Illinois Update- Business Interruption Coverage Does Not Include Losses from COVID 19 Pandemic

At the beginning of the COVID-19 Pandemic, two weeks into the Illinois Shelter-In-Place Order, I wrote a blog about insurance coverage for business losses due to the COVID-19 Pandemic. At the time of that blog, more than a billion people were under some sort of quarantine law, and numerous US states and foreign countries had “shelter in place” laws, shuttering so many businesses that it seemed like otherwise vibrant business communities were ghost towns. Companies were already turning to their insurers to determine if there was insurance coverage available for business loss due to business closings due to COVID-19 shut downs.

This summer the Illinois appellate courts issued more than a dozen decisions holding that business interruption insurance is not available for interruptions caused by the Pandemic.

At least in Illinois, the issue appears decided – business interruption losses are not covered under the typical commercial general liability policy or the Business Interruption Endorsement for losses generated by the COVID-19 Pandemic.

TYPICAL BUSINESS INTERRUPTION POLICY LANGUAGE

Business interruption endorsements in insurance policies are intended to do for the insured what the business itself would have done had no interruption occurred. Business Interruption Coverage indemnifies an insured for losses sustained because of the insured’s inability to continue to use specified premises.  

Insurance policies vary in the wording of the Business Interruption Endorsement. A common version of the insuring agreement language used in a Business Interruption Endorsement is that the insurer will pay an insured during its period of suspended business operation the net income that would have been earned or incurred if no “direct physical loss” or damage had occurred, including normal operating expenses and payroll.

The purpose of the Business Interruption Coverage is to replace the amount of earnings required to return the insured to the same financial condition that would have existed had no loss (shutdown) occurred. 

ILLINOIS APPELLATE COURTS HOLD BUSINESS INTERRUPTION INSURANCE INAPPLICABLE TO COVID-19 INTERRUPTIONS

The Illinois Appellate Courts issued numerous decisions this summer holding that there is no insurance coverage available for the COVID-19 business interruption.

The Illinois Courts have held that business interruption claims do not qualify as a “covered cause of loss,” given that there was no “direct physical loss” of covered property, and the economic loss is subject to “virus” and “microorganism” exclusions.

While this issue has not yet reached the Illinois Supreme Court, these cases rely principally on principles set forth by the Illinois Supreme Court in Traveler’s Ins. Co. v. Eljer Mfg., 197 Ill. 2d 278, 757 N.E.2d 481 (2001).

In Traveler’s, the Illinois Supreme Court explicitly concluded that there is “no ambiguity in the phrase “physical injury to tangible property’ and “the phrase ‘physical injury’ does not include intangible damage to property, such as economic loss.” Applying the holding of Traveler’s v. Eljer to the policy language, the Illinois Appellate Courts interpret “direct physical loss” as requiring a physical alteration to property, which is the plain, ordinary, and popular meaning given to that phrase by the average, ordinary, normal, reasonable person. With this precedent as support, the Illinois Appellate Courts have consistently held that business interruption claims resulting from the COVID-19 closure orders constituted an economic loss and not a “physical loss” to covered property needed to trigger coverage under the business policies.

More than a dozen Illinois Appellate Courts have now rejected the Business Interruption Endorsement and the general property damage claims related to the COVID-19 Pandemic. 

• Sweet Berry Café, Inc. v. Society Insurance, Inc., 2022 IL App (2d) 210088 (March 15, 2022) (The Court concluded that the insurance policy did not cover losses due to the virus at and around the plaintiff’s premises and due to the executive orders instituted by the governor. The Court reasoned: “The fact that the virus was present at [the plaintiff’s] premises, an allegation we must accept as true, did not result in or cause ‘direct physical loss of or damage to’ the property. This is because no property needed to be repaired or replaced.” In Sweet Berry, the plaintiff filed a declaratory judgment action seeking coverage under a Business Policy. The policy language provided coverage for “direct physical loss of or damage to” covered property. The Appellate Court held in accordance with Traveler’s v. Eljer and the dictionary definition of “physical” that the presence of the virus inside the café did not result in direct physical loss of or damage to property because no property was altered such that it needed to be repaired or replaced. Also, the Governor’s closure orders prohibiting in-person dining were not connected to any change in the physical condition of the property, but merely caused an economic loss for the plaintiff that was not covered under the policy.)

• Lee v. State Farm Fire and Casualty Co., 2022 IL App (1st) 210105 (March 21, 2022) (The Court held that “direct physical loss” requires a physical alteration to property under Traveler’s v. Eljer because it is the plain, ordinary, and popular meaning given to “property damage” by the average, ordinary, normal, reasonable person.)

• ABW Development, LLC v. Continental Casualty Co., 2022 IL App (1^st) 210930 (March 30, 2022)(“Plaintiff has alleged no physical alteration of its property that would bring its alleged losses within its business income and extra expense coverage” and “the mere presence of the virus on surfaces does not constitute ‘physical loss of or damage to property’ because COVID-19  did not physically alter the appearance, shape, floor, structure, or other material dimension of the property.”)

• Firebirds International, LLC v. Zurich American Insurance Co., 2022 IL App (1^st) 210558 (May 20, 2022). (“Firebirds’ complaint alleged business interruption losses due to the presence of the COVID-19 virus in their properties. The policies, however, explicitly exclude “Contamination,” defined as “[a]ny condition of property due to the actual presence of any *** virus,” from coverage. Pursuant to the plain language of the policies, the COVID-19 virus is not a covered cause of loss. It follows that business interruption due to the COVID-19 virus, as alleged by Firebirds in their complaint, is not a suspension caused by a covered cause of loss.” The virus did not cause physical loss or damage to property so as to be covered by commercial insurance policies).

• GPIF Crescent Court Hotel LLC v. Zurich American Insurance Co., 2022 IL App (1^st) 211335-U (May 20, 2022) (COVID-19-related loss of use of hotel properties did not qualify as a “physical loss” so as to enable hotels to recover under insurance policy provisions insuring against a “physical loss” of property.)

• Ark Restaurants Corp. v. Zurich American Insurance Co., 2022 IL App (1^st) 211147-U (June 15, 2022) (“It is our opinion that the circuit court correctly adhered to Traveler’s v. Eljer in construing the meaning of  ‘physical’ as a modifier of  ‘loss’ and  ‘damage’ in the Zurich policy and concluding that Ark Restaurants’ loss of its intended use of property was not  ‘physical’ loss or damage to property.”)

• Ortiz Eye Associates, P.C. v. Cincinnati Insurance, Inc., 2022 IL App (1^st) 211312-U (June 9, 2022) (Plaintiff has failed to state a cause of action for coverage under the Building and Personal Property, Business Income and Extra Expense and Civil Authority provisions of the policy.)

• Bottleneck Mgmt. v. Zurich Am. Ins. Co., 2022 IL App (1st) 211462-U (June 30, 2022) (“Having not alleged any physical loss or physical damage to its property, the circuit court properly found that Bottleneck’s alleged losses and extra expenses were not covered by the Business Income Coverage and Extra Expense Coverage provisions of the insurance policy.”)

• State & 9 St. Corp. v. Society Insurance, 2022 IL App (1st) 211222-U (June 30, 2022) (The Court concluded that plaintiffs’ business interruption claim resulting from institution of the COVID-19 executive orders constituted an economic loss and not a “physical loss” to covered property required to trigger coverage under the policy.)

• JCJ Restaurant Co. v. Society Insurance, 2022 IL App (1^st) 211225-U (August 19, 2022) (Because the plaintiff’s insurance policy did not provide coverage for losses caused  by governmental COVID-related mitigation orders, the circuit court did not err in granting the defendant insurance company’s motion for judgment on the pleadings.)

•  Black Rock Restaurants, LLC v. Society Insurance,2022 IL App (1^st) 211215-U (August 19, 2022) (Because the plaintiff’s insurance policy did not provide coverage for losses caused by governmental COVID-related mitigation orders, the circuit court did not err in granting the defendant insurance company’s motion for judgment on the pleadings.)

• R Restaurant Group LLC v. Society Insurance, 2022 IL App (1^st) 211216-U (August 19, 2022) (Because the plaintiff’s insurance policy did not provide coverage for losses caused by governmental COVID-related mitigation orders, the circuit court did not err in granting the defendant insurance company’s motion for judgment on the pleadings.)

• Station Two LLC. v. Society Insurance, 2022 IL App (1^st) 211217-U (August 19, 2022) (Because the plaintiff’s insurance policy did not provide coverage for losses caused  by governmental COVID-related mitigation orders, the circuit court did not err in granting the defendant insurance company’s motion for judgment on the pleadings.)

• Lodge Mgmt. Insurance Corp. v. Society Insurance, 2022 IL App (1st) 211133-U (September 16. 2022) (“In this case, plaintiffs make precisely the same arguments that the plaintiffs made (and which were rejected) in State & 9 Street. Plaintiffs’ contentions that (1) they successfully alleged policy coverage under the “Business Income” provision; and (2) we should disregard prior adverse decisions—including State & 9 Street— necessarily fail because they have not provided anything to convince us to set aside the persuasive reasoning in State & 9 Street.”)

FEDERAL COURTS APPLYING ILLINOIS LAW FINFEDERAL COURTS APPLYING ILLINOIS LAW FIND BUSINESS INTERRUPTION INSURANCE INAPPLICABLE TO COVID-19 INTERRUPTIONSD

The Illinois federal courts were the first in Illinois to address the business interruption insurance clauses in the context of the COVID-19 Pandemic. On issues of insurance coverage, federal courts must rule as a state court would in its jurisdiction and, where there is no state law in existence, base its determination on how it believes a state’s Supreme Court would address the issue.  Even before Illinois’ Appellate Courts spoke on this, the federal courts in Illinois came to the same conclusion.

• Zajas, Inc. v. Badger Mut. Ins. Co., 2021 U.S. Dist. LEXIS 53875, *1, 2021 WL 1102403 (S. D., Ill. March 23, 2021).(The “all risk” commercial insurance policies did not provide coverage for the damages alleged in the insured’s breach of contract claim because the Covid-19 virus did not cause direct physical loss or damage to covered property under a business income loss policy.)

• VZA, LLC v. Cincinnati Ins. Co., 564 F. Supp. 3d 645, 654 (S.D.Ill., Sept. 30, 2021) (Plaintiff cannot recover for loss of use or access to its property because of COVID-19. Relying on the definition of “physical” used in Travelers v. Eljer, there must be some material change or alteration to the property or premises in order to constitute physical loss to property. The presence of COVID-19 on the premises does not constitute a material change or alteration to the property or premises. Therefore, the Court concludes that there is no coverage.)

• Sandy Point Dental, P.C. v. Cin. Ins. Co., 20 F.4th 327 (7^th Cir., Dec. 9, 2021) (Dental office, hotel and operator of food and bar services were joined in this case on appeal, having the same insurer.  The 7^th Circuit held in favor of the denial of coverage reasoning that “they alleged neither a physical alteration to property nor an access-or-use-deprivation so substantial as to constitute a physical dispossession.”)

• Crescent Plaza Hotel Owner, L.P. v. Zurich Am. Ins. Co., 20 F.4th 303, 308 (7^th Cir., Dec. 9, 2021) (“The first issue presented is whether Crescent has alleged direct physical loss or damage to its property. For the reasons explained in today’s decision in [Sandy Point Dental, P.C.] we conclude that it has not.”  The Court also held that the virus qualifies as a “microorganism” under the terms of the microorganism exclusion.)

• Carlisle Banquets Inc. v. Owners Ins. Co., 2022 U.S. Dist. LEXIS 45584, 2022 WL 787935 Based upon the above binding precedent and persuasive authority,  ‘physical loss or damage’ requires an actual permanent disposition to property brought by some demonstrable physical harm; mere loss of use due to the pandemic does not meet the physicality requirement.”)

THE ILLINOIS SUPREME COURT WOULD PROBABLY HOLD  BUSINESS INTERRUPTION INSURANCE INAPPLICABLE TO  COVID-19 INTERRUPTIONS

The Illinois Supreme Court has not yet weighed in on this decision, but it is doubtful the Supreme Court will come to a different result. 

In Traveler’s Ins. Co. v. Eljer Mfg., the Illinois Supreme Court concluded that there is “no ambiguity in the phrase ‘physical injury to tangible property’” and “the phrase ‘physical injury’ does not include intangible damage to property, such as economic loss.” Applying the holding of Traveler’s v. Eljer to the standard policy language, the appellate and federal courts interpreting Illinois law all conclude they interpret “direct physical loss” as requiring a physical alteration to property, which is the plain, ordinary, and popular meaning given to that phrase by the average, ordinary, normal, reasonable person.

With this precedent as support, if presented with this issue of standard policy language, it is likely the Illinois Supreme Court will hold that business interruption claims resulting from the COVID-19 closure orders constituted an economic loss and not a “physical loss” to covered property needed to trigger coverage under the business policies.

Kristin Tauras is a litigation and insurance coverage attorney at McKenna Storer in Chicago, Illinois, practicing in both state and federal courts. If you have any questions regarding this or any other litigation issue, please contact Kristin at (312) 558-3900 or ktauras@mckenna-law.com

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