Opinion
No. 21 C 793
2021-09-23
C.J.M., INC. d/b/a The Fireside Grill, Plaintiff, v. MID-CENTURY INSURANCE COMPANY, Defendant.
Charles Aaron Silverman, Charles Aaron Silverman PC, Skokie, IL, Roberta Ann Becker, Becker & Becker, Hoffman Estates, IL, for Plaintiff. David Newmann, Pro Hac Vice, Caitlyn Anne Mancuso, Pro Hac Vice, Jasmeet K. Ahuja, Pro Hac Vice, Hogan Lovells US LLP, Philadelphia, PA, Randall Allan Hack, Locke Lord LLP, Chicago, IL, for Defendant.
Charles Aaron Silverman, Charles Aaron Silverman PC, Skokie, IL, Roberta Ann Becker, Becker & Becker, Hoffman Estates, IL, for Plaintiff.
David Newmann, Pro Hac Vice, Caitlyn Anne Mancuso, Pro Hac Vice, Jasmeet K. Ahuja, Pro Hac Vice, Hogan Lovells US LLP, Philadelphia, PA, Randall Allan Hack, Locke Lord LLP, Chicago, IL, for Defendant.
OPINION AND ORDER
SARA L. ELLIS, United States District Judge
Plaintiff C.J.M., Inc. d/b/a The Fireside Grill ("C.J.M."), which operates a restaurant in Sugar Grove, Illinois, suffered losses due to the COVID-19 pandemic. C.J.M. subsequently filed a claim with its insurer, Defendant Mid-Century Insurance Company ("Mid-Century"). Mid-Century denied the claim, and C.J.M. filed this suit in response. C.J.M. brings claims for breach of contract and related declaratory relief, as well as for bad faith denial of coverage under Illinois law. Mid-Century filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court finds that C.J.M. has not sufficiently alleged "direct physical loss of or damage to" property as required to obtain coverage under its insurance policy. This failure dooms C.J.M.'s breach of contract and declaratory judgment claims, as well as its bad faith claim. The Court thus grants Mid-Century's motion to dismiss and dismisses C.J.M.'s complaint without prejudice.
BACKGROUND
I. The Insurance Policy
C.J.M. owns and operates a restaurant in Sugar Grove, Illinois. C.J.M. obtained a commercial property insurance policy with policy number 60675-71-16 (the "Policy") from Mid-Century. The Policy covered the period from August 15, 2019 through August 15, 2020.
As relevant here, the Policy provides coverage for "direct physical loss of or damage to Covered Property ... caused by or resulting from any Covered Cause of Loss." Doc. 17-1 at 5. The Policy's "business income" coverage further provides:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration." The suspension must be caused by direct physical loss of or damage to property at the described premises.
Id. at 8. A policyholder may also recover for "Extra Expense" it "incur[s] during the ‘period of restoration’ that [it] would not have incurred if there had been no direct physical loss or damage to property at the described premises." Id. at 9. Finally, as relevant here, the Policy provides "civil authority" coverage:
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.
Id. at 10. The Policy defines "period of restoration" as the time period that begins "(1) 72 hours after the time of direct physical loss or damage for Business Income Coverage; or (2) [i]mmediately after the time of direct physical loss or damage for Extra Expense Coverage; caused by or resulting from any Covered Cause of Loss at the described premises." Id. at 26. The "period of restoration" ends on the earlier of "(1) [t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or (2) [t]he date when business is resumed at a new permanent location." Id. at 27.
The Policy also includes a number of exclusions. As relevant here, the Virus Exclusion, which applies to all coverage, including that for business income, extra expense, or actions of civil authorities, states that Mid-Century "will not pay for loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness or disease." Id. at 28. The Ordinance or Law Exclusion bars coverage for loss or damage caused directly or indirectly by the enforcement of any ordinance or law "regulating the construction, use or repair of any property." Id. at 13. Finally, the Consequential Losses Exclusion bars coverage for loss or damage caused directly or indirectly by "[d]elay, loss of use or loss of market." Id. at 15.
II. C.J.M.'s Insurance Claim
In response to the COVID-19 pandemic, Illinois Governor J.B. Pritzker issued Executive Order 2020-07 on March 15, 2020, which required all bars, restaurants, and movie theaters to close to the public. On March 20, 2020, Governor Pritzker issued Executive Order 2020-10, which closed all non-essential businesses in a further effort to combat the COVID-19 pandemic. As essential businesses, restaurants could remain open but only to prepare and serve food for off-premises consumption. No on-premises dining was allowed.
In response to the Executive Orders and the ongoing spread of COVID-19, C.J.M. initially suspended its operations and then resumed them in a limited manner. C.J.M. filed a claim with Mid-Century seeking coverage for its COVID-19 related business losses. Mid-Century denied C.J.M.'s claims, concluding that the Policy did not provide coverage for C.J.M.'s losses. This suit followed.
LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits. Fed. R. Civ. P. 12(b)(6) ; Gibson v. City of Chicago , 910 F.2d 1510, 1520 (7th Cir. 1990). In considering a Rule 12(b)(6) motion, the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. Kubiak v. City of Chicago , 810 F.3d 476, 480–81 (7th Cir. 2016). To survive a Rule 12(b)(6) motion, the complaint must assert a facially plausible claim and provide fair notice to the defendant of the claim's basis. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Adams v. City of Indianapolis , 742 F.3d 720, 728–29 (7th Cir. 2014). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.
ANALYSIS
I. Scope of Coverage
Under Illinois law, which the parties agree governs the Policy, the construction of an insurance policy is a question of law. Country Mut. Ins. Co. v. Livorsi Marine, Inc. , 222 Ill. 2d 303, 311, 305 Ill.Dec. 533, 856 N.E.2d 338 (2006). The Court construes an insurance policy as a whole, giving effect to the true intentions of the contracting parties as expressed in the policy. First Ins. Funding Corp. v. Fed. Ins. Co. , 284 F.3d 799, 804 (7th Cir. 2002). The Court gives unambiguous policy language its "plain, ordinary, and popular meaning." Cent. Ill. Light Co. v. Home Ins. Co. , 213 Ill. 2d 141, 153, 290 Ill.Dec. 155, 821 N.E.2d 206 (2004). An ambiguity exists where policy language is subject to more than one reasonable interpretation. Hobbs v. Hartford Ins. Co. of the Midwest , 214 Ill. 2d 11, 17, 291 Ill.Dec. 269, 823 N.E.2d 561 (2005). The Court will not find ambiguity simply because the parties disagree as to the meaning of a policy provision, however. Founders Ins. Co. v. Munoz , 237 Ill. 2d 424, 433, 341 Ill.Dec. 485, 930 N.E.2d 999 (2010). Where ambiguity exists, courts construe the ambiguous terms strictly against the drafter and in favor of coverage. Outboard Marine Corp. v. Liberty Mut. Ins. Co. , 154 Ill. 2d 90, 119, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992).
Here, Mid-Century contends that C.J.M.'s breach of contract and declaratory judgment claims fail because the Policy does not cover C.J.M.'s losses. Mid-Century argues that C.J.M. has failed to allege "direct physical loss of or damage to" property, or alternatively, that several of the Policy's exclusions bar coverage for C.J.M.'s losses. The Court need only address the first argument, whether C.J.M. suffered "direct physical loss of or damage to" property, which C.J.M. must have suffered to obtain either business income or civil authority coverage. Mid-Century maintains that "physical loss" and "physical damage" requires "physical alteration or structural degradation of the property." Doc. 17 at 14 (quoting Sandy Point Dental, PC v. The Cincinnati Ins. Co. , 488 F. Supp. 3d 690, 693 (N.D. Ill. 2020) ). C.J.M., on the other hand, argues that "direct physical loss" can also apply to "work stoppage due to physical conditions that render the premises of the business unusable." Doc. 22 at 11.
While the Policy does not define "physical loss" or "physical damage," that does not automatically render these terms ambiguous. Nicor, Inc. v. Associated Elec. & Gas Ins. Servs. Ltd. , 223 Ill. 2d 407, 417, 307 Ill.Dec. 626, 860 N.E.2d 280 (2006). In addressing a similar question, the Illinois Supreme Court concluded that "physical injury," under its plain and ordinary meaning, "unambiguously connotes damage to tangible property causing an alteration in appearance, shape, color or in other material dimension." Travelers Ins. Co. v. Eljer Mfg., Inc. , 197 Ill. 2d 278, 312, 258 Ill.Dec. 792, 757 N.E.2d 481 (2001). More recently, the majority of courts considering COVID-19 insurance claims have agreed that "physical" loss or damage requires a tangible or concrete injury. See, e.g., Image Dental, LLC v. Citizens Ins. Co. of Am. , 543 F.Supp.3d 582, 588 (N.D. Ill. June 11, 2021) ("The nature of the loss must be physical , not intangible, immaterial, economic, or regulatory."); Sandy Point Dental , 488 F. Supp. 3d at 693 ("The words ‘direct’ and ‘physical,’ which modify the word ‘loss,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons extraneous to the premises themselves, or adverse business consequences that flow from such closure."); see also Gilreath Fam. & Cosm. Dentistry, Inc. v. Cincinnati Ins. Co. , 2021 WL 3870697, at *2 (11th Cir. Aug. 31, 2021) ("[T]here must be ‘an actual change in insured property’ that either makes the property ‘unsatisfactory for future use’ or requires ‘that repairs be made.’ " (citation omitted)); Oral Surgeons, P.C. v. Cincinnati Ins. Co. , 2 F.4th 1141, 1144 (8th Cir. 2021) ("[T]here must be some physicality to the loss or damage of property—e.g. , a physical alteration, physical contamination, or physical destruction.").
C.J.M. argues, however, that the Court should find that a loss of use or access to a business' physical space qualifies as physical loss. See Blue Springs Dental Care, LLC v. Owners Ins. Co. , 488 F. Supp. 3d 867, 873–74 (W.D. Mo. 2020) ("Plaintiffs plausibly allege that COVID-19 physically attached itself to their dental clinics, thereby depriving them of the possession and use of those insured properties."); Studio 417, Inc. v. Cincinnati Ins. Co. , 478 F. Supp. 3d 794, 800–01 (W.D. Mo. 2020) ("Defendant conflates ‘loss’ and ‘damage’ in support of its argument that the Policies require a tangible, physical alteration."). True, the terms "loss of" and "damage to" must mean different things: "[t]he plain wording of the phrase requires either a permanent disposition of the property due to a physical change (‘loss’), or physical injury to the property requiring repair (‘damage’)." Crescent Plaza Hotel Owner L.P. v. Zurich Am. Ins. Co. , 520 F.Supp.3d 1066, 1070 (N.D. Ill. 2021). But the Court respectfully disagrees that the Policy's language allows for the conclusion that "physical loss of" property includes loss of use of the property without any tangible or concrete loss. See Image Dental , 543 F.Supp.3d at 589 ("A ‘physical loss’ of property does not mean a mere inability to run a business."). Such an interpretation improperly reads "physical" out of the Policy's language. See id. at 59 ("Under the policy in question, a physical loss is a sine qua non of coverage. A loss of use without a physical loss doesn't count."); Chief of Staff LLC v. Hiscox Ins. Co. , 532 F.Supp.3d 598, 602 (N.D. Ill. Mar. 31, 2021) ("[I]f the mere loss of use were covered, what would be the difference between ‘direct loss’ and ‘direct physical loss’?").
The Policy's definition of "period of restoration" further supports requiring a tangible or concrete change. The Policy's business income provision covers losses due to the "necessary suspension of [C.J.M.'s] ‘operations’ during the ‘period of restoration.’ " Doc. 17-1 at 10. Under the Policy, the "period of restoration" begins "after the time of direct physical loss or damage" and lasts until either "[t]he date when the property ... should be repaired, rebuilt, or replaced ... or ... when business is resumed at a new permanent location." Doc. 17-1 at 27. The policyholder must suffer some physical alteration to its property to determine the end of the "period of restoration;" otherwise, there would be no need to repair, rebuild, or replace anything, let alone a need to move to a new permanent location. See Melcorp, Inc. v. W. Am. Ins. Co. , No. 20 C 4839, 548 F.Supp.3d 711, 715 (N.D. Ill. July 8, 2021) ("The uneasy fit between the ‘period of restoration’ language, which is critical to application of the Business Income provision, and Melcorp's interpretation of the provision confirms that the correct reading is the one requiring some physical change in the condition or location of property at the insured's premises."); Chief of Staff , 532 F.Supp.3d at 603 ("If there has been no physical alteration to the condition or location of the property, there is nothing to ‘repair[ ], rebuil[d], or replace[ ].’ Nor is there any reason to expect that ... the business would resume at ‘a new permanent location.’ " (citations omitted)). Therefore, the Court rejects C.J.M.'s preferred interpretation and instead agrees with the majority of courts to have considered the question that "direct physical loss of or damage to" property requires concrete or tangible loss or damage. See Image Dental , at 590-91 (collecting cases).
Here, C.J.M. has failed to allege any actual physical loss or damage to its property. "The coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property." Sandy Point Dental , 488 F. Supp. 3d at 694 ; see also L&J Mattson's Co. v. Cincinnati Ins. Co. , No. 20 C 7784, 536 F.Supp.3d 307, 314 (N.D. Ill. Apr. 29, 2021) ("The presence of virus in the air does not physically damage any of the property at the premises. Nor does the presence of the virus on surfaces physically damage them."). The Court does not find persuasive C.J.M.'s analogy to cases finding that the presence of asbestos, ammonia, or other persistent hazards cause a physical loss. Unlike COVID-19, these hazards "generally involve persistent physical contamination that requires repair or replacement, rather than cleaning and disinfecting, to remediate." Circle Block Partners, LLC v. Fireman's Fund Ins. Co. , No. 1:20-cv-02512, 2021 WL 3187521, at *7 (S.D. Ind. July 27, 2021) ; Kim-Chee LLC v. Philadelphia Indem. Ins. Co. , 535 F.Supp.3d 152, 161 (W.D.N.Y. Apr. 23, 2021) ("[C]ourts have consistently ruled that contamination by a persistent chemical or biological agent, not otherwise excluded from coverage, may cause a direct physical loss if it renders the insured property unusable.... [C]ontamination that is temporary ... or that imposes remediation costs without preventing use of the building ... is unlikely to qualify as a direct physical loss to the insured premises." (collecting cases)). Additionally, C.J.M. has not alleged any actual physical loss or damage to other property—a necessary element for the civil authority provision to apply. See Chief of Staff , 532 F.Supp.3d at 606-07 (collecting cases). Nor did the closure orders prohibit access to C.J.M.'s property; while the orders prohibited on-site consumption of food and drink, C.J.M. could continue to use the property to prepare and serve food for off-site consumption. See Sandy Point Dental , 488 F. Supp. 3d at 694 ("[W]hile coronavirus orders have limited plaintiff's operations, no order issued in Illinois prohibits access to plaintiff's premises."); see also Santo's Italian Café v. Acuity Ins. Co. , 15 F.4th 398, 402 (6th Cir. Sept. 22, 2021) ("[The closure orders] simply prohibited one use of the property—in-person dining—while permitting takeout dining and through it all did not remotely cause direct physical damage to the property."). Because COVID-19 and the closure orders caused only an economic loss, not a physical loss, no basis exists for coverage under either the business income or civil authority provisions. Therefore, the Court dismisses C.J.M.'s breach of contract and declaratory relief claims.
Because the Court concludes that the Policy does not provide coverage for C.J.M.'s losses, it need not address whether any exclusions in the policy would apply.
II. Bad Faith Claim
Having found that C.J.M.'s coverage claims fail, the Court concludes that the bad faith denial claim fails as well. Under Illinois law, Section 155 "provides an extracontractual remedy to policyholders whose insurer's refusal to recognize liability and pay a claim under a policy is vexatious and unreasonable." Cramer v. Ins. Exch. Agency , 174 Ill. 2d 513, 519, 221 Ill.Dec. 473, 675 N.E.2d 897 (1996) ; 215 Ill. Comp. Stat. 5/155. Illinois law allows a cause of action to proceed under Section 155 only if the insurer owes the insured benefits under the terms of the policy. First Ins. Funding Corp. , 284 F.3d at 807. Thus, when "an insurer denies the claim of an insured because no coverage exists, the insurer has not failed to honor its contractual obligations under an insurance policy." Id. Accordingly, because C.J.M. has not sufficiently alleged claims for coverage under the Policy, it also cannot proceed on its claim for bad faith denial of coverage under Illinois law.
CONCLUSION
For the foregoing reasons, the Court grants Mid-Century's motion to dismiss [16]. Although the Court does not see how C.J.M. could cure the deficiencies in its complaint, the Court will provide it with one opportunity to replead its claims. Therefore, the Court dismisses C.J.M.'s complaint without prejudice and orders C.J.M. to file an amended complaint by October 22, 2021. If C.J.M. does not file an amended complaint, the dismissal will automatically convert to one with prejudice and the Court will enter judgment accordingly.