United States of America, Court of Appeals of the Seventh Circuit, 3 May 2022, No. 21-1695
Case overview
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Deciding body (English)
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Link to the full text of the decision
General Summary
Plaintiffs, childcare centers in Illinois and Michigan, sued their insurer after it denied claims related to business disruptions caused by the COVID-19 pandemic. The district court granted the insurer's motion to dismiss, concluding that the complaint did not plausibly allege "direct physical loss of or damage to" property or any other facts falling within the scope of the insurance policies' coverage. The district court concluded that the Centers had not plausibly alleged that COVID-19 caused physical loss of or damage to their property-or to nearby property- or that government shutdown orders were due to a COVID-19 outbreak on their premises. The court also determined that the Sue and Labor section imposed duties on the Centers but did not itself provide any coverage. Plaintiffs appealed. The Court of Appeals found that the district court's dismissal was consistent with the Court’s recent decisions in COVID-19-related insurance cases-and, therefore, reaffirmed the decision, rejecting the Plaintiffs’ claims.
Facts of the case
Plaintiffs prepared young children for kindergarten, focusing on their academic, social, and emotional needs. The Centers operated successfully until the arrival of the COVID-19 pandemic. On March 20, 2020, "to slow and stop the spread of COVID-19," the Governor of Illinois ordered all persons living in the state to stay at home except to perform specified "essential activities" and ordered "non-essential" businesses to cease all but minimum basic operations. Childcare providers were permitted to continue operating only if they received an emergency license to care for the children of workers deemed essential. A few days later, the Governor of Michigan issued a similar order to "suppress the spread of COVID-19." Subject to certain mitigating measures, childcare providers could remain open solely for the purpose of serving the children of "critical infrastructure" workers.
Both States would eventually lift these restrictions by June 2020. While they were in place, however, the Centers suspended operations. Upon reopening, the Centers operated at reduced capacities. As a result, they lost substantial income and incurred additional expenses. The Centers filed claims under their all-risk commercial property insurance policies. Their insurer denied the claims. So, the Centers brought this action. They alleged that the Defendant breached its contracts with them and sought a declaratory judgment to that effect, on behalf of themselves and a similar class of insureds.
Type of measure challenged
Individual / collective enforcement
Nature of the parties
Claimant(s)
Private collectiveDefendant(s)
Private individual
Type of procedure
Reasoning of the deciding body
The Court has analyzed the arguments of the Plaintiffs and the Defendants and has reasoned that:
- To survive a motion to dismiss, a complaint must state a claim to relief that is plausible on its face.
- Plaintiffs contended that the undefined policy requirement of "direct physical loss" appearing in these provisions were broad enough to describe the circumstances alleged in their complaint-where the COVID-19 virus was present in the air and had attached to the surfaces of property, rendering their premises dangerous and unusable, thereby constituting a physical loss. The Court has reasoned that with respect to Illinois law that the phrase "direct physical loss" in a commercial property insurance policy "requires a physical alteration to property"-that is, some "alteration in appearance, shape, color or other material dimension."
- The Centers have reasoned that the policies acknowledge that a communicable disease can cause direct physical loss of or damage to covered property. The Centers' contention that the meaning of "physical loss" can be discerned from their policies' structure was raised for the first time in their opening brief in this Court. Neither their brief in opposition to the motion to dismiss nor any other submission to the district court had mentioned it. The Court has reasoned that the argument is therefore forfeited.
- Plaintiffs have also claimed coverage under the Civil Authority section. The Court has argued that this provision is only triggered when access to the Centers' premises is prohibited because of damage to nearby property caused by a Covered Cause of Loss, which is defined in the policy as "[d]irect physical loss." As already reasoned, COVID-19 does not cause physical loss (nor damage) in any plain or ordinary sense.
- Plaintiffs have also invoked the Communicable Disease provision, which covers lost income and extra expenses if a government entity shuts down business operations "due to an outbreak" of a communicable disease "at the insured premises." The Court has reasoned that unlike the provisions discussed above, Communicable Disease coverage does not turn on the existence of physical loss or damage.
- Plaintiffs have also raised the Sue and Labor provision. The Court has reasoned that this provision specifies certain things an insured must do when seeking reimbursement for covered losses or expenses. These include promptly notifying the insurer when loss or damage occurs, allowing it to inspect the property, taking reasonable steps to protect the property from additional harm, and keeping adequate records regarding expenses incurred-including records of expenses incurred as a result of the duty to protect. The Court has found that Sue and Labor provision does not itself establish coverage. Rather, it imposes obligations on an insured seeking coverage that is outlined elsewhere in the policy.
Conclusions of the deciding body
For all these reasons, the Court has concluded that the COVID-19 pandemic undoubtedly caused tremendous financial strain to small businesses like the Centers, but the losses and expenses they allege are simply not covered under the ordinary and unambiguous terms of their insurance policies. Therefore, the district court's judgment has been affirmed.
Fundamental Right(s) involved
- Freedom to conduct a business
- Right to property
Rights and freedoms specifically identified as (possibly) conflicting with the right to health
- Health v. freedom to conduct a business
- Health v. property
Balancing techniques and principles (proportionality, reasonableness, others)
The Court has not applied balancing techniques.
