Loss of Intended Use Due to COVID-19 Not “Direct Physical Loss”

The United States District Court for the Northern District of Illinois, in an opinion written by Judge Ellis, applying Illinois law, granted Continental Insurance Company’s (“Continental”) motion to dismiss Park Place Hospitality, LLC d/b/a Hilton Garden Inn Milwaukee Northwest Conference Center’s (“Park Place”) claims for breach of contract and bad faith denial of coverage for failure to state a claim. The insured failed to sufficiently allege “direct physical loss of or damage to” its property as required for coverage under its commercial property insurance policy.

The insured owns and operates a hotel, restaurant, lounge, and banquet and meeting facilities in Milwaukee, Wisconsin. Park Place obtained a commercial property insurance policy providing coverage for “direct physical loss of or damage to real property at a location directly caused by a covered peril.” In response to the COVID-19 pandemic, the Wisconsin governor issued a series of orders intending to halt the spread of the virus, which required Park Place to reduce operations at its restaurant, lounge, and banquet and meeting facilities. Park Place submitted a claim to Continental under the policy, and Continental denied the claim, concluding that the policy did not provide coverage because there was no indication of physical loss or damage.

Park Place argued that COVID-19 particles had a physical impact on its property, rendering it unusable, and that the governor’s orders prevented it from using the space as intended. Continental argued that a “physical loss” requires a tangible alteration in the property’s material state.

The District Court rejected Park Place’s argument that “physical loss of property” includes loss of use of property without any tangible or concrete loss, and, citing nationwide case law, differentiated COVID-19 particles from asbestos, mold, or other hazards that would require repair or replacement, rather than cleaning or disinfecting, to remediate.  Moreover, the District Court found that the governor’s closure orders constituted only an economic loss, not a physical loss.

Because the Court dismissed Park Places’ claims for breach of contract, it further concluded that the bad faith denial of coverage claims must fail as well, as that claim requires a wrongful denial of benefit. Because Park Place failed to allege any physical loss or damage to its property, the policy does not provide it with coverage for the losses suffered as a result of the COVID-19 pandemic and government closure orders, and, thus, the District Court dismissed Park Place’s complaint without prejudice. Park Place Hospitality, LLC v. Cont’l Ins. Co., No. 20-C-6403 (N.D. Ill. Aug. 10, 2021).