Lee v. State Farm Fire & Casualty Co.
2022 IL App (1st) 210105
| Ill. App. Ct. | 2022Background:
- State Farm issued a Businessowners policy (Aug 15, 2019–Aug 15, 2020) to Evanston Grill that included a Loss of Income endorsement requiring an "accidental direct physical loss" to trigger business-interruption coverage and a Virus Exclusion.
- In March 2020 Illinois executive orders closed on-premises dining; Evanston Grill complied and alleges a substantial revenue loss (over $100,000 in April 2020 vs. April 2019).
- Evanston Grill submitted a claim; State Farm denied the same day, citing no "accidental direct physical loss" and policy exclusions (virus, ordinance/law enforcement, consequential losses).
- Evanston Grill sued for declaratory judgment (coverage), breach of contract, and bad-faith denial under section 155 of the Illinois Insurance Code.
- The trial court dismissed the complaint with prejudice under section 2-615, finding the losses were economic (not a physical alteration) and that the Virus Exclusion applied.
- On appeal the First District affirmed, agreeing that no "direct physical loss" occurred and that the Virus Exclusion bars recovery; therefore related breach and bad-faith claims fail.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether closures/closure orders caused a "direct physical loss" to covered property triggering loss-of-income coverage | Lee: Loss of use and prohibition of customer entry is a "direct physical loss" (policy is all-risk; ordinary meaning includes sudden inability to use property) | State Farm: Insured suffered economic loss only; no physical alteration to property; presence/suspected presence of virus does not equal "direct physical loss" | Held: No. "Direct physical loss" requires a physical alteration to property; economic loss from closure orders is insufficient. |
| Whether the policy's Virus Exclusion bars recovery where losses stem from government closure orders | Lee: Losses result from the Orders, not the virus, so the Virus Exclusion does not apply | State Farm: The virus caused the orders and exclusion for losses from viruses therefore applies | Held: Virus Exclusion applies because the coronavirus can induce illness and the alleged causal chain (virus → orders → losses) falls within the exclusion. |
| Whether breach of contract and bad-faith (section 155) claims survive if coverage is not triggered | Lee: Denial of the claim supports breach and bad-faith counts | State Farm: If no coverage obligation exists, no breach or bad-faith claim lies | Held: Dismissed. Without coverage obligation, breach and bad-faith claims fail. |
Key Cases Cited
- Travelers Insurance Co. v. Eljer Manufacturing, 197 Ill. 2d 278 (2001) (interpreting "physical injury" to require an alteration in appearance, shape, color, or other material dimension)
- Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327 (7th Cir. 2021) (interpreting identical policy language and predicting Illinois law that "direct physical loss" requires physical alteration)
- Bradley Hotel Corp. v. Aspen Specialty Insurance Co., 19 F.4th 1002 (7th Cir. 2021) (holding COVID-19 closure losses are economic, not physical, for coverage purposes)
- Mudpie, Inc. v. Travelers Casualty Insurance Co., 15 F.4th 885 (9th Cir. 2021) (concluding "direct physical loss" requires physical change to property)