The court’s analysis was appropriately driven by the language of the insurance policy at issue and the plain meaning of the core terms therein. The court’s decision hinged in large part on the phrase “direct physical loss of or damage to covered property” and whether that encompasses the affected restaurants’ losses attributable to their capacity restrictions and forced closures throughout the pandemic. Analyzing this phrase, the court observed that the disjunctive “or” means that “‘physical loss’ must cover something different from ‘physical damage,’” thereby dismissing Society’s argument that the virus could not constitute “direct physical loss of or damage to” because “the virus ‘does not cause a tangible change to the physical characteristics of property.’” Rather, the court noted, “coverage extends to direct physical ‘loss of’ property as well. So the Plaintiffs need not plead or show a change to the property’s physical characteristics.”
The court went on to consider whether or not the plaintiffs’ operating restrictions constitute, at a minimum, “a direct ‘physical’ loss of property on their premises.” Ultimately siding with plaintiffs, the court explained:
[T]he pandemic-caused shutdown orders do impose a physical limit: the restaurants are limited from using much of their physical space. It is not as if the shutdown orders imposed a financial limit on the restaurants by, for example, capping the dollar-amount of daily sales that each restaurant could make. No, instead the Plaintiffs cannot use (or cannot fully use) the physical space….
Another way to understand the physical nature of the loss inflicted by the shutdown orders is to consider how a restaurant might mitigate against the suspension of operations caused by, say, a 25%-capacity limitation on the number of guests inside the restaurant. If the restaurant could expand its physical space, then the restaurant could serve more guests and the loss would be mitigated (at least in part). The loss is physical – or at the very least, a reasonable jury can make that finding.
Society countered this conclusion by pointing to the policy’s definition of “Period of Restoration,” which states that coverage for loss of business income “ends on the earlier of” “the date when the property at the described premises should be repaired, rebuilt[,] or replaced with reasonable speed and similar quality; or the date when business is resumed at a new permanent location.” The phrase “repaired, rebuilt[,] or replaced,” Society reasoned, necessarily requires physical injury to property rather than mere loss of use. This did not sway the court, however. Rather, the court found that “[t]here is nothing inherent in the meanings of those words that would be inconsistent with characterizing the Plaintiffs’ loss of their space due to the shutdown orders as a physical loss.” Further:
If, for example, the coronavirus risk could be minimized by the installation of partitions and a particular ventilation system, then the restaurants would be expected to “repair” the space by installing those safety features. As another example, if a restaurant could mitigate the loss caused by a percentage-capacity limit by “replacing” some of its dining-room space by opening its adjacent banquet-hall room to increase the number of guests it could serve, then the restaurant would be expected to “replace” the loss of space by doing so.
In addition, the court disagreed with Society’s argument that direct causation or last-in-chain causation is required to trigger coverage. Society argued that the civil orders were a non-covered cause of loss and were closer in the chain of causation to the policyholders’ business income losses. In so disagreeing, the court found Society’s conclusion to be the incorrect causation standard – that is, that coverage is precluded because “the Plaintiffs’ businesses have been interrupted by the various state and local shutdown orders – not by the coronavirus itself.” The court reasoned: “It is true that Covered Cause of Loss is defined as ‘direct physical loss,’ but that definition does not purport to impose a stricter causation standard than proximate cause.” The court examined the law of all four states at issue and determined that none of them impose such a strict causation requirement as advocated by Society. In fact, the court observed, in Illinois “the proximate-cause standard traces back over a century” and remains binding today.
The court defined a proximate cause as “one that produces an injury through a natural and continuous sequence of events unbroken by any effective intervening cause,” in effect adopting a concurrent causation theory when applied to the chain of events that caused plaintiffs’ loss – that is, the pandemic (a covered cause of loss) caused the shutdown orders, which imposed the restrictions that caused plaintiffs’ losses.
Despite the foregoing, the court ultimately sided with Society regarding the plaintiffs’ request for coverage under the Civil Authority and Contamination provisions. In doing so, the court found that the plaintiffs’ ability to operate, even at reduced capacity, precluded coverage because the policy required that access be “prohibited” and operations “suspended,” respectively, at the insured properties. The court further found that plaintiffs had not made a factual argument that “one or more of them has been closed due to actual COVID-19 contamination of the premises, machinery, or equipment.” Similarly, the court agreed with Society that one plaintiff’s Sue and Labor clause did not apply because it “does not independently describe coverage, but instead sets forth what the insured must do if there is coverage.”
Client Alert 2020-053
