Businesses across the country have experienced unique and unchartered losses as a result of coronavirus shutdowns. “Closure Orders” have been instrumental in controlling the spread of COVID-19. While these government orders have been issued with strong and compelling purposes, they have severely impacted all businesses. Additionally, insurers have faced new claims and coverage issues.
Recently, the Northern District of Illinois ruled on whether a hotel’s losses, stemming from COVID-19 closures, triggered coverage under an “all risk” policy. The hotel specifically claimed, “physical damage to its property” as a result of the government shutdown orders. The Court held that the policy language required a “direct physical loss or damage.” It is important to note the policy did not have an exclusion for viruses.
Plaintiff claimed the insurer’s denial of coverage breached the parties’ contract. The hotel sought damages and a declaratory judgment that the defendant had a duty to cover the losses.
Illinois law governed the dispute. Plaintiff did not premise its claims on COVID-19 entering the property. Instead, the alleged business losses were a result of the state’s Closure Orders. The Court distinguished these arguments from Missouri’s interpretation of “direct physical loss,” which focused on the business property becoming “unsafe and unusable.” Additionally, the Court considered that “every court in this district… has concluded that the virus does not cause direct physical loss or damage to property.”
Illinois law requires actual physical damage or loss to prompt coverage. Plaintiff did not allege any physical alteration or structural degradation to the premises. There was also no need to “repair,” “replace,” or “restore” any physical element of the property. Plaintiff’s claims may have been more effective in the context of business interruption, income, or extra expenses. Moreover, the hotel did not allege losses directly from viral contamination. Based on the plain and simple meaning of “physical damage” to property, the “Closure Order” claims did not fit within the scope of coverage.
Ultimately, the denial of coverage was upheld and the insurer’s motion to dismiss was granted.
The Bend Hotel Development Co. LLC v. Cincinnati Insurance Co., case number 1:20-cv-04636, in the U.S. District Court for the Northern District of Illinois.
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