33 F.4th 417
7th Cir.2022Background
- Appellants are four childcare centers in Illinois and Michigan that suspended or reduced operations after state COVID-19 executive orders in March 2020 and lost income/incurred extra expenses.
- They submitted claims under all-risk commercial property policies; West Bend denied coverage and moved to dismiss the complaint.
- Relevant policy provisions: Business Income and Extra Expense (cover loss caused by “direct physical loss of or damage to” property); Civil Authority (covers loss when access is prohibited because nearby property was damaged by a “Covered Cause of Loss,” defined as direct physical loss); Communicable Disease (covers loss when a government board shuts down operations “due to an outbreak” of a communicable disease “at the insured premises”); Sue & Labor (insured duties after loss).
- District court granted dismissal, finding plaintiffs failed to plausibly allege physical loss/damage, that shutdown orders were due to outbreaks at their premises, or any independent coverage under Sue & Labor.
- Seventh Circuit affirmed, applying Illinois law for Creative Paths and Michigan law for Paradigm Care (predicting Michigan would follow Illinois principles).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether “direct physical loss of or damage to” property covers COVID-19 contamination or temporary loss of use | "Direct physical loss" is broad and includes virus presence on surfaces/air making premises unusable | "Direct physical loss" requires a tangible, material alteration, destruction, or dispossession of property | Court: No — follows Sandy Point/Eljer; virus presence does not materially alter property and thus does not satisfy "direct physical loss" |
| Whether Civil Authority coverage applies because executive orders prohibited access due to COVID-19 | Orders prohibiting business operations triggered Civil Authority coverage because they restricted access | Civil Authority requires damage to nearby property caused by a Covered Cause of Loss (i.e., physical loss) | Court: No — requirement of physical loss not met, so Civil Authority not triggered |
| Whether Communicable Disease provision covers losses because shutdown orders were issued "due to" an outbreak | General statewide shutdowns were “due to” the pandemic and thus count as shutdowns "due to an outbreak" at insured premises | "Due to" requires some causal nexus to an outbreak at the insured premises; the orders were prophylactic and not issued because of conditions at plaintiffs’ locations | Court: No — executive orders were general public-health measures, not issued because of an outbreak at the insured premises, so causation fails |
| Whether Sue & Labor provision independently creates coverage or requires reimbursement | Plaintiffs say Sue & Labor entitles them to recover expenses they incurred protecting property | Insurer says Sue & Labor imposes duties and may create costs but does not itself establish coverage | Court: No — Sue & Labor imposes duties/records requirements but does not create standalone coverage when policy otherwise does not cover the loss |
Key Cases Cited
- Mashallah, Inc. v. W. Bend Mut. Ins. Co., 20 F.4th 311 (7th Cir. 2021) (pleading-standard and COVID-19 coverage context)
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) ("direct physical loss" requires physical alteration of property)
- Travelers Ins. Co. v. Eljer Mfg., 757 N.E.2d 481 (Ill. 2001) (interpretation of "physical" loss under Illinois law)
- Brown Jug, Inc. v. Cincinnati Ins. Co., 27 F.4th 398 (6th Cir. 2022) ("direct physical loss" requires destruction/alteration or dispossession)
- Uncork & Create LLC v. Cincinnati Ins. Co., 27 F.4th 926 (4th Cir. 2022) (collecting circuits reaching similar conclusions on "direct physical loss")
- Dakota Girls, LLC v. Philadelphia Indem. Ins. Co., 17 F.4th 645 (6th Cir. 2021) (executive orders not issued because of conditions at specific insured premises)
- Bradley Hotel Corp. v. Aspen Specialty Ins. Co., 19 F.4th 1002 (7th Cir. 2021) (executive orders are legal documents whose plain text controls)
- Bilek v. Fed. Ins. Co., 8 F.4th 581 (7th Cir. 2021) (court need not accept as true legal conclusions inconsistent with documents)
- Levy v. Minn. Life Ins. Co., 517 F.3d 519 (7th Cir. 2008) ("due to" requires a causal relationship)
- Sloan v. Phoenix of Hartford Ins. Co., 207 N.W.2d 434 (Mich. Ct. App. 1973) (distinguishable older Michigan authority where policy language differed)