44 F.4th 1014
7th Cir.2022Background
- Circle Block Partners owned and Conrad Hotel (luxury hotel in Indianapolis) that lost almost all business after COVID-19 restrictions; hotel suspended operations and continued incurring expenses.
- Circle Block submitted a claim under an all-risk commercial policy (business income, extra expense, civil-authority, dependent-property, communicable-disease, business-access); each coverage required “direct physical loss or damage.” The policy also contained a “mortality and disease” exclusion.
- Fireman’s Fund denied the claim; Circle Block sued in Indiana state court; defendant removed and the federal district court dismissed under Rule 12(b)(6) for failure to allege direct physical loss or damage and denied leave to amend (dismissal with prejudice).
- On appeal, the Seventh Circuit applied Indiana law, relying on Indiana Repertory Theatre (Ind. Ct. App.) and federal COVID-insurance precedent, and examined policy language (including “period of restoration” that ends when property is repaired/replaced or business relocates).
- The court rejected loss-of-use theory and the contention that mere presence/attachment of viral particles constituted the requisite physical alteration or damage; it also found amendment futile and denied certification to the Indiana Supreme Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether “direct physical loss or damage” covers loss-of-use absent physical alteration | "Direct physical loss" can include being unable to use the property for its intended purpose (loss of use) | Policy requires tangible physical alteration, contamination, destruction, or dispossession | Loss-of-use alone does not satisfy “direct physical loss or damage.” |
| Whether attachment/presence of SARS-CoV-2 on surfaces constitutes physical alteration or damage | Virus particles adsorb to surfaces and materially alter them, satisfying physical alteration/damage | Presence of virus on surfaces is not the sort of persistent physical contamination that requires repair/replacement | Presence/attachment of virus particles insufficient to allege direct physical loss or direct physical damage. |
| Whether policy definitions/examples (stock, data/software, digital stamps) show “direct physical loss” can be intangible | Listed items (labor/service interests, data on media, digital stamps) show the phrase can cover non‑physical harms | Those items depend on physical media or dispossession; list does not change plain meaning of "physical" loss | Examples do not alter the plain meaning; “direct physical loss” still requires physical alteration/dispossession of tangible property. |
| Whether dismissal should be without leave to amend (futility) | Plaintiff should get leave to amend to add factual allegations (e.g., about viral contamination) | Amendment would be futile because the asserted theories cannot satisfy the policy language as a matter of law | Denial of leave to amend was appropriate; amendment would be futile. |
Key Cases Cited
- Paradigm Care & Enrichment Ctr., LLC v. West Bend Mut. Ins. Co., 33 F.4th 417 (7th Cir. 2022) (applied precedent rejecting loss-of-use theory under COVID-related claims)
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) (held mere loss of use/temporarily unusable premises does not establish direct physical loss)
- Indiana Repertory Theatre v. Cincinnati Cas. Co., 180 N.E.3d 403 (Ind. Ct. App. 2022) (Indiana appellate decision rejecting loss-of-use and holding no physical alteration requiring restoration)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (held direct physical loss requires physical alteration/contamination/destruction)
- SA Palm Beach, LLC v. Certain Underwriters at Lloyd’s, 32 F.4th 1347 (11th Cir. 2022) (rejected loss-of-use theory in COVID coverage disputes)
- Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (explained that ending of COVID bans, not repair/replacement, was needed—not a covered period of restoration)
- Crescent Plaza Hotel Owner, L.P. v. Zurich Am. Ins. Co., 20 F.4th 303 (7th Cir. 2021) (rejected surplusage and broad readings to create COVID coverage)
- East Coast Ent. of Durham, LLC v. Houston Cas. Co., 31 F.4th 547 (7th Cir. 2022) (procedural standards and application of COVID coverage precedents)