The federal court of appeals in Chicago affirmed the dismissal of COVID-19 business interruption insurance lawsuits filed by a variety of Illinois businesses seeking coverage for lost income. Sandy Point Dental, The Bend Hotel, and Main Street Brewing were all impacted by Governor Pritzker’s executive orders shutting down businesses to prevent the spread of COVID-19. However, all three businesses were able to continue limited operations under the orders.

The businesses pursued business interruption insurance claims under their commercial property insurance policies issued by Cincinnati Insurance. The policies covered lost business income resulting from (1) a suspension of operations caused by “direct physical loss or damage” to covered property, and (2) from civil authority orders (e.g., orders by a governor) prohibiting access to covered property, when such action is taken in response to “direct physical loss or damage” to an adjacent or nearby property.

The court decided that under Illinois law, the policy phrase “direct physical loss” means the policyholder must be physically dispossessed of the covered property, equating to a complete inability to access or use the property. Because the businesses were able to use part of their property for continued operations, the court held that they did not suffer a “direct physical loss.”

The court then decided that under Illinois law, the policy term “damage” requires a physical alteration of the covered property. The court reasoned that this coincides with the policy’s end date for measuring lost income upon the repair or replacement of the damaged property. While the virus may adhere to covered property, the court decided that it does not damage or physically alter the property since “it may be wiped off surfaces using ordinary cleaners, and it disintegrates on its own in a matter of days.” The court also rejected the businesses’ assertion that the virus altered the indoor air of the businesses, finding that the policy insured the premises (meaning the building and contents) and not the indoor air.

Implicit in the court’s ruling was its rejection of the scientific literature concluding that the virus cannot be wiped clean from surfaces with ordinary cleaners. As one brief stated, if the virus could be eradicated with Lysol and a rag, the pandemic would have ended long ago. Likewise, the business interruption coverage does not insure the “premises,” but insures the business “operations,” which should include the indoor air unless specifically excluded. In fact, a variety of agencies regulate the indoor air quality of businesses, like the U.S. Environmental Protection Agency (EPA).

Ultimately, the question of what constitutes “direct physical loss or damage” under an insurance policy governed by Illinois law will have to be decided by the Illinois Supreme Court. It has the final say on Illinois law.

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