Opinion
Case No. 1:21-cv-02376
2022-09-27
MOTHERWAY & NAPLETON, LLP, Plaintiff, v. SENTINEL INSURANCE COMPANY LIMITED a/k/a The Hartford, Defendant.
Dominic C. LoVerde, Power Rogers, LLP, Chicago, IL, Robert J. Napleton, Cameron James Botticelli, Motherway & Napleton, LLP, Chicago, IL, for Plaintiff. Anthony J. Anscombe, Darlene Kay Alt, Mary E. Buckley, Steptoe & Johnson LLP, Chicago, IL, John James Kavanagh, III, Pro Hac Vice, Steptoe & Johnson LLP, Washington, DC, for Defendant Sentinel Insurance Company Limited.
Dominic C. LoVerde, Power Rogers, LLP, Chicago, IL, Robert J. Napleton, Cameron James Botticelli, Motherway & Napleton, LLP, Chicago, IL, for Plaintiff. Anthony J. Anscombe, Darlene Kay Alt, Mary E. Buckley, Steptoe & Johnson LLP, Chicago, IL, John James Kavanagh, III, Pro Hac Vice, Steptoe & Johnson LLP, Washington, DC, for Defendant Sentinel Insurance Company Limited. ORDER John Robert Blakey, United States District Judge
In March 2020, law firm Motherway & Napleton, LLP (Motherway) had to shut down its office because building occupants contracted COVID-19 and Illinois' Governor issued business closure orders. [1-2]. As a result, Motherway suffered business losses and expenses and filed a coverage claim with its insurer, Defendant Sentinel Insurance Company Limited a/k/a The Hartford (Sentinel). Id. When Sentinel denied the claim, Motherway sued in Illinois state court seeking a declaratory judgment and alleging breach of contract, bad-faith claims handling, and negligent misrepresentation. Id. Sentinel removed the suit to this Court, [1], and now moves for judgment on the pleadings pursuant to Rule 12(c), [29]. Because the Court agrees that Plaintiff's claims fail as a matter of law, it grants Sentinel's motion [29] and dismisses the complaint with prejudice. Civil case terminated.
STATEMENT
A court evaluates a motion for judgment on the pleadings pursuant to Rule 12(c) using the same standards that it applies to a motion to dismiss under Rule 12(b)(6). See Adams v. City of Indianapolis, 742 F.3d 720, 727-28 (7th Cir. 2014) (citing Pisciotta v. Old Nat'l Bancorp, 499 F.3d 629, 633 (7th Cir. 2007)). Judgment on the pleadings is proper if "no genuine issues of material fact remain to be resolved" and "the moving party is entitled to judgment as a matter of law." Alexander v. City of Chicago, 994 F.2d 333, 336 (7th Cir. 1993).
Plaintiff seeks to recover the business losses and expenses it sustained related to the COVID-19 pandemic shutdown pursuant to an "all risks" commercial business policy it had with Defendant covering the period of October 14, 2019 through October 14, 2020 (the "Policy"). [1-2] ¶¶ 8-10; Ex. A. Plaintiff bases its coverage demand on the Policy's Special Property Coverage Form. Id. ¶¶ 14-21. In relevant part, this Form provides that Defendant will "pay for direct physical loss of or physical damage to Covered Property . . . caused by or resulting from a Covered Cause of Loss" where "Covered Causes of Loss" is defined as "risks of direct physical loss," unless the loss is excluded or otherwise limited under the Policy. Id. at 50, § A. This coverage includes payment for loss of business income "due to the necessary suspension of your 'operations' " but the "suspension must be caused by direct physical loss of or physical damage to property . . . caused by or resulting from the Covered Cause of Loss." Id. at 59, § A.5.o.1. The Form also covers "actual loss of Business Income" when access to the " 'scheduled premises' is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property in the immediate area of your 'scheduled premises.' " Id. at 60, § A.5.q.
The Policy also includes a "Limited Fungi, Bacteria or Virus Coverage" endorsement ("Endorsement"), which modifies the Special Property Coverage Form. Id. at 146. The Endorsement states that the Defendant will not pay for loss or damage caused directly or indirectly by the presence, growth, proliferation, spread or any activity of "fungi," wet rot, dry rot, bacteria or virus, unless it results in a "specified cause of loss" or is the result of (1) a "specified cause of loss" other than fire or lightning or (2) an Equipment Breakdown Accident. Id. at 146-47. In turn, the Policy defines "specified cause of loss" as "Fire; lightning; explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; [or] water damage." Id. at 74.
In its complaint, Plaintiff alleges that its losses qualify as "direct physical losses." Id. ¶¶ 68-70. Notably, the complaint also discusses the Endorsement and even acknowledges that it ostensibly excludes coverage because the virus (SARS-COV-2) that caused Plaintiff's alleged damages did not result from one of the "specified causes of loss." [1-2] ¶ 32. The complaint insists, however, that the Endorsement remains unenforceable because the Endorsement's limited coverage (for which Plaintiff paid an extra premium) provides no colorable benefit. [35] at 14-15. In other words, according to Plaintiff, the limited coverage constitutes illusory coverage. Id. Plaintiff also argues that the Endorsement remains ambiguous because, as Plaintiff sees it, the Endorsement first states that it "will not pay for loss or damage caused directly or indirectly" by a "virus" but then promises that it will "pay for loss or damages by . . . virus." [35] at 15-16.
Based upon the Policy's Special Property Coverage Form and these theories as to the Endorsement, Plaintiff seeks a declaratory judgment that Defendant must cover its income losses and expenses (Count I) and alleges that Defendant breached the Policy by refusing to pay (Count II); engaged in bad-faith claims handling (Count III); and negligently misrepresented to Plaintiff that the Endorsement provided limited coverage when it did not (Count IV).
Plaintiff's Amended Complaint also included a claim against Sentinel's insurance agent, Joseph Snyder & Associates, for negligence, [1-2], but the parties voluntarily dismissed with prejudice Defendant Snyder while the case was pending in state court, [1-3].
Plaintiff's coverage claims turn on interpretation of the Policy, and the parties agree—at least for purposes of this motion—that Illinois law controls, [30] at 6 n.1; [35] at 7. Under Illinois law, construction of an insurance policy remains a question of law. Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill.2d 303, 305 Ill.Dec. 533, 856 N.E.2d 338, 342 (2006). Applying general contract principles, a court will give clear and unambiguous terms their "plain, ordinary, and popular meaning." Cent. Ill. Light Co. v. Home Ins. Co., 213 Ill.2d 141, 290 Ill.Dec. 155, 821 N.E.2d 206, 2013 (2004). While "ambiguities in an insurance policy will be construed against the insurer, courts will not distort the language of a policy to create an ambiguity where none exists." Mashallah, Inc. v. West Bend Mut. Ins. Co., 20 F.4th 311, 322 (7th Cir. 2021) (quoting Dixon Distrib. Co. v. Hanover Ins. Co., 161 Ill.2d 433, 204 Ill.Dec. 171, 641 N.E.2d 395, 399 (1994)). Further, an insured bears the burden to establish that "its claim falls within the coverage of an insurance policy." Addison Ins. Co. v. Fay, 232 Ill.2d 446, 328 Ill.Dec. 858, 905 N.E.2d 747, 752 (2009). If it does, then the burden shifts to the insurer to prove that an exclusion applies. Id.
In moving for judgment on the pleadings, [29], Defendant argues that recent Seventh Circuit decisions firmly establish that Plaintiff's alleged damages do not constitues "direct physical loss" or "physical damage" as required for coverage, [30] at 6-10. It also argues that, even if Plaintiff could trigger coverage, the Endorsement unambiguously excludes coverage for Plaintiff's alleged losses. Id. at 10-15. Finally, Defendant also argues that Plaintiff's negligent misrepresentation claim fails, because Illinois law does not recognize such a claim against insurance companies. Id. at 17. The Court agrees on all points.
As Defendant emphasizes, this case is one of many that businesses have filed against insurers seeking recovery of business losses related to the COVID-19 pandemic. Since Plaintiff failed its lawsuit, the Seventh Circuit has issued a series of opinions addressing policy language like the language in the Policy here.
The first case, Sandy Point Dental, P.C. v. Cincinnati Insurance Co., involved a policy that, like the Policy here, covered business losses caused by "direct physical loss" or "physical damage" to the property. 20 F.4th 327, 329-34 (7th Cir. 2021). The court, applying Illinois law, held that "direct physical loss" or "physical damage" requires some alleged physical alteration to property. Id. It found that "loss of use, unaccompanied by any physical alteration to property" does not qualify. Id. at 329-30, 334. Thus, it concluded, the insureds could not recover their business losses and expenses resulting from COVID-19 shutdowns. Id. In so holding, the court rejected the plaintiff's contention that mere presence of a virus on the property or the Illinois governor's closure orders physically altered the covered property. Id. at 334-35.
Since Sandy Point, the Seventh Circuit has reiterated this finding in numerous other cases. See, e.g., Paradigm Care & Enrichment Ctr, LLC. V. West Bend Mut. Ins. Co., 33 F.4th 417 (7th Cir. 2022) (finding no coverage under Illinois and Michigan law for Childcare Center's losses); Melcorp, Inc. v. W. Am. Ins. Co., No. 21-2448, 2022 WL 2068256, at *1 (7th Cir. June 8, 2022) (same under Illinois law for a restaurant's losses). In addition, the Illinois Appellate Court has issued opinions agreeing with the Seventh Circuit's interpretation of Illinois law. See, e.g., Sweet Berry Café, Inc. v. Society Ins. Co., 456 Ill.Dec. 722, 193 N.E.3d 962, 974 (Ill. App. Ct. 2022) (discussing Sandy Point).
As relevant here, the Seventh Circuit has also addressed policies that include virus exclusions. The first case, Mashallah, Inc. v. West Bend Mutual Insurance Company, involved a policy that stated the insurer would "not pay for loss or damage caused by or resulting from any virus . . . that induces or is capable of inducing physical distress, illness or disease." 20 F.4th 311, 320 (7th Cir. 2021). The court held that, even if the policy otherwise would have provided coverage, this virus exclusion "clearly and without doubt" precluded "coverage for losses and expenses allegedly caused by the COVID-19 pandemic and government orders issued to stem its tide." Id. at 322.
Perhaps most notable for this case, however, is the Seventh Circuit's recent decision in ABC Diamonds Inc. v. Hartford Casualty Ins. Co. 22-cv-1026, 2022 WL 1830692, at *1 (7th Cir. June 3, 2022). That case, brought by a jewelry business, involved another Sentinel policy with the same Special Property Coverage Form and Endorsement. Compare [1-2] (Ex. A) with ABC Diamonds, 20-cv-07097, [29-1] (Ex. A to Second Am. Compl.). In affirming the district court's dismissal of the insured's coverage claims under Rule 12(b)(6), the Seventh Circuit reiterated its holding in Sandy Point regarding "direct physical loss" and emphasized that the "policy provisions at issue in Sandy Point are materially identical to ABC's policy." 2022 WL 1830692, at *2. It also found that, even if the insured's policy otherwise provided coverage, "the policy's virus exclusion" (which is identical to the Endorsement in the Policy here) "plainly applies." Id. (citing Mashallah, 20 F.4th at 320).
Given the ABC Diamonds decision—which came out after the parties briefed this motion—this Court ordered Plaintiff to file a supplemental brief to explain whether it maintains a good faith factual and legal basis for its claims. [38]. Plaintiff insists it does, arguing that: (1) the ABC Diamonds decision is unpublished and therefore non-binding; (2) the Seventh Circuit did not consider Plaintiff's illusory and ambiguity arguments regarding the Endorsement; and (3) even if the coverage claims fail, Plaintiff still has a viable claim for negligent misrepresentation. [39].
As a preliminary point, even if ABC Diamonds remains unpublished (and therefore non-precedential pursuant to Circuit Rule 32.1(b)), the precedential decisions upon which ABC Diamonds relies still undermine Plaintiff's coverage claims. Thus, Plaintiff's illusory and ambiguity arguments remain the only articulable bases for its coverage claims. [35] at 14.
Under Illinois law, an "illusory promise appears to be a promise, but on closer examination reveals that the promisor has not promised to do anything." Regensburger v. China Adoption Consultants, Ltd., 138 F.3d 1201, 1206-07 (7th Cir. 1998) (quoting W.E. Erickson Constr., Inc. v. Chi. Title Ins. Co., 266 Ill.App.3d 905, 204 Ill.Dec. 431, 641 N.E.2d 861, 864 (1994)). As discussed above, the Endorsement here only provides coverage for "loss or damage caused directly or indirectly by" the "[p]resence, growth, proliferation, spread or any activity of 'fungi', wet rot, dry rot, bacteria or virus" that results from a specified cause of loss" (i.e. "explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage") or an Equipment Breakdown Accident, [1-2] at 74, 146-47. Plaintiff insists that these limitations render the coverage illusory because a virus would never spread from one of these specified causes of loss. [35] at 14-15.
The Court disagrees. Under Illinois law, coverage is not illusory just because it only covers uncommon occurrences. See, e.g., Am. Country Ins. Co. v. Kraemer Bros., 298 Ill.App.3d 805, 232 Ill.Dec. 871, 699 N.E.2d 1056, 1062 (1998) (holding coverage is not illusory just "because it is difficult to imagine any factual scenario" in which the provision may apply); Liberty Mut. Fire Ins. Co. v. Statewide Ins. Co., 352 F.3d 1098, 1100-01 (7th Cir. 2003) (relying on Kraemer Bros. in finding coverage unlikely but not illusory). As Defendant points out, [30] at 13, Curtis O. Griess & Sons, Inc. v. Farm Bureau Ins. Co. of Nebraska shows that one of the specified causes could result in the spread of a virus: there, a windstorm infected the insured's livestock with the pseudorabies virus, 247 Neb. 526, 528 N.W.2d 329, 331 (1995). Further, Plaintiff ignores the Endorsement's coverage for loss caused by fungi, wet rot, dry rot, and bacteria, [1-2] at 146-47, which further demonstrate that the coverage is not illusory. See, e.g., WPB No. 1, LLC v. Valley Forge Ins. Co., 05cv2027-L(BLM), 2007 WL 9702161, at *4 (S.D. Cal. Mar. 27, 2007) (holding that a limited endorsement covered damage from mold caused by a hurricane). Plaintiff's illusory argument fails.
Next, Plaintiff argues that there exist ambiguities in the Endorsement that the Court must interpret in its favor. [35] at 15-16. Namely, Plaintiff argues that the Endorsement's provisions "irreconcilably conflict" because it first states that Defendant "will not pay for loss or damage caused directly or indirectly by" the "[p]resence, growth, proliferation, spread or any activity or 'fungi', wet rot, dry rot, bacteria or virus," [1-2] at 146, but then states that it "will pay for loss or damage by 'fungi', wet rot, dry rot, bacteria or virus," id. 147.
The Court disagrees. In fact, Plaintiff's argument misconstrues the Endorsement by selectively and misleadingly quoting it. Plaintiff claims that the Endorsement states that Defendant "will not pay for loss or damage caused directly or indirectly by" the "Presence, growth, proliferation, spread or any activity of 'fungi', wet rot, dry rot, bacteria, virus." Yet, Plaintiff fails to quote the very next sentence, which states: "But if 'fungi', wet rot, dry rot, bacteria or virus results in a 'specified cause of loss' to Covered Property, we will pay for the loss of damage caused by that 'specified cause of loss.' " [1-2] at 146.
Plaintiff also cites the Endorsement section entitled "Limited Coverage for 'Fungi', Wet Rot, Dry Rot, Bacteria and Virus." [1-2] at 147. As Plaintiff notes, this section states that the Defendant "will pay for loss or damage by 'fungi', wet rot, dry rot, bacteria or virus." Id. Plaintiff ignores, however, that it also states that this limited coverage "only applies when the 'fungi', wet or dry rot, bacteria or virus is the result of . . . (1) a 'specified cause of loss' other than fire or lightening; [or] (2) Equipment Breakdown Accident occurs to Equipment Breakdown Property." Id.
Reading these the plain language of the provisions as a whole, there exists no ambiguity. The Endorsement clearly and unambiguously states that Defendant will not pay for loss or damage caused directly or indirectly by the presence, growth, proliferation, spread or any activity of "fungi", wet rot, dry rot, bacteria or virus, unless it results in a "specified cause of loss" or is the result of (1) a "specified cause of loss" other than fire or lightning or (2) an Equipment Breakdown Accident.
Overall, the Endorsement is neither illusory nor ambiguous. To the contrary, it clearly and without doubt "plainly applies" and excludes coverage. ABC Diamonds, 2022 WL 1830692, at *2. Further, and as discussed above, even if it did not apply, Sandy Point and ABC Diamonds establish that the Policy does not cover Plaintiff's claimed losses because they do not constitute "direct physical loss" or "direct damage" to the Covered Property. Accordingly, Plaintiff's declaratory judgment (Count I) and breach of contract (Count II) claims fail as a matter of law. Plaintiff's claim for bad-faith claims denial (Count III) also fails since a defendant cannot face such a claim "where no benefits are owed." Martin v. Ill. Farmers Ins., 318 Ill.App.3d 751, 252 Ill.Dec. 310, 742 N.E.2d 848, 857 (2000).
That leaves Plaintiff's claim for negligent misrepresentation (Count IV). Here, Plaintiff insists that, even if its coverage claims fail as a matter of law, its negligent misrepresentation claim remains viable. [35] at 17; [39] at 1. The Court disagrees.
To state a claim for negligent misrepresentation under Illinois law, a plaintiff must allege: "(1) a false statement of material fact; (2) carelessness or negligence in ascertaining the truth of the statement by the speaker, (3) an intention to induce the other party to act, (4) action by the other party in reliance, and (5) damage to the other party resulting from such reliance, (6) when the party making the statement is under a duty to communicate information." Fox Assoc., Inc. v. Robert Half Int'l, Inc., 334 Ill.App.3d 90, 267 Ill.Dec. 800, 777 N.E.2d 603 (2002).
Here, Plaintiff's claim fails as a matter of law on the last element. Under Illinois law, when a plaintiff seeks "purely economic damages"—as Plaintiff does here—a plaintiff may only maintain a negligent misrepresentation claim against a defendant that "is in the business of supplying information for the guidance of others in their business transactions." First Midwest Bank, N.A. v. Stewart Title Guar. Co., 218 Ill.2d 326, 300 Ill.Dec. 69, 843 N.E.2d 327, 335 (2006) (citing Brogan v. Mitchell Int'l, Inc., 181 Ill.2d 178, 229 Ill.Dec. 503, 692 N.E.2d 276 (1998)). And insurers are in the "business of selling insurance," not "in the business of providing information to the plaintiffs for guidance in business transactions." Hoover v. Country Mut. Ins. Co., 363 Ill.Dec. 612, 975 N.E.2d 638, 648 (Ill. App. Ct. 2012); see also Kim v. State Farm Mut. Auto. Ins. Co., 460 Ill. Dec. 16, 31, 199 N.E.3d 737 (Ill. App. Ct. June 30, 2021) ("the sale of insurance policies is not the sale of 'information' "). Hoover, in dismissing a negligent misrepresentation claim against an insurer on this basis, emphasized that information an insurer may provide to insureds remains "merely ancillary" to its business of selling insurance. 363 Ill.Dec. 612, 975 N.E.2d at 648.
In arguing to the contrary, Plaintiff relies on Glazewski v. Coronet Insurance Co., 108 Ill.2d 243, 91 Ill.Dec. 628, 483 N.E.2d 1263 (1985). [35] at 17. There, insureds brought a class action against an insurer for selling them allegedly worthless underinsured motorist coverage. 108 Ill.2d 243, 91 Ill.Dec. 628, 483 N.E.2d at 1264. Glazewski does not help Plaintiff, however, because it related to claims for fraud, not negligent misrepresentation. Id. The law in Illinois remains clear: an insured alleging purely economic losses cannot maintain a claim for negligent misrepresentation against an insurer. Count IV fails.