At least five Circuit Courts of Appeal have now come out in favor of insurers in COVID-19 business interruption lawsuits. The latest is the Seventh Circuit Court of Appeals in Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 2021 U.S. App. LEXIS 36399 (7th Cir. Dec. 9, 2021). The Court in Sandy Point resolved three claims in one opinion under Illinois law. The three plaintiffs were a dentistry practice, a hotel, and restaurant. Each business was allegedly impacted by orders issued by Illinois’ governor to stem the spread of COVID-19.
Each of the businesses’ policies included a familiar coverage threshold of a “suspension” caused by direct physical “loss” to property at a premises caused by or resulting from a Covered Cause of Loss. “Loss” was defined in the policies as “accidental loss or damage.” The Court observed that by “incorporating the stated definition of ‘loss,’ the [b]usinesses were covered for income losses resulting from direct physical loss or direct physical damage to property. Thus, to survive [the insurer’s] Rule 12(b)(6) motion, they needed to allege that either the virus or the resulting closure orders caused direct physical loss or direct physical damage to covered property.”
The Court began by reviewing the meaning of “direct physical loss.” The Court observed that the Illinois Supreme Court had not addressed the precise policy language but it had addressed similar language. In that case addressing similar language, the Illinois Supreme Court held that “the term ‘physical injury’ unambiguously connotes … an alteration in appearance, shape, color or in other material dimension.” The Court observed that many courts have relied on such analysis to hold that “direct physical loss” requires a physical alteration to property.
The businesses asked for a more expansive interpretation of the policy language. They argued that “direct physical loss” comprises not only physical alterations but also loss of use. They posited that in the phrase “direct physical loss or damage,” the word “loss” must mean something different from “damage” or the language would be redundant. They argued that “loss” refers to deprivation of use or possession while “damage” refers to physical alteration of property. The businesses also pointed out that the policies had no virus exclusion and they made a convoluted argument regarding the nature of the policies’ exclusions.
The Court stated that “we have no quarrel with the idea that the disjunctive indicates that ‘loss’ means something different from ‘damage.’” But the Court pointed out that the words “direct physical” are most sensibly read as modifying both “loss” and “damage.” Otherwise, the word “physical” is read out of the policies, which is improper. The Court also rejected various arguments by the businesses based on the context of the policies. Instead, the Court observed that the policies provide coverage for losses during a “period of restoration” which is defined by references to dates that property should be repaired, rebuilt, or replaced. “Without physical alteration to property,” the Court observed, “there would be nothing to repair, rebuild, or replace.” Thus, the Court made it clear that it was joining the “overwhelming majority” of courts adopting this interpretation of the policies’ provisions.
The Court then turned to the businesses’ individual allegations. The Court held that the dentistry practice’s amended allegations did not adequately allege a “direct physical loss.” The dentistry practice alleged that coronavirus was present, made the premises unsafe and unfit for its intended use, and thereby caused physical loss or damage. The Court was highly critical that the dentistry practice did not even attempt to describe physical alteration. The Court opined that reduced use of premises or inability to make preferred use of the premises was not enough to state a claim. The Court then made an observation similar to that of many other Courts: “While the impact of the virus on the world over the last year and a half can hardly be overstated, its impact on physical property is inconsequential: deadly or not, it may be wiped off surfaces using ordinarily cleaning materials, and it disintegrates on its own in a matter of days.”
The Court disposed of similar allegations by the hotel and restaurants. The restaurants also made assertions that coronavirus allegedly altered the air and droplets attached to property. Similar assertions have been made by many other insureds and determined to be mere speculation. Indeed, the Eleventh Circuit commented that it could not “see how the presence of [viral] particles would cause damage or loss to the property.” The Court observed that such assertions do not adequately allege a “direct physical loss.”
The Court concluded by explaining that the businesses needed to allege more than a partial loss of their preferred use of the insured property. They did not make such allegations, nor did they allege physical alteration or deprivation of use or access so substantial as to constitute a physical dispossession. Looking at the bigger picture, several other Circuit Courts of Appeal are still to weigh in on these issues. For example, in the Fifth Circuit, the results of the appeals in Terry Black’s Barbecue, LLC v. State Automobile Insurance Company and Aggie Investments, LLC v. Continental Casualty Company are awaited. The insurer prevailed in both of those cases at the trial court level. It is also notable that a number of high-profile dismissals were not appealed. For example, the plaintiff in Univ. of Saint Thomas v. Am. Home Assur. Co., 2021 U.S. Dist. LEXIS 137528 (S.D. Tex. July 23, 2021) did not appeal. State appellate courts, which seem to be moving slower than federal courts, also need to weigh in on these issues.
 See, e.g., Santo’s Italian Café, LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. Sept. 22, 2021); Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. July 2, 2021); Mudpie, Inc. v. Travelers Ins. Co. of Am., 15 F.4th 885 (9th Cir. Oct. 1, 2021); Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Ins. Co., 2021 U.S. App. LEXIS 26196 (11th Cir. Aug. 31, 2021).
 Gilreath, 2021 U.S. App. LEXIS at *6.
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