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Illinois Court of Appeals Affirms Denial of Loss of Business Coverage Caused by COVID-19

ABSTRACT: Illinois Court of Appeals affirms COVID-19, and the Governor's executive actions regarding the same, did not constitute a "direct physical loss of or damage" to the covered restaurant property, and that no loss of business income coverage resulted from the prohibition of in restaurant dining during the pandemic.

In the recent decision of State & 9 Street Corporation et al. v. Society Insurance; the Appellate Court of Illinois First Judicial District affirmed the circuit court’s judgment on the pleadings in favor of Society Insurance Company, finding the restaurant company plaintiffs were not entitled to business income, extra expense, civil authority, or contamination provisions in their property damage policies.

The pertinent facts are as follows: Plaintiffs own and operate 14 taverns in Illinois; On March 16, 2020 Governor Pritzker issued several executive orders in response to the COVID-19 pandemic, including a suspension of on-premises consumption of food and beverage; Society issued plaintiffs a “Businessowners Policy” that included a “Businessowners Special Property Coverage Form” that provided covered loss of business income coverage caused by or resulting from a “Direct Physical Loss;” the Society policy also contained an exclusion for loss or damage caused by the enforcement of an ordinance or law that regulated the use of the property. 

Plaintiffs filed a Complaint for Declaratory Judgment, seeking a declaration that COVID-19, and Governor Pritzker’s executive actions, triggered loss of business income coverage under the Society policy.  Society filed a countercomplaint against plaintiffs seeking a declaration that there was no coverage under the policy.  The circuit court entered an order granting Society’s motion for judgment on the pleadings, and Plaintiffs appealed the decision.

The Appellate Court determined that COVID-19, and executive order regarding the same, caused economic loss and not a “physical loss” to the covered properties.  Without an allegation of a change to the physical nature of the existing property, the court found plaintiffs’ allegation insufficient to establish a physical loss; as a further basis to deny coverage the Appellate Court found plaintiffs failure to allege their properties needed to be physically repaired or replaced evidenced no physical loss had occurred. 

The Appellate Court also denied coverage under a contamination provision of the Society policy.  Plaintiffs alleged that COVID contamination resulted in governmental authorities prohibiting access to the restaurants.  The Appellate Court found no coverage relying upon Governor Pritzker’s expressed intent of ensuring the maximum number of people self-isolate, while enabling essential services to continue.  The Governor’s limitation on the use of the restaurant premises was not a prohibition of access to the premises required to trigger the contamination provision of policy.

Plaintiffs’ Complaint included claims for Bad Faith under section 155 of the Insurance Code (215 ILCS 5/155).  The Appellate Court found that the determination of no coverage against plaintiffs meant their bad faith claims must fail as a matter of law.  An insurer cannot act vexatiously or unreasonably with respect to a claim when no coverage applies.

The Appellate Courts decision creates a cautionary tale for both insurers, and those seeking insurance coverage.  Insurers need to remain cognizant that policies are generally construed in favor of coverage when ambiguous, and therefore extra caution needs to be taken in writing policy provisions to ensure coverage and exclusions precisely detail the coverage intended to be available. 

While the pandemic may have been unforeseeable, those seeking insurance should closely evaluate their needs and routinely review their policies with an expert to confirm that they have the coverage they need to avoid the next pandemic level event.