Illinois Courts Deny Insurance Coverage for Pandemic Related Business Losses

Several appellate courts in Illinois have further narrowed the path for businesses seeking insurance coverage for COVID-19 related losses. These recent court decisions highlight the fact that, even though the scope and economic effect of the pandemic on business was unexpected, standard insurance policy provisions have still been applied to exclude coverage. Since 2022, more than a dozen courts have rejected the Business Interruption Endorsement and property damage claims related to the pandemic.

In Firebirds International, LLC v. Zurich American Insurance Co., 2022 IL App (1st) 210558, (decided 5/20/22), Illinois’ First Appellate District addressed whether an “all risk” insurance policy covered Firebird’s losses resulting from pandemic-related business closures and other losses. The insurer denied coverage under a provision which excluded coverage for “contamination,” defined in the policy as:

“Any condition of property due to the actual presence of any foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent, Fungus, mold or mildew.”

The court found the “contamination” exclusion to include the COVID-19 virus and, accordingly, the loss was not covered.  Firebirds tried to circumvent the exclusion by arguing that the cause of its business losses were governmental closure orders, not the COVID-19 virus itself. The court was not convinced, noting that coverage under the policy is only triggered where there is a “direct physical loss” or “damage to Covered Property.” If, as Firebirds argued, the virus itself did not directly cause physical loss or damage, then no coverage would be triggered to begin with.

The Firebirds decision came on the heels of two other cases similarly precluding coverage for COVID-19 related losses: Sweet Berry Café, Inc. v. Society Insurance, Inc., 2022 IL App (2d) 210088, (holding that “neither the presence of the virus at [the insured’s] premises nor the pandemic-triggered executive orders that barred in-person dining at restaurants constitute ‘direct physical loss of or damage to’ [the insured’s] property.”); and Lee v. State Farm Fire & Casualty Co., 2022 IL App (1st) 210105 (holding that the insured’s declaratory judgment action was “properly dismissed under the virus exclusion because its plain and ordinary language excluded ‘any coverage for any loss’ from a virus, bacteria, or other microorganism that induced or was capable of inducing physical distress, illness, or disease.”)

The courts’ decisions in Firebirds and the preceding cases expose a catch-22 for those seeking coverage under similar policies: if the COVID-19 virus was not the direct cause of their losses, no coverage is triggered. If, on the other hand, the virus was the cause of damage, then such losses are excluded by the policy’s “contamination” or “virus” exclusions.

Another decision from the Seventh Circuit fuels this conundrum. In Afm Mattress Co., LLC v. Motorists Commer. Mutual Insurance Co., No. 21-1865, 2022 U.S. App. LEXIS 16687, at *1 (7th Cir. June 16, 2022), the Seventh Circuit sided with Motorists Commercial Mutual Insurance Company in finding the policy afforded no coverage for its insured’s business losses caused by COVID-19 shutdowns. There, the insured, which operated 52 stores in Illinois and Indiana, was ordered to cease business activities at all of its locations as a result of the COVID-19 pandemic. The insured sought coverage under the policy’s “Civil Authority” coverage provision, which provided coverage for lost business income and extra expenses caused when a civil authority prohibits access to the insured property in response to certain dangerous physical conditions at different, adjacent property.

The policy also contained a “virus exclusion,” which broadly excluded coverage for “loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.” Like in Firebirds, Afm Mattress Co., it was argued that the Virus Exclusion only applied to losses caused by viruses, and that its loss was caused by the closure orders, not by the virus itself.

In a twist on the First District’s Firebirds decision, the Seventh Circuit found that losses caused by the virus and those caused by closure orders are one and the same thing. The court looked back to its own decision in Mashallah, Inc. v. West Bend Mut. Ins. Co., 20 F.4th 311, 317 (7th Cir. 2021), where it explained that the virus causing COVID-19 “set in motion an unbroken causal chain via the government orders to the purported losses and expenses” and therefore “the coronavirus was the reason these orders were promulgated.” Following this reasoning, the court held that the virus exclusion controlled, excluding coverage even from the “Civil Authority” coverage provision.

The Firebirds and Afm Mattress Co. cases reinforce the uphill battle businesses have in seeking insurance coverage for their COVID-19 related losses. Even policies written before the pandemic included provisions designed to exclude the type of losses businesses experienced. As evidenced by the recent decisions, courts are inclined to construe those provisions literally and find that coverage is excluded.