548 F.Supp.3d 711
N.D. Ill.2021Background
- Melcorp, Inc. operates Great Steak & Potato Company in Fox Valley Mall (Aurora, IL) and suspended operations after Illinois COVID-19 closure orders in March–April 2020.
- Melcorp sued its insurer, West American, under diversity jurisdiction seeking Business Income coverage for lost income; West American denied coverage and moved for judgment on the pleadings under Rule 12(c).
- The policy’s Business Income provision covers actual loss of Business Income caused by the necessary suspension of operations "caused by direct physical loss of or damage to" covered Building or Business Personal Property; it defines "period of restoration" to end when property should be repaired, rebuilt or replaced or business resumes at a new permanent location.
- Melcorp argued "direct physical loss" includes a loss of use (inability to use the premises) caused by governmental closure orders; West American argued "physical" requires a tangible change to property’s condition or location.
- The court held, applying Illinois contract law, that "direct physical loss" requires a distinct, demonstrable physical alteration or a comparable physicality; temporary loss of use from government orders—without physical change—does not trigger Business Income coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Coverage trigger: whether "direct physical loss of or damage to" property is satisfied by loss of use from COVID closure orders | "Direct physical loss" includes sudden inability to use previously usable premises (loss of use) | Requires tangible physical change in condition or location of property | Court: requires physical alteration/contamination/destruction; loss of use alone not covered |
| Meaning of "period of restoration" | Period can end when use is restored even absent physical repairs | Policy definition (repair/rebuild/replace or relocate) presupposes physical alteration | Court: definition confirms need for physical change; loss of use yields no objectively ascertainable restoration date |
| "Direct physical loss" vs. "physical … damage" (avoidance of surplusage) | Reading requiring physical damage makes "or damage to" redundant | Phrases can cover different physical events (loss by theft vs. damage by vandalism) | Court: no surplusage problem; both phrases reasonably distinct; still excludes mere loss of use |
| Business Personal Property includes labor/services/use interests (intangible items) | Inclusion of intangibles shows parties intended coverage where tangible alteration is impossible (so loss of use must be covered) | Intangibles can suffer physical-loss-type events (e.g., injured worker, stolen fixtures); policy envisages physical scenarios | Court: average reader would read "physical loss" to require physicality; intangible items can still suffer objective physical losses in some circumstances |
| Ambiguity / contra proferentem | Policy is ambiguous on "physical loss" and should be construed for insured | Policy language is unambiguous and favors insurer's reading | Court: not ambiguous; contra proferentem inapplicable; judgment for insurer |
Key Cases Cited
- Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307 (Ill. 2006) (policy construed as whole; give effect to every provision)
- Founders Ins. Co. v. Munoz, 930 N.E.2d 999 (Ill. 2010) (court’s primary function is to ascertain and effectuate parties’ intent in policy language)
- Rich v. Principal Life Ins. Co., 875 N.E.2d 1082 (Ill. 2007) (limitations on insurer’s liability construed in favor of coverage only where policy ambiguous)
- Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204 (Ill. 1992) (undefined terms given their plain, ordinary meaning)
- Erie Ins. Grp. v. Sear Corp., 102 F.3d 889 (7th Cir. 1996) (conflicting case law does not, by itself, render a contract term ambiguous)
- Haywood v. Massage Envy Franchising, LLC, 887 F.3d 329 (7th Cir. 2018) (district court need not grant leave to amend where plaintiff does not request it)