy Point did not meet the other requirement of the Civil Authority coverage, which is that access to the premises was prohibited.  Sandy Point was permitted access to its premises for emergency and non-elective surgery.  In light of Sandy Point’s failure to plead facts sufficient to meet the requirements of the property damage or civil authority coverages, the court dismissed Sandy Point’s counts for declaratory judgement and breach of contract.  Sandy Point Dental, PC v. The Cincinnati Ins. Co. Case No. 20 CV 2160, 2020 U.S. Dist. LEXIS 171979 (N.D. Ill. Sept. 21, 2020).