20 F.4th 327
7th Cir.2021Background:
- Three Illinois businesses (Sandy Point Dental, Bend Hotel, TJBC) sued their insurer, Cincinnati, after Governor Pritzker's COVID-19 executive orders forced closures or severe restrictions.
- Each held materially identical commercial-property policies covering business-income loss caused by a "direct physical loss" to covered property and civil-authority closures due to "direct physical loss" elsewhere.
- Cincinnati denied coverage; district courts dismissed the complaints under Rule 12(b)(6) for failing to allege "direct physical loss." Appeals were consolidated.
- Plaintiffs argued "direct physical loss" includes loss of use (even absent a physical alteration) and that virus presence or closure orders rendered premises unusable.
- The insurer and majority of precedent read "direct physical loss" to require a physical alteration or complete dispossession; policy language (e.g., "period of restoration" tied to repair/rebuild) supports that reading.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does 'direct physical loss' cover loss-of-use absent physical alteration? | 'Loss' includes deprivation of use; disjunctive with 'damage' implies broader meaning | 'Direct physical' modifies both words; requires physical alteration or destruction/dispossession | No—loss of use alone, without physical alteration or effective dispossession, is not 'direct physical loss' |
| Does the presence of SARS‑CoV‑2 on surfaces constitute physical alteration? | Virus attaches to/contaminates air and surfaces, physically altering premises | Virus presence does not alter the structure/materials; it is transient and cleanable, so not a physical alteration | No—allegations of virus presence do not plausibly allege physical alteration to property |
| Do civil-authority provisions apply based on orders responding to the virus? | Orders prohibiting access triggered civil-authority coverage because they were in response to physical loss from virus | Civil-authority coverage requires a qualifying 'direct physical loss' elsewhere; absent such loss, coverage doesn't trigger | No—civil-authority coverage fails where underlying 'direct physical loss' is not alleged |
Key Cases Cited
- Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (Ill. 2001) (Illinois Supreme Court construing 'physical injury' to require alteration in appearance, shape, color, or other material dimension)
- Santo's Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (held COVID-19 business-interruption claims require physical alteration; loss-of-use insufficient)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (same)
- Mudpie, Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885 (9th Cir. 2021) (same)
- Toppers Salon & Health Spa, Inc. v. Travelers Prop. Cas. Co., 503 F. Supp. 3d 251 (E.D. Pa. 2020) (policy's 'period of restoration' tied to repair/rebuild supports physical-alteration requirement)
- Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968) (contamination/gas that renders premises uninhabitable can constitute constructive dispossession and hence physical loss)
- United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 578 N.E.2d 926 (Ill. 1991) (asbestos contamination constituted physical injury to tangible property)