An Illinois appeals court joined courts across the country to side with an insurance company against a company trying to recover lost revenue related to COVID-19-related closures. The first ruling by an Illinois appeals court on the subject, delivered last week in the case of Sweet Berry Café, Inc. v. Society Insurance Inc., questions whether a company can obtain coverage for Illinois-related coronavirus-related losses .
Sweet Berry Cafe v Society Insurance, Inc.
A three-judge panel upheld the denial of Sweet Berry Café’s lawsuit against company insurance, ruling that neither the presence of the virus nor government shutdown orders caused direct physical loss or damage to property necessary to trigger coverage.
First, the court considered whether “physical loss” required a change in the physical characteristics of the insured property or whether it could be met by the presence of COVID-19. Society argued the virus did not physically alter or damage property and could be removed with cleaning products. Café countered that the virus can remain airborne for hours and remain active on surfaces for up to 72 hours, thereby physically damaging tangible property by creating a dangerous property condition similar to harmful gas contamination. As a result, Café claimed that it lost full use of its premises. The court ruled that the policy required a “physical change or material expropriation” and not just a loss of use. As the court explained, “physical loss” requires deprivation caused by a material thing, which excludes economic loss resulting from Cafe’s inability to conduct its business fully. The court found that COVID-19 is not related to harmful gases that would render the entire property unusable. Unlike a noxious gas, “the presence of the virus is easily remedied by routine … cleaning and disinfection, or dies off after a few days[.]”
Café’s second theory was that executive orders barred 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. The company argued it was only a temporary reduction in operations, similar to zoning regulations, and not the result of “direct physical loss or damage” to property. The court agreed with the Society, arguing that closure orders “prohibited only personal eating, which is a use of the property, but permitted meal preparation and take-out delivery.”
The decision was consistent with a majority of courts across the country interpreting similar pandemic-related loss cases, including a December Seventh Circuit ruling that sided with an appeal to Cincinnati Insurance Company, which settled three lawsuits by Illinois companies included: Sandy Point Dental, PC, the Bend Hotel Development Company and TJBC, Inc. (restaurants). The Seventh Circuit upheld the lower courts’ dismissal of the cases, agreeing that all three companies failed to adequately allege that either the COVID-19 virus or the resulting closure orders caused a “direct physical loss” of property. In addition, the court ruled that reduced use of the premises or the impossibility of preferential use of the premises was not sufficient to establish a claim. “[The plaintiffs] alleging neither a physical alteration of ownership nor a deprivation of access or use sufficiently substantial to constitute physical expropriation,” the court ruled, proposing gas infiltration as an example of something that could potentially cause the latter scenario.
Like the Seventh Circuit, the Illinois Court of Appeals referred to the noxious gas analogy in its decision that Café did not suffer a “substantial dispossession” of its property, but failed to elaborate on what it meant by substantial dispossession. This lack of clarity can leave the door open to appeals from companies that have been forced to close their entire business for an extended period due to COVID-19 or government orders.
Jump Buffalo Grove LLC vs. Cincinnati Insurance Company
Jump Buffalo Grove LLC is one such company. Illinois Trampoline Park is appealing the US District Court’s November 2021 dismissal of its lawsuit against Cincinnati Insurance Company, alleging that the Seventh Circuit Court’s ruling in Sandy Point Dental left open the possibility that a loss without structural modifications could be covered if this were far enough considered to be “complete physical dispossession”.
The virus, coupled with the governor’s lockdown orders banning customers, caused the company to suffer “total physical dispossession,” Jump Buffalo Grove (JBG) argued.
“Similar to gas, ammonia or carbon monoxide contamination, COVID-19 and resulting executive regulations rendered JBG’s facility unsafe, dangerous and unusable for a period of time,” the trampoline park wrote.
The company argued that, unlike the plaintiffs at Sandy Point Dental, it was claiming more than a partial loss of its preferred use of its premises.
“This was not a situation where JBG could not use its facility for its preferred purposes, but for limited purposes,” the company wrote. “It was unable to use its premises for any of its intended purposes. JBG has been completely shut down and closed to the public.”
Colectivo Coffee Roasters against company insurance
While courts have largely dismissed lawsuits from companies whose operations were partially open, an appeal can be observed from Colectivo Coffee Roasters in Wisconsin. The case, arising from a class action lawsuit filed 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 companies’ complaint, saying that “direct physical loss of or damage to” insured property was required to trigger coverage and that the companies had not asserted this. To do so, insureds would have had to demonstrate physical damage in the form of material liability for insured property or physical loss in the form of actual destruction or dispossession of insured property.
The trial court denied Society Insurance’s motion, finding that the companies had reasonably claimed that they suffered direct physical loss of the insured property because they were physically unable to use their property in the manner intended. The court also concluded that the insureds had reasonably claimed a dangerous condition on or near their insured property because COVID-19 was likely to be present on the property, which in turn prompted the government to restrict access to the insured property ban, which led to civil authority cover from occurring.
Society Insurance filed motions for leave to appeal to bypass the Court of Appeals and go directly to the Wisconsin Supreme Court, which were granted.
take that away
With Illinois’ appeal verdict in Sweet Berry Cafe and the Seventh Circuit decision in Sandy Point Dental, the road ahead is a challenging one for companies pursuing COVID-19 claims in Illinois. It is likely that a company will need to claim full expropriation of the premises to get through the layoff phase.