State and 9 Street Corporation v. Society Insurance

2022 IL App (1st) 211222-UFIFTH DIVISION
June 30, 2022
No. 1-21-1222
NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent
by any party except in the limited circumstances allowed under Rule 23(e)(1).
IN THE
APPELLATE COURT OF ILLINOIS
FIRST JUDICIAL DISTRICT
STATE & 9 STREET CORPORATION, d/b/a ) Appeal from the Circuit Court of
BULLDOG ALE HOUSE; AURORA BULL DOG ) Cook County.
COMPANY, d/b/a BULLDOG ALE HOUSE; 459 )
RANDALL CROSSINGS COMPANY, d/b/a )
BULLDOG ALE HOUSE; 6610 SHERIDAN )
CORPORATION, d/b/a BULLDOG ALE HOUSE; )
ROOSEVELT 100 CORPORATION, d/b/a BULLDOG )
ALE HOUSE; 2628 RT 59 COMPANY, d/b/a BURNT )
PIZZA COMPANY; 451 COMMONS COMPANY, )
d/b/a BULLDOG ALE HOUSE; 1480 GOLF )
CORPORATION, d/b/a BULLDOG ALE HOUSE; )
YORKTOWN TOASTMASTER CORPORATION, )
d/b/a HONEY BERRY CAFÉ; ROSELLE LLA, INC., )
d/b/a BULLDOG ALE HOUSE; BULL DOG ALE )
HOUSE, INC., d/b/a BULLDOG ALE HOUSE; )
MCHENRY 31 COMPANY, d/b/a BULLDOG ALE )
HOUSE; ALGONQUIN COMMONS COMPANY, )
d/b/a BULLDOG ALE HOUSE; and 157 WEBER )
COMPANY, d/b/a BULLDOG ALE HOUSE, )
)
Plaintiffs and Counterdefendants- )
Appellants, )
)
v. ) No. 20 CH 4004
)
SOCIETY INSURANCE, A MUTUAL COMPANY, )
) Honorable
Defendant and Counterplaintiff- ) Moshe Jacobius,
Appellee. ) Judge Presiding.
1-21-1222
PRESIDING JUSTICE DELORT delivered the judgment of the court.
Justices Hoffman and Connors concurred in the judgment.
ORDER
¶1 Held: In this insurance coverage dispute, we affirm the order of the circuit court granting
the defendant insurance company’s motion for judgment on the pleadings. The insureds
failed to sufficiently plead that they were entitled to insurance coverage under business
income, extra expense, civil authority, or contamination provisions in their commercial
property damage liability policies. This failure precludes their claim of bad faith denial of
coverage.
¶2 This appeal arises from a declaratory judgment action seeking insurance coverage for
alleged business interruption losses caused by executive orders instituted by the governor to limit
the operations of restaurants during the height of the COVID-19 pandemic. Plaintiffs-
Counterdefendants, State & 9 Corporation, d/b/a Bulldog Ale House, Aurora Bull Dog Company,
d/b/a Bulldog Ale House, 459 Randall Crossings Company, d/b/a Bulldog Ale House, 6610
Sheridan Corporation, d/b/a Bulldog Ale House, Roosevelt 100 Corporation, d/b/a Bulldog Ale
House, 2628 Rt 59 Company, d/b/a Burnt Pizza Company, 451 Commons Company, d/b/a Bulldog
Ale House, 1480 Golf Corporation, d/b/a Bulldog Ale House, Yorktown Toastmaster Corporation,
d/b/a Honey Berry Café, Roselle LLA, Inc., d/b/a Bulldog Ale House, Bull Dog Ale House, Inc.,
d/b/a Bulldog Ale House, McHenry 31 Company, d/b/a Bulldog Ale House, Algonquin Commons
Company, d/b/a Bulldog Ale House, and 157 Weber Company, d/b/a Bulldog Ale House
(collectively, plaintiffs), are restaurant and tavern operators alleging that they sustained economic
losses from the cessation of on-premises dining at their establishments because of the governor’s
orders, and the presence of the COVID-19 virus in the community and on their premises. The
insurance policy at issue, a commercial property damage liability policy, provides that if the
policyholder must suspend its operations because of “direct physical loss of or damage to” insured
property, the policy will provide coverage for actual loss of business income incurred during a
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“necessary suspension of operations” while the property is being repaired, rebuilt, or replaced.
Plaintiffs also asserted a cause of action for bad faith denial of coverage under section 155 of the
Illinois Insurance Code (215 ILCS 5/155 (West 2020)). Defendant-Counterplaintiff Society
Insurance (Society) filed an answer and counterclaim seeking a declaratory judgment that no
insurance coverage existed for plaintiffs’ claims under its policy and Illinois law. Society moved
for a judgment on the pleadings under section 2-615(e) of the Illinois Code of Civil Procedure
(Code) (735 ILCS 5/2-615(e) (West 2020)), which the circuit court granted, finding there was no
insurance coverage under the policy. We affirm.
¶3 BACKGROUND
¶4 Plaintiffs own and operate 14 taverns and restaurants in Illinois. On March 16, 2020,
pursuant to the emergency powers granted him under section 7 of the Illinois Emergency
Management Agency Act (20 ILCS 3305/7 (West 2020)), Governor JB Pritzker entered several
executive orders in response to the COVID-19 pandemic. Order 2020-07 stated:
“[A]ll businesses in the State of Illinois that offer food or beverages for on-premises
consumption – including restaurants, bars, grocery stores, and food halls – must
suspend service for and may not permit on-premises consumption. Such businesses
are permitted and encouraged to serve food and beverages so that they may be
consumed off-premises, as currently permitted by law, through means such as in-
house delivery, third-party delivery, drive-through, and curbside pick-up. In
addition, customers may enter the premises to purchase food or beverages for carry-
out.” Exec. Order No. 2020-07, 44 Ill. Reg. 5536 (Mar. 16, 2020),
https://www2.illinois.gov/Documents/ExecOrders/2020/ExecutiveOrder-2020-
07.pdf.
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¶5 On March 20, 2020, Governor Pritzker issued executive order 2020-10, which designated
restaurants serving food for consumption off-premises to be “essential” businesses. See Exec.
Order No. 2020-10, 44 Ill. Reg. 5857 (Mar. 20, 2020),
https://www2.illinois.gov/Documents/ExecOrders/2020/ExecutiveOrder-2020-10.pdf. The order
stated that it “is consistent with and does not amend or supersede Section 1 of Executive Order
2020-07,” and expressly provided that restaurants could continue to operate for purposes of
preparing and serving food for consumption off-premises. Id. The order also stated that employees
continue “Minimum Basic Operations” to comply with social distancing requirements “to maintain
the value of the business’s inventory, preserve the condition of the business’s physical plant and
equipment, ensure security, process payroll and employee benefits, or for related functions.” Id.Governor Pritzker declared the intent of the executive orders was “to ensure that the maximum
number of people self-isolate in their places of residence to the maximum extent feasible, while
enabling essential services to continue, to slow the spread of COVID-19 to the greatest extent
possible.” Id. The governor issued subsequent executive orders that either disallowed on-premises
dining, permitted outdoor on-premises dining, or reduced the capacity allowed for indoor dining.
See, e.g., Exec. Order No. 2021-10, 45 Ill. Reg. 22 (May 17, 2021),
https://coronavirus.illinois.gov/resources/executive-orders/display.executive-order-number-
10.2021.html. None of these orders prevented restaurant or tavern operators from selling food for
carry-out or delivery.
¶6 Plaintiffs procured a “Businessowners Policy” from Society that includes a
“Businessowners Special Property Coverage Form.” The Coverage Form provides that Society
“will pay for direct physical loss of or damage to Covered Property at the premises described in
the Declarations caused by or resulting from any Covered Cause of Loss.” The policy further
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defines a “Covered Cause of Loss” as “Direct Physical Loss unless the loss is excluded or limited
under this coverage form.”
¶7 Section (A)(5) of this provision, “Additional Coverages,” contains a subsection (g), entitled
“Business Income,” which states:
“We will pay for the actual loss of Business Income you sustain due to the necessary
suspension of your ‘operations’ during the ‘period of restoration’. The suspension
must be caused by direct physical loss of or damage to covered property at the
described premises. The loss or damage must be caused by or result from a Covered
Cause of Loss.”
¶8 The Business Income provision defines the term “suspension” as:
“(a) The partial slowdown or complete cessation of your business activities; or
(b) That a part or all of the described premises is rendered untenantable if coverage
for Business Income applies.”
¶9 The policy defines Business Income as “Net Income *** that would have been earned or
incurred if no physical loss or damage had occurred *** and [] [c]ontinuing necessary operating
expenses incurred.” The “Period of Restoration,” is a period of time that:
“a. Begins immediately after the time of direct physical loss or damage for Business
Income or Extra Expense coverage caused by or resulting from any covered Cause
of Loss at the described premises; and
b. Ends on the earlier of:
(1) The date when the property at the described premises should be repaired,
rebuilt or replaced with reasonable speed and similar quality; or
(2) The date when business is resumed at a new permanent location.”
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A “Period of Restoration” also includes “any increased period required to repair or reconstruct the
property to comply with the minimum standard of, or compliance with any ordinance or law, in
force at the time of loss, that regulates the construction or repair, or requires the tearing down of
property.”
¶ 10 Subsection (h) of the Additional Coverages provision defines “Extra Expense” as follows:
“We will pay necessary Extra Expense you incur during the ‘period of restoration’
that you would not have incurred if there had been no direct physical loss or damage
to covered property at the described premises. The loss or damage must be caused
or result from a Covered Cause of Loss.”
Extra Expense are expenses incurred:
(a) To avoid or minimize the suspension of business and to continue
‘operations’:
(i) At the described premises; or
(ii) At replacement premises or at temporary locations, including relocation
expenses, and costs to equip and operate the replacement or temporary
locations.
(b) To minimize the suspension of business if you cannot continue ‘operations’.
(c) To:
(i) Repair or replace any property; or
(ii) Research, replace or restore the lost information on damaged ‘valuable
papers and records.’ ”
¶ 11 Subsection (k) of the Additional Coverages includes coverage entitled “Civil Authority,”
providing:
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“When a Covered Cause of Loss causes damage to property other than property at
the described premises, we will pay for the actual loss of Business Income you
sustain and necessary Extra Expense caused by action of civil authority that
prohibits access to the described premises, provided that both of the following
apply:
(1) Access to the area immediately surrounding the damaged property is prohibited
by civil authority as a result of the damage, and the described premises are within
the area; and
(2) The action of civil authority is taken in response to dangerous physical
conditions resulting from the damage or continuation of the Covered Cause of Loss
that caused the damage, or the action is taken to enable a civil authority to have
unimpeded access to the damaged property.”
This provision also states that “[t]he definitions of Business Income and Extra Expense contained
in the Business Income and Extra Expense Additional Coverages also apply to this Civil Authority
Additional Coverage.”
¶ 12 The policy also provides contamination coverage under subsection (m) of the Additional
Coverages provision. If operations are suspended due to “contamination,” the policy states:
“(1) We will pay for your costs to clean and sanitize your premises, machinery and
equipment, and expenses you incur to withdraw or recall products or merchandise
from the market. ***
(2) We will also pay for the actual loss of Business Income and Extra Expense you
sustain caused by
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(a) ‘Contamination’ that results in an action by a public health or other
governmental authority that prohibits access to the described premises or
production of your product.
(b) ‘Contamination threat’
(c) ‘Publicity’ resulting from the discovery or suspicion of
‘contamination’.”
This provision also states that “[c]overage for the actual loss of Business Income under this section
will begin immediately upon the suspension of your business operations and will continue for a
period not to exceed a total of three consecutive weeks after coverage begins.” In addition, “[t]he
definitions of Business Income and Extra Expense, contained in the Business Income and Extra
Expense Additional Coverages section shall also apply to the additional coverages under this
section.” “Contamination” is defined as “a defect, deficiency, inadequacy or dangerous condition
in your products, merchandise or premises.” The policy defines “[p]ublicity” as “a publication or
broadcast by the media, of the discovery or suspicion of ‘contamination’ at a described premise.”
¶ 13 Finally, the Society policy contains an exclusion for loss or damage caused by the
enforcement of an ordinance or law that regulated the use of any property. This exclusion states:
“We will not pay for loss or damage caused directly or indirectly by any of the
following. Such loss or damage is excluded regardless of any other cause or event
that contributes concurrently or in any sequence to the loss. These exclusions apply
whether or not the loss event results in widespread damage or affects a substantial
area.
a. Ordinance Or Law
The enforcement of or compliance with any ordinance or law:
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(1) Regulating the construction, use or repair of any property; ***
This exclusion, Ordinance Or Law, applies whether the loss results from:
(1) An ordinance or law that is enforced even if the property has not been
damaged; or
(2) The increased costs incurred to comply with an ordinance or law in the
course of construction, repair, renovation, remodeling or demolition of property or
removal of its debris, following a physical loss to that property.”
¶ 14 On April 28, 2020, plaintiffs filed their complaint for declaratory judgment, seeking a
declaration of rights pursuant to the Society policy. Society filed its answer and affirmative
defenses, as well as a countercomplaint against plaintiffs for declaratory judgment. On September
9, 2020, Society moved for judgment on the pleadings under section 2-615(e) of the Code (735
ILCS 5/2-615(e) (West 2020)). After briefing and oral argument, the circuit court entered an order
granting Society’s motion for judgment on the pleadings on August 24, 2021. This appeal
followed.
¶ 15 ANALYSIS
¶ 16 Plaintiffs argue that the circuit court erred when it held that the pleadings failed to establish
the existence of “direct physical loss of or damage to” their property under the Business Income
and Extra Expense coverages of the policy. Plaintiffs also contend that the court erred in finding
that their pleadings failed to establish the existence of coverage under the contamination and civil
authority coverages of the policy. Finally, plaintiffs argue they properly pleaded a claim for bad
faith denial of coverage.
¶ 17 Society responds that the circuit court’s decision should be affirmed because there is no
coverage under the policy. In addition, Society argues that even if plaintiffs properly pled a direct
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physical loss or damage to their property, the policy’s ordinance or law exclusion applies to
preclude coverage.
¶ 18 Standard of Review
¶ 19 A court properly enters a judgment on the pleadings when no genuine issue of material fact
exists and the movant is entitled to judgment as a matter of law. H & M Commercial Driver
Leasing, Inc. v. Fox Valley Containers, Inc., 209 Ill. 2d 52, 56 (2004). “Only those facts apparent
from the face of the pleadings, matters subject to judicial notice, and judicial admissions in the
record may be considered.” Id. At 56-57. “Moreover, all well-pleaded facts and all reasonable
inferences from those facts are taken as true.” Id. At 57. We review the entry of a judgment on the
pleadings de novo. Id.¶ 20 In construing the language of an insurance policy, our primary objective is to ascertain and
give effect to the intent of the parties to the contract. Outboard Marine Corp. v. Liberty Mutual
Insurance Co., 154 Ill. 2d 90, 108 (1992). To determine the meaning of the policy’s language and
the parties’ intent, we must construe the policy as a whole “with due regard to the risk undertaken,
the subject matter that is insured[,] and the purposes of the entire contract.” Id. If the policy terms
are clear and unambiguous, we afford them their plain, ordinary, and popular meaning. Id.Conversely, if the language of the policy is ambiguous (i.e., susceptible to more than one meaning),
it is construed strictly against the insurer who drafted the policy and in favor of the insured. Id. At
108-09. We will not, however, “strain to find ambiguity in an insurance policy where none exists.”
McKinney v. Allstate Insurance Co., 188 Ill. 2d 493, 497 (1999). The construction of an insurance
policy is also a question of law that we review de novo. Travelers Insurance Co. v. Eljer
Manufacturing, Inc., 197 Ill. 2d 278, 292-93 (2001).
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¶ 21 Finally, this court can affirm the circuit court’s decision on any basis in the record,
regardless of whether the circuit court relied on those ground or its reasoning was correct. Leonardi
v. Loyola University of Chicago, 168 Ill. 2d 83, 97 (1995).
¶ 22 Before turning to the merits of plaintiffs’ appeal, we must first address the significance of
the type of insurance policy plaintiffs purchased, because they seem to both conflate and equalize
property damage liability coverage and business interruption coverage. Considering the language
of the policy at issue here, this is a distinction with a difference, and is dispositive to our analysis
regarding the scope of coverage.
¶ 23 In Image Dental, LLC v. Citizens Insurance Co. of America, 543 F. Supp. 3d 582, 588
(N.D. Ill. 2021), the United States District Court for the Northern District of Illinois considered
under Illinois law whether the insurer’s policy covered the plaintiff’s dental business losses arising
from the COVID-19 pandemic. The court stated that, “[a]s a general matter, it is important to bear
in mind what type of policy Image Dental purchased.” Id. The plaintiff insured believed that it had
purchased an “all risk” policy that covered “all damage from all sources unless specifically
excluded.” Id. However, the court, in finding that the plaintiff did not suffer a physical loss of or
damage to property, specifically noted the difference between scope of coverage for property
losses versus business interruption:
“Image Dental did not buy ‘business interruption insurance,’ writ large. That is,
Image Dental did not purchase a policy that covers anything and everything that
interrupts its business. It purchased a specific type of policy that covered a specific
type of risk. The policy covered business losses in limited circumstances, and those
circumstances do not include a loss of business without a physical harm.” Id.11
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¶ 24 Further bolstering this distinction, the court noted that the policy was “chockfull of textual
clues that there must be a loss of or damage to a thing, meaning a tangible object,” considering,
for example, the heading “PROPERTY.” Id. In short, the policy at issue in Image Dental covered
property loss, not business interruption loss. Pertinent here, the court stated that “[t]he scope-of-
coverage provision builds on that clue, and requires a physical problem with a physical object. ***
Not just any loss or damage will do. It must be a ‘physical’ loss or damage.” Id. See also 10A
Couch on Insurance § 148:46 (Steven Plitt et al. eds., 3d ed. Nov. 2021 update) (“The requirement
that the loss be ‘physical,’ given the ordinary definition of that term, is widely held to exclude
alleged losses that are intangible or incorporeal and, thereby, to preclude any claim against the
property insurer when the insured merely suffers a detrimental economic impact unaccompanied
by a distinct, demonstrable, physical alteration of the property.”).
¶ 25 The plaintiffs here also purchased commercial property insurance, the purpose of which is
to protect insureds from physical loss of or damage to property, such as the occurrence of a tornado
or fire. This type of policy limits coverage for business losses and generally does not insure
business interruption without the presence of physical loss. See Sandy Point Dental, P.C. v.
Cincinnati Insurance Co., 20 F. 4th 327, 331-34 (7th Cir. 2021) (finding a mere loss of use of
property, without any physical alteration, is not “direct physical loss or damage,” and therefore
does not qualify as a covered case of loss). With these scope-of-coverage principles in mind, we
turn to plaintiffs’ arguments.
¶ 26 Sufficient Pleading of Coverage for Business Income and Extra Expense
¶ 27 Plaintiffs first argue that the circuit court mistakenly concluded that their complaint fails
to allege the existence of a “direct loss of or damage to” property regarding the Business Income
and Extra Expense provisions. Plaintiffs point to the court’s finding that if the loss was “not able
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to be seen with the naked eye,” referring to COVID-19, then the virus was incapable of causing
“direct physical loss of or damage to” property. Plaintiffs contend the court failed to give credence
to their reasonable interpretation of the operative language of the Society policy and precedent
holding that other causes of loss that are similarly incapable of being seen with the naked eye, such
as asbestos, ammonia, or carbon monoxide, are sufficient to cause direct physical loss of or damage
to property.
¶ 28 Here, both the Business Income and Extra Expense provisions require a “direct physical
loss of or damage to covered property” to trigger coverage under the policy. Therefore, we must
determine whether plaintiffs properly pled that a “direct loss of or damage to covered property”
occurred. The policy does not define what constitutes a “direct loss of or damage to covered
property.” Rather, the policy defines “Covered Cause of Loss” as “Direct Physical Loss unless the
loss is excluded or limited under this coverage form.”
¶ 29 When plaintiffs filed their initial brief, Illinois courts had yet to rule on whether COVID-
19-related limitations on plaintiffs’ use of their properties constituted a physical loss. Recently,
however, Illinois courts have issued decisions determining that a COVID-19-related loss of use
does not qualify as a physical loss. Indeed, Sweet Berry Café, Inc. v. Society Insurance, Inc., 2022
IL App (2d) 210088, is directly on point and involves the exact same policy language as this case.
¶ 30 In Sweet Berry Café, the plaintiff insured sought coverage under a “Businessowners
Policy” it purchased from Society, the defendant insurer, for losses resulting from restricted
operations during the pandemic. Similar to plaintiffs here, the plaintiff insured sought coverage
under the policy’s “Business Income,” “Extra Expense,” and “Civil Authority” provisions,
alleging that it sustained “direct physical loss of or damage to” property at its premises. In addition,
the plaintiff alleged that it incurred covered losses resulting from Governor Pritzker’s executive
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orders. Society filed a countercomplaint for declaratory judgment. The circuit court granted
Society’s motion for judgment on the pleadings.
¶ 31 On appeal, the plaintiff argued that the Society policy covered its loss because the virus
was the root cause of the restricted use of its premises and, thus, its loss of income. The plaintiff
also contended that the circuit court erred by taking judicial notice that the virus had not rendered
other businesses unusable and that the virus is easily destroyed. The plaintiff argued that the court
was required to accept as true its allegations that the virus can remain suspended in the air for
hours and remains active on surfaces for up to 72 hours. In short, the plaintiff argued that the court
considered issues beyond the pleadings regarding the virus that were not matters of common
knowledge or capable of verification, and because the facts were disputed, granting a motion for
judgment on the pleadings was improper.
¶ 32 The Sweet Berry Café court disagreed with the insured’s analysis. It concluded that “the
policy unambiguously requires a physical alteration or substantial dispossession, not merely loss
of use, which is what [the plaintiff] sufficiently pleaded it experienced.” Id. ¶ 39. In reaching this
conclusion, the court considered whether “ ‘physical loss’ unambiguously requires that the
deprivation be caused by a material thing,” which would rule out economic losses resulting from
the plaintiff’s inability to fully operate its business. Id. ¶ 40. The court analyzed the dictionary
definitions of “physical loss,” “direct,” and whether the term “physical” modified “loss,” because
the circuit court ignored the term “physical” and focused solely on “loss.” Id.¶ 33 Our supreme court provided guidance on this issue in Eljer, 197 Ill. 2d at 287, interpreting
the provision, “physical injury to tangible property,” consistently with the dictionary definition of
“physical,” meaning, “ ‘having material existence: perceptible especially through the senses and
subject to the laws of nature’ and ‘of or relating to material things.’ ” Sweet Berry Café, Inc., 2022
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IL App (2d) 210088, ¶¶ 40-41 (quoting Merriam-Webster’s Online Dictionary, www.merriam-
webster.com/dictionary/physical (last visited Mar. 2, 2021)). Eljer held that “ ‘physical injury to
tangible property’ was not ambiguous and that tangible property suffers ‘physical’ injury when
that property is ‘altered in appearance, shape, color or in other material dimension.’ ” Sweet Berry
Café, Inc., 2022 IL App (2d) 210088, ¶ 41 (quoting Eljer, 197 Ill. 2d at 301). Further, “[t]angible
property does not experience physical injury ‘if that property suffers intangible damage, such as
diminution in value as a result from the failure of a component *** to function as promised.’ ” Id.(quoting Eljer, 197 Ill. 2d at 301-02).
¶ 34 The Sweet Berry Café court concluded that the insurance policy did not cover losses due
to the virus’s presence at and around the plaintiff’s premises and due to the executive orders
instituted by the governor. The court reasoned:
“The fact that the virus was present at [the plaintiff’s] premises, an allegation we
must accept as true, did not result in or cause ‘direct physical loss of or damage to’
the property. This is because no property needed to be repaired or replaced.” Sweet
Berry Café, Inc., 2022 IL App (2d) 210088, ¶ 43.
¶ 35 Plaintiffs here similarly alleged in their complaint that “[i]t is likely that SARS-CoV-2
particles have been physically present at Plaintiffs’ premises and on surfaces and items of personal
property located at Plaintiffs’ premises described in the Policy during the time the policy was in
effect,” and that they “sustained direct physical loss and damage to items of property located at
their premises and direct physical loss and damage to their premises described in the Policy as a
result of the presence of SARS-CoV-2 particles and/or the Pandemic.” Plaintiffs claimed their
operations were suspended due to the foregoing physical loss and damage to physical property on
their premises. However, to demonstrate “physical loss,” plaintiffs were required to allege a
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“physical alteration to [their] property,” and more specifically, “an alteration in appearance, shape,
color or in other material dimension,” but they failed to do so. Eljer, 197 Ill. 2d at 301; see also
Lee v. State Farm Fire and Casualty Co., 2022 IL App (1st) 210105, ¶ 19 (finding that “direct
physical loss” requires a physical alteration to property under Eljer, because it is the plain,
ordinary, and popular meaning given to that phrase by the average, ordinary, normal, reasonable
person).
¶ 36 Like Sweet Berry Café, Lee, and many of the courts that have addressed the same coverage
issue presented here, we conclude that plaintiffs’ business interruption claim resulting from
institution of the COVID-19 executive orders constituted an economic loss and not a “physical
loss” to covered property required to trigger coverage under the policy. As discussed in Sweet
Berry Café and Lee, without an allegation of a change to the physical nature of the existing
property, plaintiffs’ allegations are insufficient to establish a physical loss. Furthermore, plaintiffs’
complaint likewise failed to demonstrate a physical loss because they did not allege that the
restaurants and taverns at issue needed to be physically repaired or replaced. See Sweet Berry Café,
2022 IL App (1st) 210088, ¶ 43. Indeed, “the mere presence of the virus on surfaces does not
constitute ‘physical loss of or damage to property’ because COVID-19 does not physically alter
the appearance, shape, floor, structure, or other material dimension of the property.” ABW
Development, LLC v. Continental Casualty Co., 2022 IL App (1st) 210930, ¶ 35. The Seventh
Circuit has explained:
“Even if the virus was present and physically attached itself to [the plaintiff’s]
premises, [the plaintiff] does not allege that the virus altered the physical structures
to which it attached, and there is no reason to think that it could have done so. While
the impact of the virus on the world over the last year and a half can hardly be
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overstated, its impact on physical property is inconsequential: deadly or not, it may
be wiped off surfaces using ordinary cleaning materials, and it disintegrates on its
own in a matter of days. We thus find no reversible error in the district court’s
denial of [the plaintiff’s] motion for leave to amend its complaint.” (Emphasis
omitted.) Sandy Point Dental, 20 F. 4th at 335.
¶ 37 The Sandy Point court also addressed plaintiffs’ reliance on cases arguing physical loss
that involved the presence of asbestos, noxious gases, termite infestations, or other health-
threatening products causing intangible economic loss in the form of diminished market value. See
20 F. 4th at 333. The court explained that cases involving gas infiltration, for example, without
any physical alteration, resulted to more than a diminished ability to use the property. Instead, “[i]t
was so severe that it led to complete dispossession – something easily characterized as a ‘direct
physical loss,’ ” in which the contamination made the premises “ ‘uninhabitable.’ ” Id. at 334. It
distinguished the gas infiltration cases, because the COVID-19 executive orders required a partial
limitation on the preferred use of the premises. Id. The court concluded that “[w]ithout any
physical alteration to accompany it, this partial loss of use does not amount to a ‘direct physical
loss.’ ” Id.
¶ 38 Plaintiffs rely on a handful of federal district court cases, including In re Society Insurance
Co. COVID-19 Business Interruption Protection Insurance Litigation, 521 F. Supp. 3d 729 (N.D.
Ill. 2021) and Studio 417, Inc. v. Cincinnati Insurance Co., 478 F. Supp. 3d 794 (W.D. Mo. 2020),
which have interpreted similar policy language to cover losses due to the COVID-19 virus or
government-imposed shut down orders. In these cases, as here, the policies did not contain a
specific exclusion of coverage for losses due to a virus or pandemic. These cases held that “even
absent a physical alteration, a physical loss may occur when the property is uninhabitable or
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unusable for its intended purpose.” Studio 417, Inc. v. Cincinnati Insurance Co., 478 F. Supp. 3d
at 801. These courts found that the focus on an actual physical alteration ignores the coverage for
a physical loss. Id. at 800. However, the court in In re Society Insurance, which analyzed policy
language similar to this case, did not consider the Illinois Supreme Court’s interpretation of the
term “physical” in Eljer, did not consult the dictionary to analyze the terms involved and how they
read together, and instead, chose to focus on and separate the term “loss,” rather than the terms
preceding it (direct and physical). 521 F. Supp. 3d at 741-743. Current Illinois precedent rejects
the interpretation and analysis of these cases and corresponding federal appellate courts in the
same circuit have spoken to the contrary. See Sandy Point Dental, 20 F. 4th at 335 (finding the
decision in Studio 417 non-binding); see also Sweet Berry Café, Inc., 2022 IL App (2d) 210088, ¶
46 (finding that “[l]oss of use without ‘physical loss’ is not covered”).
¶ 39 We elect to follow Illinois courts and the Seventh Circuit (interpreting Illinois law) because
we find they are directly on point and controlling on the issue presented in this appeal. Sweet Berry
Café, Inc., 2022 IL App (2d) 210088, ¶ 43; Lee, 2022 IL App (1st) 210105, ¶ 19; see also Sandy
Point Dental, 20 F. 4th at 335. Accordingly, plaintiffs have alleged no physical alteration of its
property that would bring their alleged losses within the Business Income and Extra Expense
Coverage.
¶ 40 Sufficient Pleading of Coverage for Civil Authority
¶ 41 Next, we address plaintiffs’ claim for coverage under the Civil Authority provision. This
provision states that “[t]he definitions of Business Income and Extra Expense contained in the
Business Income and Extra Expense Additional Coverages also apply to this Civil Authority
Additional Coverage.” Accordingly, coverage for Civil Authority likewise “must be caused by
direct physical loss of or damage to covered property at the described premises.”
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¶ 42 As with Business Income and Extra Expense coverage, which we examined above, the
trigger for civil authority coverage is “direct physical loss of or damage to” property “other than
property at the described premises,” meaning the property suffering the loss or damage is that of
third parties rather than plaintiffs’ property.
¶ 43 Just as plaintiffs failed to plead sufficient factual allegations to support their conclusion
that the COVID-19 virus caused direct physical loss to their property, they also failed to allege any
facts that would indicate that the virus caused direct physical loss or damage to any other property.
They simply alleged “[p]roperties and premises throughout Illinois contain the presence of SARS-
CoV-2 particles on surfaces and items of property,” and that they “sustained loss and damage as a
direct and proximate result of the orders issued by civil authorities.” The allegation that other third-
party locations contained the presence of the COVID-19 virus particles is insufficient to allege
direct physical loss or damage because, as explained above, the mere presence of the COVID-19
virus does not constitute physical loss or damage. Therefore, under the terms of the policy and
supporting Illinois law, the Civil Authority provision does not apply here.
¶ 44 Sufficient Pleading of Coverage for Contamination
¶ 45 Plaintiffs next contend that the contamination provision applies because “contamination”
resulted in action by a governmental authority prohibiting access to plaintiffs’ premises. In their
complaint, plaintiffs alleged that “SARS-CoV-2 contamination resulted in governmental
authorities prohibiting access to Plaintiffs’ premises.” Although we must take this allegation as
true, we may also take judicial notice of Governor Pritzker’s executive orders, which expressly
provided that restaurants could continue to operate for purposes of preparing and serving food for
consumption off-premises. The intent of the executive orders was “to ensure that the maximum
number of people self-isolate in their places of residence to the maximum extent feasible, while
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enabling essential services to continue, to slow the spread of COVID-19 to the greatest extent
possible.” The governor issued subsequent executive orders that either disallowed on-premises
dining, permitted outdoor on-premises dining, or reduced the capacity allowed for indoor dining.
¶ 46 In short, contrary to plaintiffs’ allegations, the executive orders expressly did not prohibit
access to plaintiffs’ premises and specifically designated their establishments as “essential
services.” Limiting the use of the premises does not constitute a prohibition of access to those
premises. Furthermore, plaintiffs have failed to plead that the contamination included a
“deficiency, inadequacy or dangerous condition in your *** premises.” They simply concluded
that the executive orders prohibited access to their premises without pleading supporting facts. In
reviewing a ruling on a motion for judgment on the pleadings, we may disregard all conclusory
allegations and surplusage, and construe the evidence strictly against the movant. See Parkway
Bank & Trust v. Meseljevic, 406 Ill. App. 3d 435, 442 (2010). Indeed, the governmental orders
make clear that the applicable businesses’ operations were not being suspended or restricted due
to contamination within them, but rather due to the threat of transmission of the virus from persons
who may congregate in such premises.
¶ 47 Further, plaintiffs claim that they suffered losses resulting from publicity from the
discovery or suspicion of contamination is likewise inapplicable. Under the policy, “publicity” is
defined as “a publication or broadcast by the media, of the discovery or suspicion of
‘contamination’ at a described premise.” (Emphasis added.) Plaintiffs failed to plead in their
complaint that they suffered losses due to publicity of contamination at any of their described
premises, other than another conclusory allegation that “[i]t is likely that SARS-CoV-2 particles
have been physically present at Plaintiffs’ premises and on surfaces and items of personal property
located at Plaintiffs’ premises described in the Policy during the time the policy was in effect.”
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This blanket allegation lacks any description whatsoever of a broadcast or media publication of
contamination at a described premise and, therefore, is insufficient to plead a loss from publicity
due to contamination from the virus. Accordingly, we find plaintiffs have not sufficiently pled a
claim for coverage under the Contamination provision.
¶ 48 Ordinance or Law Exclusion
¶ 49 Because we conclude that there is no coverage under the Additional Coverages provisions,
we need not consider whether any applicable coverage would be excluded under the ordinance or
law exclusion provision in the Society policy.
¶ 50 Bad Faith Claim
¶ 51 Finally, plaintiffs contend that the circuit court improperly dismissed their claim for bad
faith denial of coverage pursuant to section 155 of the Insurance Code (215 ILCS 5/155 (West
2020)). Section 155 provides “an extracontractual remedy intended to make suits by policyholders
economically feasible and punish insurance companies for misconduct.” McGee v. State Farm
Fire & Casualty Co., 315 Ill. App. 3d 673, 681 (2000). Thus, the key question in a section 155
claim is “whether an insurer’s conduct is vexatious and unreasonable.” Id. “To state a claim under
section 155,” the insured must plead “a modicum of factual support” and “cannot merely allege
that the insurer’s conduct was vexatious and unreasonable.” Id. The court must consider the totality
of the circumstances “when deciding whether an insurer’s conduct is vexatious and unreasonable,
including the insurer’s attitude, whether the insured was forced to sue to recover and whether the
insured was deprived of the use of his property.” Baxter International, Inc. v. American Guarantee
& Liability Insurance Co., 369 Ill. App. 3d 700, 710 (2006).
¶ 52 Plaintiffs’ sole argument on this issue is that the circuit court improperly dismissed their
complaint based on an erroneous conclusion that they had failed to allege coverage under the
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policy. We have found that the circuit court properly determined plaintiffs are not covered under
the Society policy and, therefore, their bad faith claim fails as well. The insurer cannot act
vexatiously or unreasonably with respect to the claim when no coverage is owed. We find the
circuit court properly ruled on this issue.
¶ 53 CONCLUSION
¶ 54 In sum, the partial loss of use of plaintiffs’ establishments, without any physical alteration
to the property or a deprivation of use or access so substantial as to constitute a physical
dispossession was not sufficient to allege a “direct physical loss of or damage to” their property to
trigger coverage under Society’s policy.
¶ 55 We acknowledge the immense challenges facing restaurants, taverns, and other hospitality-
service providers during the COVID-19 pandemic. However, we must construe the insurance
contract into which the parties entered and hold them to their agreement.
¶ 56 We affirm the judgment of the circuit court of Cook County.
¶ 57 Affirmed.
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