Seventh Circuit Court of Appeals Affirms Indiana District Court Finding No Coverage for COVID-19 Business Interruption Claims

Michael R. Giordano

Circle Block Partners v. Fireman’s Fund Ins. Co.
2022 WL 3401535 (7th Cir. 2022)

The Seventh Circuit Federal Court has weighed in on whether business owners’ claims for business interruption losses from the COVID-19 pandemic are covered under business policies.  The owners of the Conrad Hotel in Indianapolis submitted a claim to its insurer seeking recovery for business interruption losses during the pandemic-related lockdown.  The Conrad owners claimed their losses were covered under the various insurance policy coverages offered, which included, business income and extra expense coverage, civil authority coverage, dependent property coverage, communicable disease coverage, and business access coverage.  Under each of these coverages, the policy required that the insured demonstrate “direct physical loss or damage” to property.

The Indiana Federal District Court granted the insurer’s motion to dismiss the complaint finding that there were no allegations of direct physical loss or damage to the Conrad’s property asserted in the complaint.  The district court further rejected the owners’ claims that the direct physical loss or damage requirement was satisfied based upon allegations that virus particles had attached to the surface of the hotel’s property.

On appeal, the Seventh Circuit observed that the resolution of the case focused upon Indiana law, and the Indiana Court of Appeals had recently addressed this situation in Indiana Reparatory Theater v. Cincinnati Cas. Co., 180 N.E.3d 403 (Ind. Ct. App. 2022).  In that case, the Indiana Court of Appeals rejected a similar claim by a theater based upon the lack of evidence that the theater had suffered “direct physical loss or damage” to its property.

The Seventh Circuit affirmed the district court.  While observing that the hotel was not able to use the property as it preferred, a temporary denial of an insured use of its property, absent some physical alteration of the property, fails to demonstrate “direct physical loss or damage” to the property, which was required for coverage to exist.

In further rejecting the hotel’s argument that virus particles attached to the property which demonstrated direct physical loss, the court observed that such conditions can simply be cleaned or disinfected, which does not result in the property being directly impacted.  The court further observed that accepting the hotel’s argument would result in a broad definition that would extend coverage to any situation where “material matter” is added to a surface.  For instance, the court observed that a person’s sneeze spreads cold virus particles, but no reasonable policyholder would believe that a person’s sneeze results in “direct physical damage” to property. This ruling appears to be consistent with most jurisdictions that have addressed this issue.