COVID-19 Case Tracker
Rosebud Case and Other Recent Dismissals
N.D. Ill. / COVID-19: Rosebud Restaurants Fail to Allege Physical Loss or Damage Resulting from COVID-19 Pandemic
The United States District Court for the Northern District of Illinois, in an opinion written by Judge Kendall, applying Illinois law, granted the insurer’s motion to dismiss for failure to state a claim against insured Rosebud Restaurant, Inc. (“Rosebud”), holding that business losses sustained during government closures throughout the COVID-19 pandemic were not covered by its “all-risk” policy with Regent Insurance, Co. (“Regent”).
Rosebud owns and operates 11 restaurants in the Chicago metropolitan area. As a result of the Illinois governor’s closure orders at the outset of the COVID-19 pandemic, Rosebud ceased ordinary operations and lost revenue. In its claims for declaratory relief, breach of contract, and bad faith denial against Regent, Rosebud posited three arguments: (1) that the business income and extra expense provisions in the policy granted coverage for these revenue losses; (2) that the virus exclusion clause did not exclude the effects of COVID-19 from coverage; and (3) that Regent denied coverage in bad faith.
The District Court rejected all three arguments. On the first, the Court cited a litany of case law in Illinois and elsewhere for the proposition that these losses were not the result of “physical loss or damage.” Second, while Rosebud argued that the closures were the result of closure orders, the court instead held that the orders were the effect of the coronavirus, thus bringing the losses within the virus exclusion clause in the policy. Finally, because there is no coverage, Rosebud was unable to bring a bad faith denial claim against Rosebud.
With the dismissal of each of these counts, the District Court granted Regent’s motion to dismiss for failure to state a claim. Rosebud’s claim for coverage was dismissed without prejudice. Rosebud Restaurant, Inc. v. QBE North America, a/k/a QBE Americas, Inc., No. 20 C 5526 (N.D. Ill. Sep. 20, 2021).
IL / COVID-19: Loss of Business Due to COVID-19 Not Physical Loss
The United States District Court for the Northern District of Illinois, applying federal case law, dismissed a lawsuit filed by the policyholder Cozzini Bros., Inc. (“Cozzini”) against its insurer The Cincinnati Insurance Company, Inc. (“Cincinnati”), holding that Cozzini failed to state a claim alleging physical loss as a result of the COVID-19 pandemic and related government closure orders. Cozzini generates most of its business by sharpening knives for restaurants and lost income as a result of the shuttering of its own facility and those of its clients.
The District Court rejected Cozzini’s argument that its loss of business income constituted a “physical loss” that would trigger coverage under the Business Income and Civil Authority provisions of the policy. The District Court held instead that some “tangible or concrete change in the condition or location of the thing that is lost” is required to state a claim, stating that closures caused by the presence of COVID-19 are not properly described as “physical damage.” Thus, the District Court granted Cincinnati’s motion to dismiss for failure to state a claim. Cozzini Bros., Inc. v. The Cincinnati Insurance Company, Inc., 2021 WL 3408499 (N.D. Ill. Aug. 4, 2021).
Similarly, the United States District Court for the Northern District of Illinois, in an opinion written by Judge Kendall, applying Illinois law, granted the insurer’s motion to dismiss for failure to state a claim against insured Rosebud Restaurant, Inc. (“Rosebud”), holding that business losses sustained during government closures throughout the COVID-19 pandemic were not covered by its “all-risk” policy with Regent Insurance, Co. (“Regent”).
Additionally, the U.S. Court of Appeals for the Seventh Circuit recently heard appeals in six similar cases on September 10, 2021. The appellants are six policyholders, comprising of hotels, a dentist office, a restaurant operator, and a retail store, each of which were denied coverage by its insurer and the denial was upheld by a district court. To listen to oral arguments, search the Seventh Circuit’s website here.
Like the District Court for the Northern District, the Circuit Court of Cook County, applying Illinois law, dismissed 17 separate lawsuits filed by policyholders against insurer Society Insurance, Inc. for losses stemming from COVID-19 restrictions, holding that Society Insurance owed no coverage because there was no showing of physical alteration or structural degradation of the property. The policyholders, comprising Illinois bars and restaurants, had argued that contamination of COVID-19 particles, which led to the Illinois governor’s stay-at-home and closure orders, constituted a direct physical loss that was covered under their policies with Society Insurance, but this argument was rejected by the Circuit Court.
The Circuit Court agreed with Society Insurance in stating that “physical loss” requires some tangible loss or some physical manifestation resulting from the occurrence that triggers insurance coverage. The loss of use of a restaurant does not constitute physical loss. Moreover, the Circuit Court found that it is not reasonable for the policy to cover a microscopic particle that could be easily removed from the property with everyday cleaning products. Station Two LLC, d/b/a Firehouse Grill v. Society Ins. Inc., No. 2020-L-006410 (Aug. 24, 2021).
The contention over the definition of “physical loss” in these policies is a common dispute amongst insurers and retail businesses and services like doctors’ offices and restaurants. For another case decided similarly to these, see Park Place Hospitality, LLC v. Cont’l Ins. Co., (N.D. Ill. Aug. 10, 2021) discussed here. For a case decided differently, see MacMiles, LLC D/B/A Grant Street Tavern v. Erie Insurance Exchange (Ct. Com. Pl. Pa. May 25, 2021), discussed here.
11th Cir. / COVID-19: Dental Practice Fails to Allege Physical Loss or Damage Resulting from COVID-19 Pandemic
The United States Court of Appeals for the Eleventh Circuit, applying Georgia law, affirmed the district court’s grant of a motion to dismiss to the insurer Cincinnati Insurance Company (“Cincinnati”) against the insured Gilreath Family & Cosmetic Dentistry, Inc. (“Gilreath”), holding that the insured failed to state a claim for breach of its policy. This is the second of three decisions rendered by the United States Court of Appeals on business interruption claims resulting from COVID-19. In a very similar case decided in July, the Eighth Circuit also decided that no showing of “physical loss” was alleged. The Sixth Circuit agreed for many of the same reasons in a September opinion. For more information on the Eighth Circuit case, see here.
Responding to federal guidance and Georgia’s stay-at-home policy at the beginning of the COVID-19 pandemic, Gilreath, a dental practice, postponed routine and elective dental procedures, which constitutes the bulk of its income. Cincinnati subsequently denied Gilreath’s claim for business-interruption coverage, which was upheld by the district court.
Gilreath argued that the Business Income, Extra Expenses, and Civil Authority provisions required Cincinnati to pay for lost income and other expenses while government restrictions were in effect. Instead, the Eleventh Circuit held that all two of the three provisions—the Business Income and the Extra Expenses provisions—required a showing of actual physical damage, described as “‘an actual change in insured property’ that either makes the property ‘unsatisfactory for future use’ or requires ‘that repairs be made.’” The Civil Authority provision similarly requires an allegation of actual physical damage in the vicinity of the practice. The lingering of COVID-19 particles in an enclosed space was not a sufficient showing of actual physical damage, and, thus, the Eleventh Circuit dismissed Gilreath’s complaint against Cincinnati for failure to state a claim. Gilreath Family & Cosmetic Dentistry, Inc. v. The Cincinnati Insurance Company, No. 21-11046, 2021 WL 3870697 (11th Cir. Aug. 31, 2021).
6th Cir. / COVID-19: Physical Loss and Physical Damage Require Some Tangible Destruction to Property
The United States Court of Appeals for the Sixth Circuit, applying Ohio law, affirmed the district court’s grant of a motion to dismiss to insurer Acuity Insurance Company against an insured restaurant company, Santo’s Italian Café LLC, rejecting the insured’s argument that loss of business income during the COVID-19 pandemic resulted from “physical loss” or “damage.” With this decision, the Sixth Circuit joins the Eighth and Eleventh Circuits in holding that “Business Income” and “Extra Expenses” provisions do not cover losses in income due to government-ordered closures and decreased business demand related to COVID-19.
Recognizing the complexity of insurance contract language, the Sixth Circuit nevertheless found that the “common and ordinary” meaning of terms like “physical loss” and “physical damage” does require some tangible destruction to property. Deprivation of use, without physical or structural alteration or loss of property, is not sufficient to trigger this policy. In addition to providing a definition of these terms, the court also recognized how such an interpretation accords with the rest of the policy, with the sources and purposes of insurance law generally, and with Ohio case law. Additionally, the Sixth Circuit rejected the insured’s attempt to create ambiguity in the provision through its argument that a physical requirement renders the term “loss” as surplusage. Instead, the Sixth Circuit pointed out the difference between losing undamaged property through theft and keeping damaged property though vandalized. Put simply, loss of use of property does not necessarily entail physical damage or loss of that same property.
Additionally, the Sixth Circuit stopped short of interpreting the breadth of a virus exclusion in the policy, as its ultimate decision rendered an interpretation unnecessary. Discussing an “Ordinance or Law” exclusion, however, the court indicated how the term “use” has different meanings throughout the policy, supporting its hesitancy to use an overbroad definition when examining the loss of use of property.
Though sympathetic to the plight of restaurants and retailers in the COVID-19 pandemic, the Sixth Circuit determined the insurance policy at issue did not cover loss of business income attributable to the pandemic or shut-down orders. Indeed, it was wary that extending coverage in this scenario would run the risk of limiting funds available for risks the insurance policy does plainly cover. As such, the Sixth Circuit affirmed the district court’s grant of the insurer’s motion to dismiss for failure to state a claim. Santo’s Italian Café LLC v. Acuity Ins. Co., No. 21-3068, 2021 WL 4304607 (6th Cir. Sept. 22, 2021).