Closure due to Governor’s Orders Not “Direct Physical Loss”

The United State District Court for the Northern District of Illinois, in memorandum and order written by Judge Harry D. Leinenweber, applying Illinois law, granted The Cincinnati Insurance Company’s (“Cincinnati”) motion to dismiss plaintiff, T & E Chicago LLC’s (“T & E”), four-count putative class action complaint. The court found that the loss of use of property without any physical change to that property cannot constitute direct physical loss or damage to the property.

T & E owns and operates a tavern located in the Logan Square neighborhood of Chicago, Illinois. In March, in response to the COVID-19 pandemic, Governor Pritzker ordered the closure of all “non-essential businesses.” Governor Pritzker extended the order several times. T & E, a non-essential business pursuant to the order, closed its doors and suffered substantial economic losses. As a result of its business interruption and the resulting loss of income caused by the COVID-19 closure orders, T & E filed a claim with Cincinnati, its insurer. T & E alleged that its business interruption insurance was part of an “all risks” policy, providing coverage for any risk except those that are specifically excluded.

Cincinnati promptly denied coverage for any losses resulting from the COVID-19 pandemic and the Governor’s closure orders. Its denial letter “asserted that Plaintiff’s losses were not covered because the reason preventing Plaintiff from operating its business did not result from ‘direct physical damage’ or ‘direct physical loss’ to Plaintiff’s property.” T & E thereafter filed a putative class action complaint for declaratory judgment, breach of contract and bad faith. Cincinnati moved to dismiss the complaint because T & E did not allege a direct physical loss or damage to property. Cincinnati contended the policy indemnifies against loss or damage to property while an infectious disease like COVID-19 damages people. And that coverage does not extend to “purely financial losses.” Cincinnati further argued that “[t]he Business Income, Extra Expense, and Civil Authority coverages likewise apply only to income losses tied to physical loss or damage to property and not losses incurred to protect the public from disease.” Thus, absent direct physical loss or damage to property, there was no coverage under the policy. Cincinnati adumbrated at the multitude of cases, including two from Illinois, that have since been decided to interpret policy provisions like these as not providing coverage for COVID-19-related losses.

T & E argued that the policy covered both physical loss and physical damage, which it alleged Cincinnati incorrectly treated as synonymous. Moreover, T & E argued that an average person would interpret the phrase “accidental physical loss” to “include a sudden inability by the insured to use the property that was previously useable.” For the same reason—because T & E lost the physical use of its property—it claimed that it was alternatively entitled to coverage under the Civil Authority provision of the policy. Judge Leinenweber dismissed T & E’s complaint in its entirety. The policy defined the term “loss” as “accidental physical loss or accidental physical damage.” The court found dismissal appropriate here because T & E’s allegations were “implausible.” Put differently, the court could not draw a reasonable inference that Cincinnati was liable for the loss alleged by T & E. The court found that “loss of use of property without any physical change to that property cannot constitute direct physical loss or damage to the property.” Thus, in reliance on the plain meaning of the underlying policy language, the court granted Cincinnati’s motion to dismiss.  T & E Chicago LLC v. The Cincinnati Insurance Company, No. 1:20-cv-04001 (N.D. Ill. Nov. 19, 2020).