520 F.Supp.3d 1066
N.D. Ill.2021Background
- Plaintiff Crescent Plaza Hotel Owner L.P. (owner of the Ritz-Carlton Dallas, operated by Marriott) sues insurer Zurich American for coverage under property/business-interruption policies for losses from COVID-19 and related Dallas County civil-authority orders (Mar–May 2020).
- Marriott purchased the policies; Crescent alleges it is an additional insured under the 2019–2020 and 2020–2021 policies.
- Dallas County issued public-health orders limiting on-site services, ordering nonessential businesses to cease in-person operations, and imposing social-distancing requirements; hotels were not ordered closed but faced operational limits.
- Coverage under the policies is triggered only by "direct physical loss or damage" to insured property; Zurich moved to dismiss under Rule 12(b)(6) for failure to allege such loss or damage.
- Crescent alleges financial losses from forced closure/limited operations and alleges it made physical changes (HEPA filters, plexiglass, hand sanitizers) in response to COVID-19.
- The court found Crescent failed to plausibly allege direct physical loss or damage and granted Zurich’s motion to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-19 and civil-authority orders caused "direct physical loss or damage" to the insured property | COVID-19 and closure orders made the hotel unusable for its intended purpose, causing covered physical loss | The policies require actual, demonstrable physical alteration or injury to property; business interruption/loss of use is not enough | Court: No; mere loss of use or government-ordered limitations without physical alteration does not satisfy "direct physical loss or damage" |
| Whether alleged protective measures (filters, plexiglass, sanitizers) constitute physical "damage" or "repairs" triggering coverage | These physical modifications show the virus altered the property and required repairs/changes, constituting physical loss/damage | These measures are precautionary, not repairs to physical injury; they do not show structural alteration or physical degradation | Court: No; those modifications are insufficient to show physical loss/damage requiring coverage |
| How to interpret the disjunctive phrase "direct physical loss or damage" (does "loss" cover loss of use?) | "Loss" should be read to cover loss of use even without structural change, so coverage applies | The disjunctive requires either permanent disposition or physical injury requiring repair; "loss" does not mean mere loss of use | Court: Interprets the phrase to require some physical change or injury; disallows a reading that covers mere loss of use |
| Pleading sufficiency under Rule 12(b)(6) for coverage claims | Plaintiff has pleaded facts sufficient to make coverage plausible | Plaintiff fails to plead facts showing physical alteration; legal conclusions insufficient | Court: Complaint fails plausibly to allege the necessary physical loss/damage; dismissal proper |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for complaints)
- McMillan v. Collection Professionals, Inc., 455 F.3d 754 (7th Cir. 2006) (accept well-pleaded factual allegations on motion to dismiss)
- Gibson v. City of Chicago, 910 F.2d 1510 (7th Cir. 1990) (purpose of Rule 12(b)(6) is to test sufficiency of the complaint)
- Country Mut. Ins. Co. v. Livorsi Marine, Inc., 856 N.E.2d 338 (Ill. 2006) (insurance-policy construction is a question of law)
- Cent. Ill. Light Co. v. Home Ins. Co., 821 N.E.2d 206 (Ill. 2004) (clear policy language given plain, ordinary meaning)
- Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) (forced closure or loss of use does not necessarily constitute direct physical loss)