The U.S. Court of Appeals for the Seventh Circuit has become the latest federal appeals court to hold that pandemic-related business losses do not constitute “physical loss of or damage to property” covered under business interruption insurance policies — citing a “growing national consensus” on the issue.
East Coast Entertainment of Durham, North Carolina, is in the movie theater business. The company suffered financially after the imposition of statewide closures of movie theaters caused by the rise of COVID-19, according to the appellate court’s April 12 decision.
ECE filed a claim for coverage with its insurer, Houston Casualty Co., which was denied, the opinion said. The insurance policy includes a “Business Income” provision, which states, “we will pay the actual loss of business income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.” The policy goes on to define that the damage “must be caused by direct physical loss of or damage to property at premises.”
According to the appeals court, ECE first brought suit for “declaratory relief and damages in Illinois state court,” but ultimately, HCC removed the case to the U.S. District Court for the Northern District of Illinois under diversity jurisdiction.
The movie theater chain sued for “a declaratory judgment in favor of coverage, as well as damages for bad-faith denial of coverage.” HCC, its insurer, moved to dismiss on the grounds that ECE failed to state a claim and argued that the loss was based on “the governor’s executive orders, not any physical alteration of or damage to the property.” The district court agreed with HCC and dismissed the case with prejudice.
Judge Amy J. St. Eve wrote in the appeals court’s opinion that “a federal court sitting in diversity applies the choice-of-law rules of the forum state, here Illinois.” St. Eve explained that undefined terms in the insurance policy “will be given their plain, ordinary, and popular meaning” as per Illinois law in “ascertaining the parties’ intent” in an insurance contract.
St. Eve referenced the court’s own recent opinion in Sandy Point Dental P.C. v. Cincinnati Insurance, in which the Seventh Circuit joined what, at the time, were “four other circuits in concluding that mere loss of use due to COVID-related closures does not constitute ‘direct physical loss’ when unaccompanied by any physical alteration to property.” The Seventh Circuit found in Sandy that “whatever ‘loss’ means, it must be physical in nature.”
St. Eve found “ECE similarly fails to allege a physical alteration of its property” and that the “mere presence of the virus on surfaces did not physically alter” their premises. Therefore the further policy provisions allowing the property to be “repaired, rebuilt, or replaced” in the “period of restoration provision” do not apply.
ECE’s argument that there is a “conflict between Illinois law and North Carolina law” was dismissed by the court on the ground that both states “look to the plain and ordinary meaning of terms in an insurance policy.”
St. Eve affirmed the judgment of the lower court by stating “Sandy Point squarely precludes coverage,” with Judge Joel M. Flaum and Judge Candace Jackson-Akiwumi concurring.
In addition to the Seventh Circuit, every other federal appeals courts to address the issue thus far has reached the same conclusion. Those include: the U.S. Court of Appeals for the Second Circuit in 10012 Holdings v. Sentinel Insurance; the Fourth Circuit in Uncork & Create v. Cincinnati Insurance; the Fifth Circuit in Terry Black’s Barbecue Dallas v. State Automobile Mutual Insurance; the Sixth Circuit in Santo’s Italian Cafe v. Acuity Insurance; the Eighth Circuit in Oral Surgeons v. Cincinnati Insurance; the Ninth Circuit in Mudpie v. Travelers Casualty Insurance Co. of America; the Tenth Circuit in Goodwill Industries of Central Oklahoma v. Philadelphia Indemnity Insurance; and the Eleventh Circuit in Gilreath Family & Cosmetic Dentistry v. The Cincinnati Insurance.
Also, last week, the Massachusetts Supreme Judicial Court and the Iowa Supreme Court became the first state high courts in the country last week to address the issue, both agreeing that pandemic-induced closures do not equate to covered “direct physical loss or damage to” property.
Bryan D. King of Brown, Udell, Pomerantz & Delrahim, representing ECE, could not be reached for comment. Daniel Feinberg of Gordon & Rees, representing Houston Casualty, declined to comment for this story.
