GPIF Crescent Court Hotel, LLC v. Zurich American Insurance Company , 2022 IL App (1st) 211335-U ( 2022 )

2022 IL App (1st) 211335-UFIFTH DIVISION
Order filed: May 20, 2022
No. 1-21-1335
NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except in the
limited circumstances allowed under Rule 23(e)(1).
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
______________________________________________________________________________
GPIF CRESCENT COURT HOTEL LLC; GPIF WSAN ) Appeal from the
RIVERWALK HOTEL LLC; GPIF BRICE HOTEL LLC; ) Circuit Court of
GPIF WPN HOTEL LLC; GPIF WANN HOTEL LLC; ) Cook County.
GPIF A7 WESTSHORE OPERATOR LLC; and GPIF )
BROWN PALACE HOTEL LLC, individually and on )
behalf of all others similarly situated, )
) No. 2020 CH 05564
Plaintiffs-Appellants, )
)
v. )
)
ZURICH AMERICAN INSURANCE COMPANY, ) Honorable
) Alison C. Conlon,
Defendant-Appellee. ) Judge, presiding.
JUSTICE HOFFMAN delivered the judgment of the court.
Justices Cunningham and Connors concurred in the judgment.
ORDER
¶1 Held: COVID-19-related loss of use of hotel properties did not qualify as a “physical
loss” so as to enable hotels to recover under insurance policy provisions insuring
against a “physical loss” of property.
No. 1-21-1335
¶2 A group of hotel operators, GPIF Crescent Court Hotel LLC, GPIF WSAN Riverwalk Hotel
LLC, GPIF Brice Hotel LLC, GPIF WPN Hotel LLC, GPIF WANN Hotel LLC, GPIF A7 Westshore
Operator LLC, and GPIF Brown Palace Hotel LLC (collectively, “GPIF”), appeals an order dismissing
with prejudice its amended complaint against Zurich American Insurance Company concerning
Zurich’s denial of coverage for alleged COVID-19-related losses. Because GPIF’s loss of use of its
properties does not qualify as a physical loss, as required by its policy with Zurich, we affirm the
dismissal of the amended complaint.
¶3 The following facts are drawn from the allegations in GPIF’s amended complaint, which
we accept as true and construe in GPIF’s favor at the motion-to-dismiss stage. See Borowiec v.
Gateway 2000, Inc., 209 Ill. 2d 376, 382 (2004).
¶4 The GPIF hotels at issue in this case are part of the HEI Hotels & Resorts portfolio. HEI
purchased an “all-risk” insurance policy from Zurich covering the period of August 2019 to August
2020. GPIF alleged that its hotels were covered by that policy.
¶5 GPIF alleged in its amended complaint that the COVID-19 pandemic, which resulted from
the spread of the SARS-CoV-2 virus, caused its hotels to suffer significant harm. Specifically,
GPIF alleged that the pandemic “impaired [its] property by making [its] hotels unusable in a way
they had been used prior to the outbreak of COVID-19” and that, as a result of its implementation
of common containment measures and its compliance with government orders in the states in
which its hotels are located, each GPIF property “suspended (slowed or ceased) some or all of its
business activities,” with the hotels closing entirely for two months and then reopening at a reduced
capacity. GPIF also asserted that its hotels had to make “structural alterations, changes and/or
repairs” to the properties by installing plexiglass barriers, hand sanitizer stations, and various
placards and stickers. Further, the hotels removed and reorganized their furniture in public areas
-2-
No. 1-21-1335
to promote distancing between guests, and they implemented capacity limits for pools, spas, fitness
centers, bars, and restaurants.
¶6 GPIF asserted that these limitations on its use of its hotels resulted in substantial economic
losses. To recover those losses, it submitted claims to Zurich, which refused to pay. GPIF
responded by filing the instant action on behalf of its hotels and similarly situated putative class
members. Its amended and operative complaint presented six breach-of-contract claims related to
six separate alleged bases for coverage under its policy with Zurich, as well as six corresponding
claims for declaratory judgments regarding the six alleged bases for coverage. 1
¶7 Zurich moved to dismiss the amended complaint under section 2-615 of the Code of Civil
Procedure (735 ILCS 5/2-615 (West 2020)), arguing that GPIF failed to state a claim for breach
of contract. The circuit court granted the motion and dismissed GPIF’s action with prejudice. In
doing so, the court observed that each of the policy provisions at issue required that GPIF suffer
“direct physical loss of or damage” to its property, and the court concluded that, in the absence of
physical damage or alteration to the properties, GPIF’s alleged loss of use of its properties and
inability to fully operate its business did not qualify as a physical loss. The court also ruled that,
in the alternative, GPIF’s claims were barred by a “Contamination” exclusion in the policy, which,
according to the court, excluded claims for losses caused by the actual presence of a virus at a
covered property. This appeal follows.
¶8 “A section 2-615 motion to dismiss [citation] challenges the legal sufficiency of a
complaint based on defects apparent on its face.” Marshall v. Burger King Corp., 222 Ill. 2d 422,
1
Given the similarity of the legal issues presented in each pair of corresponding breach-of-
contract and declaratory-judgment claims, for the purposes of this appeal we will analyze each pair
together as a single claim.
-3-
No. 1-21-1335
429 (2006) (citing City of Chicago v. Beretta U.S.A. Corp., 213 Ill. 2d 351, 364 (2004)). When
ruling on a section 2-615 motion to dismiss, a court must accept the plaintiff’s well-pleaded
allegations as true and must construe those allegations and any reasonable inferences in the
plaintiff’s favor. Cochran v. Securitas Security Services USA, Inc., 2017 IL 121200, ¶ 11. “A
cause of action should not be dismissed under section 2-615 unless it is clearly apparent from the
pleadings that no set of facts can be proven that would entitle the plaintiff to recover.” Id. We
review the circuit court’s order granting a motion to dismiss de novo. Id.¶9 Resolution of this appeal requires construction of the language of the parties’ insurance
policy. “The rules applicable to contract interpretation govern the interpretation of an insurance
policy.” Sproull v. State Farm Fire & Casualty Co., 2021 IL 126446, ¶ 19 (citing State Farm
Mutual Automobile Insurance Co. v. Elmore, 2020 IL 125441, ¶ 21)). “Our primary objective
when construing an insurance policy is to ascertain and give effect to the intention of the parties,
as expressed in the policy language.” Id. (citing Hobbs v. Hartford Insurance Co. of the Midwest,
214 Ill. 2d 11, 17 (2005)). “Undefined terms will be given their plain, ordinary, and popular
meaning; i.e., they will be construed with reference to the average, ordinary, normal, reasonable
person.” Id. (citing Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 115
(1992)).
¶ 10 As the circuit court correctly observed, nearly all of GPIF’s claims depend on it proving
that it suffered a direct physical loss. Looking at the policy’s general provisions first, the policy
insures against “direct physical loss of or damage caused by a Covered Cause of Loss to Covered
Property.” (Emphasis added.) The policy defines “Covered Cause of Loss” as “[a]ll risks of direct
physical loss of or damage from any cause unless excluded.” (Emphasis added.)
-4-
No. 1-21-1335
¶ 11 This requirement that the loss be of a physical nature is also present in the more-specialized
policy provisions that GPIF contends provide coverage for its COVID-19-related losses. GPIF’s
first two claims sought to recover under the policy’s “Time Element” provision. That section of
the policy provides coverage for losses sustained as a result of the necessary suspension of GPIF’s
business activities at an insured location, including coverage for gross earnings losses and related
extra expenses. In its first and second claims for relief, GPIF sought to recover under those Gross
Earnings and Extra Expenses provisions, respectively. However, the Time Element provision
provides that the suspension of operations “must be due to direct physical loss of or damage to
Property (of the type insurable under this Policy other than Finished Stock) caused by a Covered
Cause of Loss.” (Emphasis added.)
¶ 12 GPIF’s third claim invoked coverage under a provision covering losses sustained as a result
of the necessary suspension of GPIF’s business activities “caused by order of civil or military
authority that prohibits access” to GPIF’s property. As with the Time Element coverages, this Civil
or Military Authority provision imposes a requirement that the order “must result from a civil
authority's response to direct physical loss of or damage caused by a Covered Cause of Loss to
property not owned, occupied, leased or rented by the Insured or insured under this Policy.”
(Emphasis added.)
¶ 13 Similar language is present in the provision at issue in GPIF’s fourth claim, which
concerned the policy’s Protection and Preservation of Property coverage. That provision provides
coverage for “[t]he reasonable and necessary costs incurred for actions to temporarily protect or
preserve Covered Property; provided such actions are necessary due to actual or imminent physical
loss or damage due to a Covered Cause of Loss to such Covered Property.” (Emphasis added.)
-5-
No. 1-21-1335
¶ 14 We mentioned earlier that “nearly all” of GPIF’s claims required proof of a physical loss,
and indeed the policy provisions at issue in two of the six breach-of-contract claims do not impose
such a requirement, specifically the “Interruption by Communicable Diseases” provision and an
alleged “Sue and Labor” provision. However, GPIF does not contest the dismissal of those
particular claims in this appeal. Accordingly, the four claims at issue in this appeal all require proof
of either a “direct physical loss” or an “actual or imminent physical loss.”
¶ 15 The question then becomes whether the COVID-19-related limitations on GPIF’s use of
its properties amounts to a physical loss. Despite a substantial amount of litigation around the
country in recent months regarding whether various use limitations amount to a physical loss, see
SA Palm Beach, LLC v. Certain Underwriters at Lloyd's London, 20-14812, 2022 WL 1421414,
at *8 (11th Cir. May 5, 2022) (collecting cases), at the time that GPIF filed its initial brief in this
appeal, Illinois courts had not yet weighed in on the issue. However, since that time both this
district and the Second District of the Illinois Appellate Court have issued decisions on the question
presented. Both concluded that a COVID-19-related loss of use does not qualify as a physical loss.
¶ 16 In the first of these cases, a café sought a declaration that its insurance policy covered
“business income losses it suffered due to the COVID-19 pandemic and the Governor's executive
orders, which restricted in-person dining, but not carryout or delivery services, at restaurants and
similar establishments.” Sweet Berry Cafe, Inc. v. Society Insurance, Inc., 2022 IL App (2d)
210088, ¶ 1. The café alleged that government orders prohibited access to its premises and forced
it to significantly reduce its operations. Id. ¶ 6. As in this case, the café’s insurance policy provided
income and expense coverage for “direct physical loss of or damage to” the café’s property. Id.¶¶ 9–11.
-6-
No. 1-21-1335
¶ 17 The appellate court held that such a policy provision “unambiguously requires a physical
alteration or substantial dispossession, not merely loss of use.” Id. ¶ 39. After reviewing dictionary
definitions for the terms “direct,” “physical,” and “loss,” the court concluded that “ ‘physical loss’
unambiguously requires that the deprivation be caused by a material thing, which necessarily rules
out economic losses resulting from Café’s inability to fully run its business.” Id. ¶ 40. The court
also rejected the café’s argument that the SARS-CoV-2 virus physically damages tangible
property, reasoning that, unlike gas-contamination and asbestos cases, the café’s property
remained usable with routine cleaning practices and did not need to be repaired. Id. ¶ 43.
¶ 18 Particularly relevant to the present case, the court in Sweet Berry dismissed the café’s
argument that the government orders “prohibited access to its business and that the continued
orders required it to cease and/or significantly reduce access to, and operations at, its premises,”
causing “direct physical loss of or damage to” its property. Id. ¶ 45.
“The executive orders did not cause a tangible ‘loss of or damage to’ Café’s
property, which is what is required for coverage under the business income and extra
expense provisions. They merely prohibited in-person dining, which is one use of the
property, but permitted food preparation for carryout dining and delivery. Café seeks to
equate loss of use with ‘direct physical loss,’ which it cannot do. The prohibition on in-
person dining was not connected to any change in the physical condition of the premises
or property at the premises, nor did it cause any physical harm to the premises or any
property. It caused an economic loss for Café.” Id.¶ 19 One week after the Second District issued its decision in Sweet Berry, our district issued a
consistent ruling in Lee v. State Farm Fire & Casualty Co., 2022 IL App (1st) 210105. As in Sweet
-7-
No. 1-21-1335
Berry, the plaintiff in Lee was a restaurant seeking to recover losses resulting from government
orders limiting its operation of its business. Id. ¶¶ 4–6. And, like Sweet Berry and the present case,
the restaurant’s insurance policy covered “direct physical loss” to the restaurant’s property. Id. ¶ 7.
¶ 20 Citing a case from the United State Seventh Circuit Court of Appeals, Sandy Point Dental,
P.C. v. Cincinnati Insurance Co., 20 F.4th 327 (7th Cir. 2021), and a case from the Illinois
Supreme Court, Travelers Insurance Co. v. Eljer Manufacturing, Inc., 197 Ill. 2d 278 (2001), this
court held that “direct physical loss” requires “a physical alteration to property.” Lee, 2022 IL App
(1st) 210105, ¶ 19. As did the Second District in Sweet Berry, this court concluded that the type of
limitation on use that the restaurant alleged “constituted an economic loss and not a ‘physical loss’
to covered property needed to trigger coverage under the policy.” (Emphasis in original.) Id. ¶ 20;
see also ABW Development, LLC v. Continental Casualty Co., 2022 IL App (1st) 210930, ¶ 35
(agreeing with the holdings in Sweet Berry and Lee and likewise concluding that, under Eljer’s
definition of “physical,” a “physical loss” means a physical alteration to the property).
Accordingly, these two cases position Illinois law alongside the apparent majority of states in
holding that a COVID-19-related loss of use and resulting economic harm do not amount to a
physical loss. See SA Palm Beach, 2022 WL 1421414 at *8 (“As far as we can tell, every federal
and state appellate court that has decided the meaning of ‘physical loss of or damage to’ property
(or similar language) in the context of the COVID-19 pandemic has come to the same conclusion
and held that some tangible alteration of the property is required. There is therefore no coverage
for loss of use based on intangible and incorporeal harm to the property due to COVID-19 and the
closure orders that were issued by state and local authorities even though the property was rendered
temporarily unsuitable for its intended use.”).
-8-
No. 1-21-1335
¶ 21 We find the decisions in Sweet Berry and Lee to be directly on point and controlling on the
issue presented in this appeal. GPIF’s allegations are, in all material respects, no different than
those made by the plaintiffs in those two cases: containment measures and government orders
limited its use of its property, creating an economic loss in the form of lost income and added
expenses. Accordingly, like the restaurants in Sweet Berry and Lee, in order to demonstrate a
“physical loss” GPIF was required to allege a “physical alteration to [its] property” (Lee, 2022 IL
App (1st) 210105, ¶ 19), more specifically “an alteration in appearance, shape, color or in other
material dimension” (Eljer, 197 Ill. 2d at 312). But it did not do so. Instead, it alleged only that it
lost use of its property and that it had to install various items to help contain the spread of the virus
(plexiglass barriers, hand sanitizer stations, instructional stickers, etc.). As discussed in Sweet
Berry and Lee, without an allegation of a change to the physical nature of the existing property,
these allegations are insufficient to establish a physical loss.
¶ 22 Further, although GPIF did allege that the SARS-CoV-2 virus causes a physical alteration
to the property with which it comes into contact, that allegation likewise failed to demonstrate a
physical loss because GPIF did not allege that the property needed to be physically repaired or
replaced. See Sweet Berry Cafe, Inc., 2022 IL App (2d) 210088, ¶ 43. Indeed, “the mere presence
of the virus on surfaces does not constitute ‘physical loss of or damage to property’ because
[SARS-CoV-2] does not physically alter the appearance, shape, color, structure, or other material
dimension of the property.” ABW, 2022 IL App (1st) 210930, ¶ 35; see also Sweet Berry Cafe,
Inc., 2022 IL App (2d) 210088, ¶ 43 (“[U]nlike a noxious gas, for example, the virus's presence is
easily remediated by routine, not specialized or costly, cleaning and disinfecting or will die off
after a few days.”).
-9-
No. 1-21-1335
¶ 23 Because GPIF did not sufficiently allege an alteration to the physical nature of its property,
we agree with the circuit court that GPIF’s allegations would be insufficient to prove its entitlement
to relief on any of its first four claims for relief, the claims that remain at issue in this appeal.
Accordingly, dismissal for failure to state a claim was appropriate, and we affirm the order granting
Zurich’s motion to dismiss.
¶ 24 Affirmed.
- 10 -