East Coast Entertainment of Du v. Houston Casualty Company
31f4th547
| 7th Cir. | 2022Background
- East Coast Entertainment of Durham, LLC (ECE) operates movie theaters in North Carolina and claimed lost business income after statewide COVID-19 closures.
- ECE submitted a claim under a policy that covered "Business Income" and "Civil Authority" losses caused by "direct physical loss of or damage to property."
- ECE alleged SARS-CoV-2 was physically present on surfaces and in the air at its premises, rendering them unsafe and triggering coverage.
- Houston Casualty Company (HCC) and its administrator denied coverage; ECE sued in Illinois state court for declaratory relief and bad-faith denial; defendants removed to federal court.
- The district court dismissed with prejudice, concluding ECE failed to allege a physical alteration to property; applied Illinois law. ECE appealed.
- The Seventh Circuit affirmed, relying on its Sandy Point decision and a national consensus that mere loss of use from COVID-19 (without physical alteration or dispossession) does not constitute "direct physical loss."
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-related closures constitute "direct physical loss or damage" under the policy | Presence of virus on surfaces/air made premises physically unsafe and thus a direct physical loss | Policy requires a physical alteration or dispossession; mere presence/use loss is insufficient | No — absent physical alteration or dispossession, no "direct physical loss" (claim dismissed) |
| Choice of law: whether Illinois or North Carolina law governs interpretation | North Carolina law allegedly differs from Illinois and should apply | No actual conflict; both states use plain-meaning contract interpretation | Illinois law applies (no demonstrated conflict) |
| Viability of bad-faith denial claim | Insurer acted in bad faith in denying coverage | Bad-faith claim fails if no underlying coverage exists | Dismissed — bad-faith depends on coverage, which was lacking |
Key Cases Cited
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) (holds mere COVID-related loss of use without physical alteration is not "direct physical loss")
- Crescent Plaza Hotel Owner, L.P. v. Zurich Am. Ins. Co., 20 F.4th 303 (7th Cir. 2021) (same interpretation of policy language under Illinois law)
- Bradley Hotel Corp. v. Aspen Specialty Ins. Co., 19 F.4th 1002 (7th Cir. 2021) (reaches same result re: physical alteration requirement)
- Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (applying Ohio law; COVID closures not covered absent physical alteration)
- Mudpie, Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885 (9th Cir. 2021) (applying California law; same conclusion)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (applying Iowa law; same conclusion)
- 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd., 21 F.4th 216 (2d Cir. 2021) (New York law; joins consensus rejecting coverage for mere loss of use)
- Terry Black’s Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450 (5th Cir. 2022) (Texas law; same principle applied)