Butler Weihmuller Katz Craig LLP attorneys Clark Schirle and Jon Barger obtained a victory for their client in the case of Melcorp, Inc. v. West American Ins. Co., No. 21-2448 (7th Cir. June 8, 2022). The Seventh Circuit affirmed yet another trial court decision in favor of an insurer on a Covid-19 business interruption claim.
In Melcorp, the insured was a restaurant in a shopping mall food court in Illinois that alleged it had suffered a business interruption loss as a result of the Covid-19 pandemic and resulting governmental orders. In response to the governmental orders, the mall temporarily closed for a couple of weeks. Since the insured’s restaurant was in the interior food court, the insured argued that the mall’s closure meant that its food stall was “completely inaccessible to the public and effectively rendered it useless.” The insured did not allege, however, that the virus was present in the mall or the food court, or that there was any physical alteration of the property.
The insured argued its case was different than other cases where courts, including the Seventh Circuit, had held that there was no coverage.
First, the insured argued that because it was in the interior of the mall, and the mall completely shut down, unlike other cases involving restaurants, it completely lost the use of its restaurant.
The Court, relying on its prior opinions, including Sandy Point Dental v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) and Crescent Plaza Hotel Owner v. Zurich American Ins. Co., 20 F.4th 303 (7th Cir. 2021), rejected the insured’s loss of use argument. The Court recognized it left open the possibility that a claim could be asserted upon a showing of an access-deprivation or use-deprivation so substantial as to constitute a complete physical dispossession, such as where a property is rendered completely uninhabitable by gas infiltration. Sandy Point, 20 F.4th at 334. However, here, the insured did not allege or argue a complete dispossession of its property. It only alleged a temporary restriction on the use of the property, but it was able to access the property during the mall’s closure and to use the refrigeration and freezers on the premises. As the Court explained: “[a]s was the case for all of the businesses in the cases that we have considered, Melcorp was clearly deprived of its intended use of the property at least temporarily, but it does not allege physical dispossession or physical alteration of the property sufficient to constitute ‘direct physical loss’ under the language of the policy.”
Second, the insured argued that the policy also covered “intangible property.” The insured, citing to language in the subject policy’s Business Personal Property form, argued that the policy covered the insured’s “use interest as tenant in improvements and betterments,” and “labor, materials or services furnished or arranged by the insured on personal property of others.” As counsel for the insurer highlighted in response, the insured took a few lines of the policy’s definition of Business Personal Property out of context in an attempt to argue that damage to “intangible” property is, by itself, enough to trigger coverage. For example, the policy defined improvements and betterments as “fixtures, alterations, installations and additions,” all tangible property. Personal property of others is also tangible property. Accordingly, had a fire physically damaged a bar that was not owned by the insured, the insured might still be able to make a claim for that damage if it had an interest in that bar. The Seventh Circuit correctly rejected the insured’s “intangible” property argument. The Court held that the language cited by the insured “does not alter the meaning of ‘physical loss’ or damage,” and that the definitions address physical property.
Finally, the Court stated that because the insured is not entitled to coverage based on the language of “direct physical loss” in the policy, it did not have to consider whether the exclusions in the policy for losses caused by a virus or for losses of use applied, but the Court noted that it has found identical language to exclude coverage in a pandemic-related challenge. See Mashallah Inc. and Tanalli’s Park Ridge, LLC v. West Bend Mutual Ins. Co., 20 F.4th 311 (7th Cir. 2021) (holding that the virus exclusion barred coverage).