An Illinois appellate court joined courts across the country in siding with an insurance company against a business trying to recover lost income associated with COVID-19-related closures. The first ruling on the subject by an Illinois appellate court, which came last week in Sweet Berry Café, Inc. v. Society Insurance Inc., calls into question whether any business can get coverage for coronavirus-related losses in Illinois.
Sweet Berry Café v. Society Insurance, Inc.
A three-judge panel upheld the rejection of Sweet Berry Café’s lawsuit against Society Insurance, ruling that neither the presence of the virus nor government shutdown orders caused direct physical loss or damage to the property, which would be necessary to trigger coverage.
First, the court considered whether “physical loss” requires a change in the physical characteristics of the covered property or whether it could be satisfied by the presence of COVID-19. Society argued the virus did not physically alter or damage the property and could be removed with cleaning agents. Café countered that the virus could remain suspended in the air for hours and active on surfaces up to 72 hours and thus physically damages tangible property by creating a dangerous property condition akin to noxious gas contamination. Thus, Café contended it lost the full use of its premises. The court held the policy required a “physical alternation or substantial dispossession,” and not merely loss of use. As the court explained, “physical loss” requires deprivation caused by a material thing, which rules out economic losses resulting from Café’s inability to fully run its business. The court found that COVID-19 is not akin to noxious gasses, which would render the entire property unusable. Unlike a noxious gas, “the virus’s presence is easily remediated by routine…cleaning and disinfecting or will die off after a few days[.]”
Café’s second theory was that executive orders prohibited access to its business and caused “direct physical loss or damage to” its property because the orders required it to cease and/or significantly reduce operations. Society argued it was just a temporary reduction in operations, akin to zoning rules, and not the result of “direct physical loss of or damage to” the property. The court agreed with Society, reasoning that shutdown orders “merely prohibited in-person dining, which is one use of the property, but permitted food preparation for carryout dining and delivery.”
The decision was consistent with the majority of courts throughout the country interpreting similar cases involving pandemic-related losses, including a December ruling by the Seventh Circuit, which sided with Cincinnati Insurance Company in an appeal that was consolidated from three claims brought by Illinois businesses: Sandy Point Dental, P.C., the Bend Hotel Development Company and TJBC, Inc. (restaurants). The Seventh Circuit affirmed the lower courts’ dismissals of the cases, agreeing that all three businesses failed to adequately allege that either the COVID-19 virus or the resulting closure orders caused “direct physical loss” to property. Further, the court held that reduced use of premises or inability to make preferred use of the premises was not enough to state a claim. “[The plaintiffs] alleged neither a physical alteration to property nor an access-or-use deprivation so substantial as to constitute a physical dispossession,” the court held, suggesting a gas infiltration as an example of something that could possibly cause the latter scenario.
Like the Seventh Circuit, the Illinois appellate court referenced the noxious gas analogy in its ruling that Café did not sustain a “substantial dispossession” of its property, but failed to elaborate on what it meant by substantial dispossession. This lack of clarity may leave the door open for appeals by companies who were forced by COVID-19 or government orders to close their entire business for a significant period of time.
Jump Buffalo Grove LLC v. Cincinnati Insurance Company
Jump Buffalo Grove LLC is one such business. The Illinois trampoline park is appealing the November 2021 U.S. District Court dismissal of its lawsuit against Cincinnati Insurance Company, claiming that the Seventh Circuit’s ruling in Sandy Point Dental left open the possibility that a loss could be covered without structural alteration if it were pervasive enough to qualify as “complete physical dispossession.”
The virus coupled with the governor’s lockdown orders prohibiting customers caused the company to suffer a “complete physical dispossession,” Jump Buffalo Grove (JBG) argued.
“Similar to gas, ammonia or carbon monoxide contamination, COVID-19 and the resulting executive orders rendered JBG’s facility unsafe, dangerous and unusable for a period of time,” the trampoline park wrote.
The company argued that, unlike the plaintiffs in Sandy Point Dental, it was alleging more than a partial loss of its preferred use of its premises.
“This was not a situation where JBG was unable to use its facility for its preferred purposes but could for limited purposes,” the company wrote. “It was unable to use its premises for any of its intended purposes. JBG was completely shut down and closed to the public.”
Colectivo Coffee Roasters v. Society Insurance
While courts have largely struck down suits by businesses whose operations remained partially open, an appeal by Colectivo Coffee Roasters in Wisconsin bears watching. The case, which stems from a class action brought by dozens of Wisconsin bar and restaurant owners against Society Insurance, is the first COVID-19 business interruption case to reach the Wisconsin Supreme Court. Society Insurance filed a motion to dismiss the businesses’ complaint, stating that “direct physical loss of or damage to” covered property is necessary to trigger coverage, and that the businesses failed to allege this. To do so, the insureds would have had to establish physical damage in the form of tangible liability to covered property or physical loss in the form of actual destruction or dispossession of covered property.
The trial court denied Society Insurance’s motion, finding that the businesses had adequately alleged that they suffered a direct physical loss of covered property because they were physically unable to use their property in its intended manner. The court also concluded the insureds had adequately alleged a dangerous condition on or around their covered property because COVID-19 was likely present on the property, which, in turn, caused the government to prohibit access to the covered property, causing civil authority coverage to kick in.
Society Insurance filed petitions for leave to appeal and then to bypass the Court of Appeals and proceed directly to the Wisconsin Supreme Court, which were granted.
Given the Illinois appellate ruling in Sweet Berry Café and the Seventh Circuit decision in Sandy Point Dental, the road ahead is very challenging for businesses pursuing COVID-19 claims in Illinois. It’s likely that a business will need to allege complete dispossession of the premises to get past the dismissal stage.
Novack and Macey LLP is a commercial and business litigation law firm that represents closely held businesses, entrepreneurs and other parties in disputes arising out of business relationships and commercial transactions. To contact the author, please email Rebekah H. Parker at email@example.com or call 312.419.6900.