Court Opinion

ID: 6342849
Source: CourtListenerOpinion
Date Created: 2022-05-20 20:03:35.226712+00
Date Added: 2024-06-11T09:19:27.674979
License: Public Domain

2022 IL App (1st) 211335-U

                                                                            FIFTH 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.

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