Opinion
1-22-0178
06-30-2023
GRADUATE HOTELS REAL ESTATE FUND III LP, on behalf of itself and AJ CAPITAL REAL ESTATE FUND II LP, Plaintiff-Appellant, v. HARTFORD FIRE INSURANCE COMPANY, Defendant-Appellee.
This order was filed under Supreme Court Rule 23 and is not precedent except in the limited circumstances allowed under Rule 23(e)(1).
Appeal from the Circuit Court of Cook County 20 CH 5700 Honorable Allen Price Walker Judge Presiding
JUSTICE ELLIS delivered the judgment of the court. Presiding Justice Fitzgerald Smith and Justice Howse concurred in the judgment.
ORDER
ELLIS JUSTICE
¶ 1 Held: Affirmed. There was no evidence of direct physical loss or direct physical damage required to trigger insurance coverage.
¶ 2 This appeal presents an issue that has been decided repeatedly in recent Illinois appellate law-whether a company's loss of business income caused by the Covid-19 pandemic and government shutdown is covered under a commercial insurance policy. Every decision has answered that question "no." And many have done so on one of the bases that the circuit court here answered it "no"-that lost income caused by the pandemic and shutdown did not constitute "physical loss" or "physical damage" to property and thus was not covered under the policies before us. We will not depart from this overwhelming weight of authority. We affirm.
¶ 3 Plaintiff, Graduate Hotels Real Estate Fund III LP (Graduate Hotels), owns and operates hotels near colleges and universities around the country. The COVID-19 pandemic forced a temporary shutdown of its businesses in March 2020. And even when re-opened, its hotels suffered significant losses of business income during the shutdown. Graduate Hotels filed claims with Defendant Hartford Fire Insurance Company (Hartford), which had issued two insurance policies covering their various properties (Policies).
¶ 4 The Policies provided that Hartford would "pay for direct physical loss of or direct physical damage to" various types of property if the loss or damage were "caused by or resulting from a Covered Cause of Loss." In turn, the Policies defined "Covered Causes of Loss" as "direct physical loss or direct physical damage." (Emphasis added.)
¶ 5 As to lost income, the Policies covered "the actual loss of Business Income you sustain and the actual, necessary and reasonable Extra Expense you incur due to the necessary interruption of your business operations during the Period of Restoration due to direct physical loss of or direct physical damage to property caused by or resulting from a Covered Cause of Loss." (Emphasis added.)
¶ 6 Hartford denied Graduate Hotels' claim in part because the "suspected contamination with the virus is not direct physical loss or damage to property. You understandably took this action to protect other people from the virus. Unfortunately, that does not trigger insurance coverage under your property policy." Defendant also denied coverage under the additional limited coverage as it did not find the loss was from a "specified cause of loss."
¶ 7 Graduate Hotels filed the present declaratory judgment action, seeking a finding that their business losses due to the COVID-19 pandemic were caused by a "specified cause of loss" and constituted physical loss or physical damage. After the initial motion practice, Hartford moved for summary judgment, arguing that these COVID-19-related losses were not covered.
¶ 8 Graduate Hotels initially sought leave to issue discovery before responding to the motion. See Ill. S.Ct. R. 191(b) (eff. Jan. 4, 2013.) The court denied that request, finding that any purported discovery would be irrelevant, as the case presented an issue of contract interpretation only. After full briefing, the circuit court entered summary judgment in favor of Hartford on several grounds, one of which was that Graduate Hotels did not suffer "direct physical loss of or direct physical damage to" property.
¶ 9 Graduate Hotels appeals. Each party cited supplemental authority to the court. Graduate Hotels cited a California decision that held that COVID-19 closures were covered. Hartford cited eight decisions from this court, and numerous others nationwide, that held otherwise.
¶ 10 The question of whether government closure mandates result in physical loss or damage to covered property has been exhaustively litigated in Illinois, with the courts consistently concluding that economic loss sustained during the pandemic did not constitute "physical loss of" or "physical damage" to property under the commercial insurance policies. See Oak Park Prosthodontics, Ltd. v. Twin City Fire Insurance Co., 2023 IL App (1st) 220563-U, ¶ 24 ("At this point, more than a dozen Illinois appellate courts have ruled that commercial property insurance policies do not cover economic losses sustained by businesses during the pandemic, despite the policyholders' attempts to attribute their financial losses to "physical loss," "physical damage" from the SARS-CoV-2 virus or the insureds' compliance with executive orders."); see also id. ¶ 31 (collecting cases).
¶ 11 The key to most of these decisions, as here, is that the insurance policies only covered physical loss of or damage to property (as here) and did not otherwise define the terms (as here). Lee v. State Farm Fire and Casualty Company, 2022 IL App (1st) 210105, ¶ 20, Sweet Berry Cafe, Inc. v. Society Insurance, Inc., 2022 IL App (2d) 21088, ¶ 42. But our supreme court has held that "physical" injury occurs when property is "altered in appearance, shape, color or in other material dimension." Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill.2d 278, 301 (2001). And the fact that the insured was unable to use the property, or had to routinely clean or sanitize it, did not amount to a physical change to, or loss of, the property that was coverable. See Lee, 2022 IL App (1st) 210105, ¶ 19, Sweet Berry Cafe, 2022 IL App (2d) 21088, ¶ 41.
¶ 12 Among the weight of authority on this point in Hartford's favor here are decisions under Illinois law concerning claims by hotels, as here. See GPIF Crescent Court Hotel LLC v. Zurich American Insurance Co., 2022 IL App (1st) 211335-U, ¶¶ 21-22 (unpublished decision under Supreme Court Rule 23(c)) (loss of use of hotel property did not amount to allegation of "change to the physical nature of the existing property" sufficient to allege physical loss of or damage to property, as" 'the mere presence of [Covid-19] virus does not physically alter the appearance, shape, color, structure, or other material dimension of the property'" (quoting ABW Development, LLC v. Continental Casualty Co., 2022 IL App (1st) 210930, ¶ 35)); Bradley Hotel Corp. v. Aspen Specialty Insurance Co., 19 F.4th 1002, 1007 (7th Cir. 2021) (under Illinois law, when insured hotel suspended in-person dining and cancelled events due to executive orders, it "allege[d] loss of use that is not tethered to any direct physical loss or damage that could serve as a covered cause of loss" under its general business property policy: "The hotel was not physically harmed or damaged in any way."); Crescent Plaza Hotel Owner, L.P. v. Zurich American Insurance Co., 20 F.4th 303 (7th Cir. 2021) (under Illinois law, losses due to "direct physical loss or damage" to property did not apply to loss of use of property without any physical alteration, adopting reasoning of Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327, 333 (7th Cir. 2021) ("Without a physical alteration to property, there would be nothing to repair, rebuild, or replace.")).
¶ 13 Graduate Hotels offers a unique spin, claiming that the policies at issue here "concede[] that the mere presence of a 'virus' causes 'direct physical loss' or 'direct physical damage' to property." The argument is that, because the policy covers physical loss or damage caused by a virus, a virus must necessarily cause physical loss or damage. In its view, holding that a virus "cannot inherently cause 'loss or damage' is an unreasonable interpretation of the term 'loss or damage' because it would make this coverage illusory."
¶ 14 But nobody is saying that a virus could never cause physical property loss or damage. If we have learned anything from the pandemic, it is the chilling reminder that the future is never certain. Perhaps we could conjure up a scenario where a different virus might cause physical loss of or damage to property. But not here. As a litany of cases have held, being required to clean and sanitize property does not amount to an alteration of the property sufficient to constitute physical property damage or loss.
¶ 15 Graduate Hotels claims it has presented evidence of physical damage or loss, as there were confirmed cases of COVID-19 at its locations. But we have found that the mere presence of the virus at the property is insufficient. See ABW Development, 2022 IL App (1st) 210930, ¶ 35 ("[E]ven assuming the COVID-19 virus was present at the premises, the mere presence of the virus on surfaces does not constitute 'physical loss of or damage to property' because COVID-19 does not physically alter the appearance, shape, color, structure, or other material dimension of the property."); see also id. (" 'While the impact of the virus on the world over the last year and a half can hardly be overstated, its impact on physical property is inconsequential: deadly or not, it may be wiped off surfaces using ordinary cleaning materials, and it disintegrates on its own in a matter of days.'" (quoting Sandy Point Dental, 20 F.4th at 335)).
¶ 16 As we find that the circuit court's legal conclusion on this ground was correct, we need not address any of the other bases for the circuit court's conclusion.
¶ 17 Finally, Graduate Hotels argues that the circuit court should have granted its request for discovery under Illinois Supreme Court Rule 191(b) (eff. Jan 4, 2013), which we review for an abuse of discretion. Jiotis v. Burr Ridge Park District, 2014 IL App (2d) 121293, ¶ 28.
¶ 18 Rule 191 discovery should be allowed if the non-movant can show that the purported discovery could create a genuine issue of material fact opposing summary judgment. Kim v. State Farm Mutual Automobile Insurance Co., 2021 IL App (1st) 200135, ¶ 59. Here, Graduate Hotels did not persuasively make that case; as the circuit court noted, it was addressing pure questions of law. See Eljer, 197 Ill.2d at 301 (if "the words of the policy are unambiguous, it is unnecessary for this court to consider extrinsic evidence of the policy's purported meaning.").
¶ 19 Graduate Hotels argues that the discovery it sought to obtain, related primarily to documents internal to Hartford, were relevant to Hartford's and the industry's "custom and usage" to explain the proper interpretation of the policy language here. We fail to see how any discovery could overcome our consistent interpretations of this language in case after case in Illinois, only some of which we have provided above. At a minimum, we certainly could not say that the circuit court's refusal to allow this discovery was so arbitrary or unreasonable as to constitute an abuse of discretion. We thus uphold the court's Rule 191 ruling as well.
¶ 20 For these reasons, we affirm the circuit court's judgment.
¶ 21 Affirmed.