Insurance Claim – Direct Physical Loss

Listen to this article

7^th Circuit Court of Appeals

Case Name: Sandy Point Dental, P.C., et al., v. The Cincinnati Insurance Company, et al.,

Case No.: 21-1186; 21-1559; 21-1203

Officials: MANION, WOOD, and HAMILTON, Circuit Judges.

Focus: Insurance Claim – Direct Physical Loss

No one doubts that the COVID-19 pandemic has inflicted enormous losses on businesses, large and small, throughout the country. It is therefore not surprising that an avalanche of insurance claims has followed in the wake of the pandemic, as the suffering businesses look for assistance in absorbing those losses. We resolve three such claims in this opinion—those brought by plaintiffs Sandy Point Dental, P.C. (“Sandy Point”), the Bend Hotel Development Company (“Bend Hotel”), and TJBC, Inc. (“TJBC”). We refer to the plaintiffs collectively as the Businesses unless the context requires otherwise.

Each Business was required to close or dramatically scale back its operations in response to a series of executive orders issued by Illinois Governor J. B. Pritzker in an effort to curb the spread of the virus in the state. The Businesses held materially identical commercial-property insurance policies, sold by the same insurer, the Cincinnati Insurance Company (“Cincinnati”). In brief, these policies provided coverage for income losses sustained on account of a suspension of operations caused by “direct physical loss” to covered property. The policies also provided coverage for income losses sustained as a result of an action of civil authority prohibiting access to covered property, when such action was taken in response to “direct physical loss” suffered by other property.

Each Business filed claims for coverage under its policy, and each time, Cincinnati denied the claim and litigation ensued. In all three cases, the responsible district court granted Cincinnati’s motion to dismiss for failure to state a claim upon which relief could be granted. See FED. R. CIV. P. 12(b)(6). Each court reasoned that the Business before it did not adequately allege that either the virus that causes COVID-19, SARS-CoV-2, or the resulting closure orders caused “direct physical loss” to property. All three Businesses appealed; we resolve those appeals in this consolidated opinion.

Our review is de novo, but we find little to criticize in the district courts’ resolutions of these cases, and so we affirm the judgments of dismissal. In doing so, we join the four circuits that so far have addressed the central question before us: whether loss of use, unaccompanied by any physical alteration to property, may constitute “direct physical loss” under the relevant insurance policies. See Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021); Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021); Mudpie, Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885 (9th Cir. 2021); Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Ins. Co., — F. App’x —, 2021 WL 3870697 (11th Cir. Aug. 31, 2021).

To state a claim under the Policy before us, the Businesses needed to allege more than a partial loss of their preferred use of the insured properties. But they alleged neither a physical alteration to property nor an access- or use deprivation so substantial as to constitute a physical dispossession. They thus have not managed to state claims upon which relief could be granted. Given this conclusion, we see no need to address the Businesses’ additional claims of consumer fraud, common law fraud, or vexatious refusal of coverage. Cincinnati could not have been fraudulent or vexatious in denying coverage where adequate grounds for coverage did not exist in the first place.

We AFFIRM the dismissals of all three cases, as well as the denials of Sandy Point’s motions for reconsideration and for leave to amend its complaint.

Affirmed

Full Text

Derek A Hawkins is Corporate Counsel, at Salesforce.