Circle Block Partners, LLC v. Fireman's Fund Ins. Co.

44 F.4th 1014

CIRCLE BLOCK PARTNERS, LLC and Circle Block Hotel, LLC, Plaintiffs-Appellants,

v.FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellee.

No. 21-2459

United States Court of Appeals, Seventh Circuit.

Argued January 14, 2022

Decided August 17, 2022

Hamilton, Circuit Judge.

This appeal involves another business insurance coverage dispute arising out of the COVID-19 pandemic. In previous cases, we have concluded under Illinois and Michigan law that businesses forced to shut down or reduce operations during the pandemic failed to allege "direct physical loss" or "direct physical damage" to property. E.g., Paradigm Care & Enrichment Center, LLC v. West Bend Mutual Insurance Co. , 33 F.4th 417 (7th Cir. 2022) (Illinois and Michigan law); Sandy Point Dental, P.C. v. Cincinnati Insurance Co. , 20 F.4th 327 (7th Cir. 2021) (Illinois law). Here, we reach the same conclusion under Indiana law, in accord with the only Indiana appellate opinion directly on point. See Indiana Repertory Theatre v. Cincinnati Casualty Co. , 180 N.E.3d 403 (Ind. App. 2022), transfer denied, 2022 WL 3021434 (Ind. July 19, 2022). We also agree with the district court that any attempt to amend the complaint would be futile, so we affirm the district court's decision to dismiss the case with prejudice. Finally, because Indiana courts will have opportunities to address these issues in other cases, and in view of the Indiana Supreme Court's decision to deny transfer in the Indiana Repertory Theatre case, we deny the plaintiffs' motion to certify two questions of state law to that court.

I. Facts and Procedural History

Plaintiffs Circle Block Partners, LLC and Circle Block Hotel, LLC own and operate the Conrad, a luxury hotel in downtown Indianapolis. The Conrad features over 200 guest rooms, a business center, and spa and fitness facilities. The hotel also hosts weddings and other gatherings.

In early 2020, Circle Block was anticipating a busy spring season at the Conrad, with several high-profile sporting events, conventions, and live performances scheduled to take place nearby. Instead, of course, the COVID-19 pandemic dramatically altered daily life. In March, state and county governments adopted public health measures in response to the spread of COVID-19. Both the state and county prohibited public gatherings of more than fifty people. In addition, an Indiana stay-at-home order restricted travel and mandated the closure of all non-essential businesses. Hotels were classified as essential businesses "to the extent they are used for lodging and delivery or carryout food services."

As COVID-19 spread and these restrictions went into effect, the Conrad's business quickly dried up. By March 19, only six of the hotel's guest rooms were occupied. A month later, the hotel suspended operations entirely. Circle Block alleges that the Conrad "lost virtually all of its business income during this time." The hotel continued to incur business expenses such as payroll and mortgage costs, along with additional expenses for cleaning and disinfecting the property.

On March 23, Circle Block filed a claim under its commercial property insurance policy with defendant Fireman's Fund Insurance Company. As relevant here, the "all-risk" policy covering the Conrad included business income and extra expense coverage, civil authority coverage, dependent property coverage, communicable disease coverage, and business access coverage. Each of those relevant coverages required "direct physical loss or damage" to property. The policy also included a "mortality and disease" exclusion.

Fireman's Fund denied the claim on September 2, 2020. Circle Block then filed this case against Fireman's Fund in an Indiana state court for breach of contract. Fireman's Fund removed the suit to the Southern District of Indiana and moved to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

The district court granted the motion to dismiss. Circle Block Partners, LLC v. Fireman's Fund Insurance Co. , No. 20-cv-02512, 2021 WL 3187521 (S.D. Ind. July 27, 2021). The court concluded that Circle Block had not alleged any direct physical loss or damage. A mere loss of use or functionality, the court said, was not sufficient. Nor were Circle Block's allegations that virus particles had attached to surfaces at the hotel enough to show direct physical loss or damage. Because it would not be possible for Circle Block to cure the pleading deficiencies in an amended complaint, the court dismissed the case with prejudice. This appeal followed.

II. Analysis

We review de novo the district court's dismissal for failure to state a claim. East Coast Entertainment of Durham, LLC v. Houston Casualty Co. , 31 F.4th 547, 550 (7th Cir. 2022). At this stage, we accept all well-pleaded allegations as true, and we draw all reasonable inferences in favor of the plaintiff. Bilek v. Federal Insurance Co. , 8 F.4th 581, 584 (7th Cir. 2021). To avoid dismissal, the complaint must "state a claim to relief that is plausible on its face." Paradigm Care , 33 F.4th at 420, quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While the plaintiff must show "more than a sheer possibility" of liability, this standard "is not akin to a ‘probability requirement.’ " Iqbal , 556 U.S. at 678, 129 S.Ct. 1937, quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

This case arises under our diversity jurisdiction, and the parties agree that Indiana law applies. Absent a controlling decision from the Indiana Supreme Court, we do our best to predict how that court would rule on the issues of law. Mashallah, Inc. v. West Bend Mutual Insurance Co. , 20 F.4th 311, 319 (7th Cir. 2021). In doing so, we may consider decisions from the Indiana Court of Appeals. See id.

Under Indiana law, the interpretation of an insurance policy is a legal question that turns on traditional principles of contract interpretation. Ebert v. Illinois Casualty Co. , 188 N.E.3d 858, 863–64 (Ind. 2022). A reviewing court must construe the policy as a whole and aim to "harmonize the policy's provisions rather than place them in conflict." Pelliccia v. Anthem Insurance Cos. , 90 N.E.3d 1226, 1231 (Ind. App. 2018). If the language of a policy provision is "clear and unambiguous," then that plain meaning controls. Ebert , 188 N.E.3d at 864. Where a provision is ambiguous, however, it is construed in favor of the insured. Id. Ambiguity exists where "reasonably intelligent policyholders would honestly disagree on the policy language's meaning." Erie Indemnity Co. v. Estate of Harris , 99 N.E.3d 625, 630 (Ind. 2018). A term is not rendered ambiguous "by the mere fact that the parties differ as to its meaning." G&G Oil Co. of Indiana v. Continental Western Insurance Co. , 165 N.E.3d 82, 87 (Ind. 2021).¹

A. Scope of Coverage

With those principles in mind, we turn to the policy language at issue. As the district court noted, each policy provision under which Circle Block asserts coverage requires "direct physical loss or damage" to property. Circle Block , 2021 WL 3187521, at *2. Just before oral argument in this case, the Indiana Court of Appeals addressed similar language in Indiana Repertory Theatre v. Cincinnati Casualty Co. , 180 N.E.3d 403 (Ind. App. 2022). There, the plaintiff was an Indianapolis theater—located just steps away from the Conrad—that had been forced to close temporarily due to the pandemic. The theater filed a claim with its insurer for loss of business income and extra expenses. The insurer denied the claim, explaining that the theater had not suffered "direct physical loss or damage" to property, as required by the insurance policy. The theater sued in Indiana state court, and the trial court granted partial summary judgment for the insurer.

On appeal, the theater argued that it had suffered direct physical loss or damage because it could not use the property to host live performances. The Indiana Court of Appeals rejected that loss-of-use theory. Instead, the court drew guidance from a New York case denying coverage where the policyholder's property "did not suffer any damage or alteration" but "was unusable for its intended purpose because of an outside factor." 180 N.E.3d at 410, citing Roundabout Theatre Co. v. Continental Casualty Co. , 751 N.Y.S.2d 4, 302 A.D.2d 1 (N.Y. App. 2002). The court also pointed to a recent COVID-19 insurance case in which the Eighth Circuit denied coverage and held that direct physical loss or damage requires "some physicality to the loss or damage of property—e.g. , a physical alteration, physical contamination, or physical destruction." Id. , quoting Oral Surgeons, P.C. v. Cincinnati Insurance Co. , 2 F.4th 1141, 1144 (8th Cir. 2021). Ultimately, the theater "did not suffer physical loss or physical damage under the language of the Policy because the premises covered ... was not destroyed or altered in a physical way that would require restoration or relocation." Id.

The same reasoning applies here. We recognize that Circle Block was not able to use the Conrad property as it would have preferred. But as Indiana Repertory Theatre and the overwhelming majority of similar cases under other states' law have held, a temporary denial of a plaintiff's preferred use of its property, absent some physical alteration, does not fall within the plain meaning of "direct physical loss or damage." Accord, e.g., Paradigm Care , 33 F.4th at 421–22 ; Sandy Point Dental , 20 F.4th at 334–35 ; SA Palm Beach, LLC v. Certain Underwriters at Lloyd's London , 32 F.4th 1347, 1358–59 (11th Cir. 2022) (rejecting loss-of-use theory and collecting cases). Because of the Conrad's status as an essential business for certain purposes, it was permitted to remain open to provide lodging and delivery or carryout food services. In other words, the hotel was not rendered "completely uninhabitable by the pandemic." See Sandy Point Dental , 20 F.4th at...