On December 9, 2021, the Seventh Circuit Court of Appeals handed insurers an enormous victory when it issued four decisions affirming the dismissal of lawsuits seeking business income coverage for losses sustained from the COVID-19 closure orders. The Seventh Circuit, which sits in Chicago and has appellate jurisdiction over federal courts in Illinois, Indiana and Wisconsin, joined the Sixth, Eighth, Ninth and Eleventh circuits in holding the term “direct physical loss or damage” requires a physical alteration to property for coverage to be triggered under “all-risks” property policies. The Seventh Circuit also found the Microorganism and Ordinance or Law exclusions barred coverage. 

The four coordinated decisions are:

• Bradley Hotel Corp v. Aspen Specialty Ins. Co., Case No. 21-1173 (7th Cir. December 9, 2021)

• Cresent Plaza Hotel Owner, L.P. v. Zurich American. Ins. Co., Case No. 21-1316 (7th Cir. December 9, 2021)

• Mashallah, Inc. v. West Bend Mutual Ins. Co., Case No. 21-1507 (7th Cir. December 9, 2021)

• Sandy Point Dental, P.C. v. The Cincinnati Ins. Co., Case No. 21-1186 (7th Cir. December 9, 2021). 

All of the cases arose from businesses that sustained economic losses when they were forced to close or limit services after government officials issued various “shutdown” orders in an effort to curb the spread of COVID-19. The policies provided coverage for income losses sustained as a result of “direct physical loss of or damage to” the business’s properties. The insureds argued the presence of the virus that causes COVID-19 or the closure orders constituted “direct physical loss” because the term includes loss of use even when unaccompanied by physical alteration. The Seventh Circuit rejected the argument, finding the policies provide coverage for losses sustained during a “period of restoration,” which is limited to the date by which the property is “repaired, rebuilt or replaced.” The Seventh Circuit reasoned that without a physical alteration to the property, there would be nothing to repair, rebuild or replace. 

The Mashallah court also found the virus exclusions barred coverage, thus rejecting the insured’s contention that the losses were sustained as a result of the governmental directives instead of the virus. 

In Cresent Plaza, the Appellate Court found the virus that causes COVID-19 was a microorganism, and thus coverage was barred under the Microorganism exclusion, despite the insureds’ claim that certain definitions of the term do not include viruses because they are not technically alive. 

Opining on a less-used exclusion, the Bradley Hotel court also held the Ordinance or Law exclusion, which excludes losses arising from any ordinance or law that regulates the construction or use of property, barred coverage because the executive orders from Illinois Governor J.B. Pritzker had the force of law. 

The decisions reflect the Seventh Circuit’s clear position that most all-risk property policies will not provide coverage for the massive losses sustained by businesses during the pandemic shutdowns.