529 F.Supp.3d 927
E.D. Wis.2021Background
- Plaintiffs Paradigm Care (Michigan) and Creative Paths (Illinois) operate childcare centers and purchased Businessowners Special Property Coverage Forms from West Bend covering Aug 2019–Aug 2020.
- COVID-19 and state/local closure orders (Michigan, Illinois, Village of Skokie) forced substantial suspension of operations; Creative Paths had one enrolled child test positive shortly after closure.
- Plaintiffs submitted claims for Business Income, Extra Expense, Civil Authority, Communicable Disease, and coverage under the Duties-in-Event-of-Loss provision; West Bend denied coverage.
- Plaintiffs sued for breach of contract and declaratory relief; they filed an amended complaint asserting both individual and putative class claims.
- The coverage disputes turn on whether the policies require "direct physical loss of or damage to" property (Business Income/Extra Expense), whether civil-authority coverage requires damage to nearby property, and whether the Communicable Disease endorsement requires an outbreak "at the insured premises."
- The Court applied Wisconsin choice-of-law rules (Michigan law for Paradigm Care, Illinois law for Creative Paths) and granted West Bend’s motion to dismiss with prejudice, finding Plaintiffs failed to plead the requisite physical loss/damage or other coverage elements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Business Income/Extra Expense coverage is triggered by COVID-19 closures because plaintiffs suffered "direct physical loss of or damage to" property | COVID-19 (and closure orders) rendered premises unusable, diminished functional space, and constituted physical alteration/contamination sufficient to show physical loss or damage | Policy requires tangible/material/structural or perceptible physical alteration; mere loss of use or economic loss from closure is not "direct physical loss or damage" | Court: Dismissed — allegations do not plausibly plead tangible/material physical loss or damage required by the policy |
| Whether Civil Authority coverage is triggered by government closure orders | Civil authority orders were responses to dangerous physical conditions from COVID-19 affecting nearby properties, so civil-authority coverage applies | Civil Authority coverage requires damage to other property by a Covered Cause of Loss and a proximate civil-authority order in response to that damage; statewide/local orders responding to pandemic generally do not satisfy that requirement | Court: Dismissed — plaintiffs failed to allege damage to nearby property caused by a Covered Cause of Loss that prompted the orders |
| Whether Communicable Disease endorsement covers losses where shutdowns were ordered (i.e., whether an "outbreak at the insured premises" is required) | Pandemic-related shutdowns in the area (and, for Creative Paths, one positive enrollee) suffice to show outbreak affecting operations | Endorsement requires an outbreak at the insured premises; area-wide or generalized pandemic shutdowns do not satisfy the "at the insured premises" requirement | Court: Dismissed — plaintiffs did not allege government shut them down because of an outbreak at their insured premises (Creative Paths’ single positive test did not show the shutdown was ordered for that premises) |
| Whether the Duties-in-Event-of-Loss provision independently provides coverage or was breached by insurer | Plaintiffs claimed denial under the Duties provision (e.g., records of protective expenses) | Duties provision imposes obligations on the insured, not a separate coverage grant; plaintiffs also failed to allege they incurred compensable protective expenses tied to a covered loss | Court: Dismissed — Duties clause does not furnish independent coverage and plaintiffs failed to plead requisite loss or actions taken |
Key Cases Cited
- Kubiak v. City of Chicago, 810 F.3d 476 (7th Cir. 2016) (standard for evaluating Rule 12(b)(6) motions — accept well-pleaded facts and reasonable inferences)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard — conclusory allegations insufficient)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (motion to dismiss pleading standard)
- Universal Image Productions, Inc. v. Federal Ins. Co., [citation="475 F. App'x 569"] (6th Cir. 2012) (contamination/odor/bacterial presence did not constitute tangible "direct physical loss or damage")
- Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (Ill. 2001) (to ordinary person, "physical" injury to tangible property requires alteration in appearance, shape, color, or other material dimension)
- Auto-Owners Ins. Co. v. Harrington, 565 N.W.2d 839 (Mich. 1997) (Michigan law on interpreting insurance policy terms)
- Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009) (Illinois rule to construe policy terms and ambiguities in insured's favor)
- State Farm Mut. Auto. Ins. Co. v. Gillette, 641 N.W.2d 662 (Wis. 2002) (choice-of-law analysis for contract disputes)