EAST COAST ENTERTAINMENT OF DURHAM, LLC v. HOUSTON CASUALTY COMPANY аnd AMERICAN CLAIMS MANAGEMENT, INC.
No. 21-2947
United States Court of Appeals For the Seventh Circuit
April 12, 2022
ARGUED MARCH 29, 2022
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:20-cv-06551 — Joan B. Gottschall, Judge.
Before FLAUM, ST. EVE, and JACKSON-AKIWUMI, Circuit Judges.
I. Background
ECE‘s insurance policy with HCC includes the following “Business Income” coverage provision:
We will pay the actual loss of Business Incоme you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises that are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damages must be caused by or result from a Covered Cause of Loss.
(Emphasis added). The “period of restoration” is thе period between “the date of direct physical loss or damage to the property” and either “[t]he date when the property should be rеpaired, rebuilt or replaced with reasonable speed and similar quality” or “when business is resumed at a new permanent location,” whichever оccurs first.
A “Civil Authority” provision similarly covers “the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authоrity that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.” (Emphasis added).
Defendants moved to dismiss the complaint for failure to state a claim, arguing that the Policy does not provide coverage because ECE‘s economic losses stem from the Governor‘s executive orders, not any physical alteratiоn of or damage to property. The district court agreed and granted their motion to dismiss with prejudice. Because ECE‘s bad-faith denial of coverаge claim depended upon the coverage determination, that claim failed as well. The district court further concluded that ECE failed to show a conflict between Illinois law and North Carolina law regarding the plain and ordinary meaning of “direct physical loss,” so Illinois law applied.
II. Discussion
We review de novo the grant of a motion to dismiss for failure to state a claim. Crescent Plaza Hotel Owner, L.P. v. Zurich Am. Ins. Co., 20 F.4th 303, 307 (7th Cir. 2021). A federal court sitting in diversity applies the choice-of-law rules of the forum state, here Illinois. Sosa v. Onfido, Inc., 8 F.4th 631, 637 (7th Cir. 2021). In the аbsence of an actual conflict between Illinois law and the law of another state, the substantive law of Illinois applies. Id. ECE, as the party seеking a choice-of-law determination, bears the burden of demonstrating that a conflict exists. Id.
Courts applying Illinois law aim to “ascertain the partiеs’ intent” by first consulting “the plain and ordinary meaning of the contract language.” Am. Bankers Ins. Co. of Fla. v. Shockley, 3 F.4th 322, 327 (7th Cir. 2021) (internal quotation marks omitted). “Undefined terms will be given their plain, ordinary, and popular meaning; i.e., they will be construed with reference to the average, ordinary, normal, reasonable person.” Sproull v. State Farm Fire & Cas. Co., 2021 IL 126446, ¶ 19. If an insurance policy is unambiguоus, the court must apply its terms as written. Crescent Plaza Hotel, 20 F.4th at 308. Mere “disagreement between the parties as to meaning does not itself make the policy ambiguous, and the сourt ‘will not strain to find an ambiguity where none exists.‘” Id. (quoting Founders Ins. Co. v. Munoz, 930 N.E.2d 999, 1004, 237 Ill. 2d 424 (2010)).
A. Sandy Point Squarely Precludes Coverage
Shortly after ECE filed its opening brief on appeal, we issued our opinion in Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327 (7th Cir. 2021). In Sandy Point, we joined four other circuits in cоncluding that mere loss of use due to COVID-related closures does not constitute “direct physical loss” when unaccompanied by any physical alteration to property. Id. at 330, 333 (applying Illinois law and collecting cases).2 On the
The policy provisions at issue in Sandy Point are materially indistinguishable from ECE‘s policy. See Sandy Point, 20 F.4th at 330–31. As we explained in Sandy Point:
The phrase is “direct physical loss or damage.” The words “direct physical” are most sensibly read as modifying both “loss” and “damage.”
But even if they can be divorced from “damage” (and we do not think that they can), they indisputably mоdify “loss.” ... Whatever “loss” means, it must be physical in nature.
Id. at 332. “Even if the virus was present and physically attached itself to Sandy Point‘s premises, Sandy Point does not allege that the virus altered the physical structures to which it attached, and there is no reason to think that it could have done so.” Id. at 335. Because the businesses in Sandy Point “alleged neither a physical alteration to property nor an access- or use-deprivation so substantial as to constitute a physical dispossession,” they failed to stаte a claim for coverage. Id. at 337.
Try as it might, ECE similarly fails to allege a physical alteration of its property. The mere presence of the virus оn surfaces did not physically alter the property, nor did the existence of airborne particles carrying the virus. ECE does not allege that it needеd to “repair[], rebuil[d] or replace[]” any structures or items on the premises, or that its business “resumed at a new permanent location,” as contemplated in the Policy‘s “period of restoration” definition. In short, the district court properly concluded that ECE was not entitled to coverage undеr the Policy.
Because ECE does not have a valid claim for coverage, its bad-faith denial of coverage claim necessarily fails as well. See Sandy Point, 20 F.4th at 337 (“[The insurer] could not have been fraudulent or vexatious in denying coverage where adequate grounds for coverage did not exist in the first plаce.“).
B. There is No Conflict of State Law
The growing national consensus regarding the meaning of “direct physical loss” underscores that this case does not turn on variations in state contract law. To the extent that ECE still argues there is a conflict between Illinois law and North Carolina law, it has not satisfied its burden. See Sosa, 8 F.4th at 637. Both Illinois and North Carolina courts look to the plain and ordinary meaning of terms in an insurance policy; where, as here, those terms are unambiguous, there is no need to сonstrue them against the insurer. See, e.g., Register v. White, 599 S.E.2d 549, 553, 358 N.C. 691 (2004). Tellingly, multiple federal district courts applying North Carolina law in COVID-19 insurance cases have reached the same conclusion as Sandy Point.4 In
III. Conclusion
For the foregoing reasons, the district court‘s judgment is
AFFIRMED.