69 F.4th 466
7th Cir.2023Background
- Froedtert Health (Wisconsin healthcare system) incurred about $85 million in COVID-19–related costs (PPE, cleanup, facility changes, paused elective procedures) during the policy period.
- Froedtert held an all-risks policy from Factory Mutual with a $2 billion per-occurrence general coverage for "physical loss or damage."
- The policy contains a broad contamination exclusion that expressly covers viruses and excludes costs from contamination (including inability to use property or costs to make it safe).
- A separate "Additional Coverages" section includes a "Communicable Disease Response" provision that covers reasonable and necessary cleanup/removal costs up to a $1 million sublimit; Factory Mutual paid Froedtert that $1 million.
- Froedtert sued for the remaining $84 million, arguing the policy’s language (particularly the Additional Coverages prefatory language) establishes that COVID-related losses qualify as "physical loss or damage" under the general $2 billion coverage. The district court dismissed; Froedtert appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-19 losses constitute "physical loss or damage" under the policy’s general coverage | "Physical loss or damage" should be read to include losses from COVID-19 (the policy’s Additional Coverages treat communicable diseases as "physical loss or damage"). | The general grant requires a tangible/physical alteration; COVID-19 presence does not alter tangible property characteristics and thus is not covered. | Court: COVID-19 losses do not fall within the general coverage’s "physical loss or damage" as written. |
| Whether the contamination exclusion bars COVID-19–related claims under general coverage | The Additional Coverages/ prefatory language shows communicable-disease losses were intended to be covered, so the contamination exclusion should not swallow that coverage. | The contamination exclusion expressly excludes viruses and thus removes COVID-19 losses from the general coverage; Additional Coverages are separate and limited. | Court: The contamination exclusion plainly excludes virus-related losses from general coverage; that exclusion stands. |
| Whether the Additional Coverages prefatory language rewrites the general coverage so COVID losses qualify for the $2B limit | The prefatory language (saying Additional Coverages are "for insured physical loss or damage") demonstrates parties treated communicable disease costs as "physical loss," so that meaning should apply to the general grant. | The Additional Coverages are separate, "additional" grants that provide limited coverage where the general coverage (and its exclusions) do not apply; the prefatory language does not expand the general grant or limit exclusions. | Court: The Additional Coverages do not alter the scope of the general coverage or negate the contamination exclusion; communicable-disease costs are recoverable only under the Additional Coverage sublimit (here $1M). |
| Whether the contamination exclusion is unenforceable because it conflicts with the communicable disease Additional Coverage | The contamination exclusion conflicts with the communicable disease provision and must be construed against the insurer to allow full recovery. | The provisions can be harmonized: contamination exclusion limits general coverage, and the communicable-disease Additional Coverage separately provides limited coverage (with its own sublimit). | Court: The provisions are harmonizable; the contamination exclusion is enforceable as to general coverage, and the communicable-disease Additional Coverage operates independently (result: only the $1M was recoverable). |
Key Cases Cited
- Colectivo Coffee Roasters, Inc. v. Soc’y Ins., 974 N.W.2d 442 (Wis. 2022) (physical loss requires alteration to property’s tangible characteristics)
- Froedtert Mem’l Lutheran Hosp. v. Nat’l States Ins. Co., 765 N.W.2d 251 (Wis. 2009) (ambiguities in insurance contracts construed for the insured)
- Wadzinski v. Auto-Owners Ins. Co., 818 N.W.2d 819 (Wis. 2012) (policy terms must be read in context of entire policy)
- Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65 (Wis. 2004) (three-step approach: initial coverage, exclusions, then reinstatement/other provisions)
- Stant USA Corp. v. Factory Mut. Ins. Co., 61 F.4th 524 (7th Cir. 2023) (same Factory Mutual policy: COVID-19 presence does not constitute physical loss under general coverage)
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) ("direct physical loss" requires physical alteration to property)
- 1325 N. Van Buren, LLC v. T-3 Grp., Ltd., 716 N.W.2d 822 (Wis. 2006) (policy should be construed to give reasonable meaning to entire contract)
- Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156 (Wis. 2014) (not all possible interpretations render a term ambiguous; ambiguity requires multiple reasonable interpretations)
Decision: Affirmed — Froedtert was not entitled to coverage beyond the $1 million paid under the communicable disease Additional Coverage; the policy’s general $2 billion coverage was not triggered for COVID-19 losses because of the physical-loss requirement and the contamination exclusion.