ABC Diamonds Inc. v. Hartford Cas. Ins. Co.

575 F.Supp.3d 1005

ABC DIAMONDS INC., Plaintiff,

v.HARTFORD CASUALTY INSURANCE COMPANY, Defendant.

20 C 7097

United States District Court, N.D. Illinois, Eastern Division.

Signed December 10, 2021

Adam J. Gomez, Pro Hac Vice, Grant & Eisenhofer P.A., Wilmington, DE, Lisa B. Weinstein, Grant & Eisenhofer P.A., Chicago, IL, for Plaintiff.

Sarah Danielle Gordon, Pro Hac Vice, Steptoe & Johnson LLP, Washington, DC, Anthony J. Anscombe, Cara Alyce Lawson, Steptoe & Johnson LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

Gary Feinerman, United States District Judge

ABC Diamonds Inc. alleges in this diversity suit that Hartford Casualty Insurance Company, its insurer, wrongfully denied coverage for losses it suffered due to government-ordered shutdowns arising from the COVID-19 pandemic. Doc. 29. Hartford moves to dismiss the complaint under Civil Rule 12(b)(6), arguing that its policy does not cover ABC Diamonds's claimed losses. Doc. 31. The motion is granted.

Background

In resolving a Rule 12(b)(6) motion, the court assumes the truth of the operative complaint's well-pleaded factual allegations, though not its legal conclusions. See Zahn v. N. Am. Power & Gas, LLC , 815 F.3d 1082, 1087 (7th Cir. 2016). The court must also consider "documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice," along with additional facts set forth in ABC Diamonds's brief opposing dismissal, so long as those additional facts "are consistent with the pleadings." Phillips v. Prudential Ins. Co. of Am. , 714 F.3d 1017, 1019-20 (7th Cir. 2013) (internal quotation marks omitted). The facts are set forth as favorably to ABC Diamonds as those materials allow. See Pierce v. Zoetis, Inc. , 818 F.3d 274, 277 (7th Cir. 2016). In setting forth the facts at the pleading stage, the court does not vouch for their accuracy. See Goldberg v. United States , 881 F.3d 529, 531 (7th Cir. 2018).

ABC Diamonds is a jewelry business in Chicago, Illinois. Doc. 29 at ¶¶ 1, 17. In March and April 2020, near the outset of the COVID-19 pandemic, the Governor of Illinois ordered the closure of all nonessential businesses. Id. at ¶¶ 51-59; Doc. 29-2. In compliance with those orders, ABC Diamonds closed its premises and discontinued its "physical operations." Doc. 29 at ¶¶ 47-48. Although ABC Diamonds eventually reopened, restrictions imposed by the Mayor of Chicago limited it to 50% capacity as of April 2021. Id. at ¶ 67. ABC Diamonds submitted a claim to recover its lost income under a commercial property insurance policy issued by Hartford, id. at ¶¶ 85-86, the pertinent terms of which are set forth below. Hartford denied coverage. Id. at ¶¶ 87, 90.

Discussion

The meaning of a written contract "is generally a question of law for the court." Stampley v. Altom Transp., Inc. , 958 F.3d 580, 586 (7th Cir. 2020). The parties agree that the Hartford policy is governed by Illinois law. Doc. 32 at 2, 5 & n.2, 7; Doc. 35 at 13, 16, 18.

Under Illinois law, an insurance policy, like any contract, "is to be construed as a whole, giving effect to every provision, if possible, because it must be assumed that every provision was intended to serve a purpose." Valley Forge Ins. Co. v. Swiderski Elecs., Inc. , 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307, 314 (2006). "[The court's] primary function is to ascertain and give effect to the intention of the parties, as expressed in the policy language." Founders Ins. Co. v. Munoz , 237 Ill.2d 424, 341 Ill.Dec. 485, 930 N.E.2d 999, 1003 (2010). "Although policy terms that limit an insurer's liability will be liberally construed in favor of coverage, this rule of construction only comes into play when the policy is ambiguous." Rich v. Principal Life Ins. Co. , 226 Ill.2d 359, 314 Ill.Dec. 795, 875 N.E.2d 1082, 1090 (2007) (quoting Hobbs v. Hartford Ins. Co. of the Midwest , 214 Ill.2d 11, 291 Ill.Dec. 269, 823 N.E.2d 561, 564 (2005) ). "While [the court] will not strain to find an ambiguity where none exists, neither will [it] adopt an interpretation which rests on gossamer distinctions that the average person, for whom the policy is written, cannot be expected to understand." Munoz , 341 Ill.Dec. 485, 930 N.E.2d at 1004 (internal quotation marks and citation omitted).

ABC Diamonds asserts coverage under four of the Hartford policy's coverage provisions: the "Business Income" provision, the "Extended Business Income" provision, the "Extra Expense" provision, and the "Civil Authority" provision. Doc. 29 at ¶¶ 111-212; Doc. 35 at 6-15; Doc. 29-1 at p. 34-35, § A.5.o, .p, .q, .r. Hartford contends that none of those provisions applies, Doc. 32 at 6-11; Doc. 37 at 3-8, but argues that even if any does apply, the policy's Virus Exclusion defeats coverage, Doc. 32 at 11-16; Doc. 37 at 8-16. Because none of the coverage provisions applies, there is no need to address the virus exclusion.

I. Business Income Provision

The policy states that Hartford "will pay for direct physical loss of or physical damage to Covered Property at [ABC Diamonds's] premises ... caused by or resulting from a Covered Cause of Loss." Doc. 29-1 at p. 25, § A. As noted, ABC Diamonds seeks coverage under the policy's Business Income provision, which states in relevant part:

[Hartford] will pay for the actual loss of Business Income [ABC Diamonds] sustain[s] due to the necessary suspension of [its] "operations" during the "period of restoration." The suspension must be caused by direct physical loss of or physical damage to property at [ABC Diamonds's premises] ... caused by or resulting from a Covered Cause of Loss.

Id. at p. 34, § A.5.o(1) (emphasis added). "Business Income," in turn, is defined as the "[n]et [i]ncome ... that would have been earned or incurred if no direct physical loss or physical damage had occurred," plus normal operating expenses that continue to accrue. Ibid.

ABC Diamonds contends that the closure of its premises qualifies as a "direct physical loss of ... property at [its premises]"—though not "damage to" such property—because it lost "access" to, "use" of, and "utility" from its premises. Doc. 35 at 6-14. Hartford takes the contrary view, arguing that "mere loss of use [,] without any tangible alteration to the physical condition or location of property at the insured's premises," is not covered. Doc. 32 at 8 (quoting Chief of Staff LLC v. Hiscox Ins. Co. , 532 F. Supp. 3d 598, 601-05 (N.D. Ill. 2021) ). Hartford's reading is correct.

True enough, the noun "loss," standing alone, can refer to "depriv[ation] of ... a possession." Loss , Oxford English Dictionary (2d ed. 1989) (def. 2a); see also Loss , Webster's Third New International Dictionary (1961) (def. 1a) ("the act or fact of losing," "failure to keep possession," "deprivation"). But the noun "loss" in the policy is modified by the adjective "physical," which in context means "tangible, concrete." Physical , Oxford English Dictionary (3d ed. updated Mar. 2006) (def. 6); see also Physical , Black's Law Dictionary (11th ed. 2019) (def. 2) ("pertaining to real, tangible objects"); Physical , Webster's Third New International Dictionary , supra (def. 2b) ("of or relating to natural or material things as opposed to things mental, moral, spiritual, or imaginary"). So "physical loss" refers not to any deprivation, but rather to a deprivation caused by a tangible or concrete change in the condition or location of the thing that is lost.

The complaint alleges no such deprivation. Instead, it alleges that ABC Diamonds's loss of use of its property was due to the Governor's and the Mayor's closure orders. Doc. 29 at ¶¶ 46-68. Those closure orders did not cause a concrete or tangible loss of ABC Diamonds's property. See 10A Steven Plitt et al. , Couch on Insurance § 148:46 (West 3d ed. updated Dec. 2020) ("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.") (footnotes omitted); accord , e.g. , Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am. , 15 F.4th 885, 890-93 (9th Cir. 2021) (California law); Santo's Italian Café LLC v. Acuity Ins. Co. , 15 F.4th 398, 400-06 (6th Cir. 2021) (Ohio law); Oral Surgeons, P.C. v. Cincinnati Ins. Co. , 2 F.4th 1141, 1144-45 (8th Cir. 2021) (Iowa law). It follows that ABC Diamonds did not suffer the "physical loss" required for coverage under the Business Income provision.

Another strike against ABC Diamonds's position is that it is difficult to square with the Business Income provision's "period of restoration" language. As noted, the provision covers losses "due to the necessary suspension of [ABC Diamonds's] ‘operations’ during the ‘period of restoration.’ " Doc. 29-1 at p. 34, § A.5.o(1). As defined by the policy, the "period of restoration" ends on the earlier of (a) "the date when ... the property at [ABC Diamonds's premises] should be repaired, rebuilt or replaced with reasonable speed and similar quality"; or (b) "[t]he date when [ABC Diamonds's] business is resumed at a new, permanent location." Id. at p. 48, § G.12.b.

If there had been a physical alteration to the condition or location of ABC Diamonds's property—for example, if a fire had destroyed its building, or if a thief had stolen its jewelry cases—one could assess when the "period of restoration" would end, for in those instances there would be something to "repair[ ], rebuil[d] or replace[ ]." Ibid. The same cannot be said of the mere loss of use of ABC Diamonds's property due to government closure orders. Under ABC Diamonds's theory—that the mere loss of use of property at its premises, without any physical alteration to the condition or location of that property, is...