Transform Holdco LLC v. Lloyd's Underwriter Syndicate No. 318 MSP

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2024 IL App (1st) 230732-U

TRANSFORM HOLDCO LLC, Plaintiff-Appellant, v. LLOYD'S UNDERWRITER SYNDICATE NO. 318 MSP, NEON SYNDICATE 2468, TOKIO MARINE AMERICAN INSURANCE COMPANY, IRONSHORE SPECIALTY INSURANCE COMPANY, ZURICH AMERICAN INSURANCE COMPANY, AMERICAN INTERNATIONAL GROUP UK LIMITED, LLOYD'S UNDERWRITER SYNDICATE NO. 2488 CGM, LLOYD'S UNDERWRITER SYNDICATE NO. 2987 BRIT, ENDURANCE WORLDWIDE INSURANCE LTD., LLOYD'S UNDERWRITER SYNDICATE NO. 5151 ENH, LLOYD'S UNDERWRITER SYNDICATE NO. 1414 ASC, LLOYD'S UNDERWRITER SYNDICATE NO. 1183 TAL, ACE AMERICAN INSURANCE COMPANY, WESTPORT INSURANCE CORPORATION, STARR SURPLUS LINES INSURANCE COMPANY, CANOPIUS INSURANCE SERVICES, and EVANSTON INSURANCE COMPANY, Defendants-Appellees.

No. 1-23-0732

Court of Appeals of Illinois, First District, First Division

March 25, 2024

This order was filed under Supreme Court Rule 23 and is not precedent except in the limited circumstances allowed under Rule 23(e)(1).

Appeal from the Circuit Court of Cook County. No. 22 CH 5523 The Honorable Anna M. Loftus, Judge Presiding.

PRESIDING JUSTICE FITZGERALD SMITH delivered the judgment of the court. Justices Lavin and Coghlan concurred in the judgment.

ORDER

FITZGERALD SMITH, PRESIDING JUSTICE

¶ 1 Held: The appellate court affirms the trial court's dismissal of plaintiff's complaint seeking insurance coverage for business interruption losses as a result of the presence at its premises of the virus that causes COVID-19, as allegations did not involve "direct physical loss or damage" to insured property necessary to trigger coverage.

¶ 2 The plaintiff, Transform Holdco LLC, appeals the trial court's dismissal of its complaint, which sought a declaratory judgment that it was entitled, under commercial property policies insuring it against "all risk of direct physical loss or damage" to insured property, to indemnity for business interruption losses and expenses as a result of the presence at its premises of SARS-CoV-2, the virus that causes COVID-19. The plaintiff also appeals the trial court's dismissal of defendant Westport Insurance Corporation (Westport) based on a provision of its policy that vested exclusive jurisdiction in the courts of New York. We affirm the judgment of the trial court.

¶ 3 I. BACKGROUND

¶ 4 The plaintiff is the operator of Sears Roebuck &Co. and Kmart retail stores. The defendants are 17 insurance companies that comprised the plaintiff's commercial property insurance program for the period of May 1, 2019 to May 1, 2020. For purposes of this appeal, there is no material difference in policy language among the various policies at issue. Each defendant's policy provides in pertinent part that it "insures against all risk of direct physical loss or damage occurring during the policy term to property insured by this policy," subject to certain exclusions.

¶ 5 On June 8, 2022, the plaintiff filed a complaint for declaratory judgment against the defendants seeking to establish insurance coverage for losses sustained in the operation of its business related to the COVID-19 pandemic. It sought indemnity under various types of coverages available for business-interruption related losses resulting from "direct physical loss or damage" to property.^[1] Generally speaking, the complaint alleged that the plaintiff was forced to limit its retail operations to providing only essential services to the public and that it incurred significant costs to alter its properties to control foot traffic and "to constantly remediate its properties to minimize the risk of transmission through fomites, droplets, droplet nuclei, and aerosols." It alleged that these losses were caused both by the physical presence at its properties of SARS-CoV-2, as well as by government orders issued in response to the pandemic directing people to stay at home and limiting non-essential retail business operations.^[2]

¶ 6 With respect to the issue of direct physical loss or damage to insured property caused by the presence of the virus at its stores, the complaint included the following allegations:

"34. *** The scientific community has confirmed that SARS-CoV-2 virions and COVID-19 alter the conditions of properties, in that the premises are physically damaged and no longer safe for normal use. In this regard, SARS-CoV-2 virions and COVID-19 cause physical loss of and damage to properties.

35. This physical loss and damage to property results because SARS-CoV-2 virions have a corporeal existence and are contained in respiratory droplets. Once expelled from infected individuals, these droplets adhere to surfaces and objects and physically change these once safe surfaces into 'fomites.' Fomites are objects, previously safe to touch, that now serve as a vehicle for transmissions of SARS-CoV-2 virions. Fomites physically change the air airspaces, property, and property surfaces by becoming a part of the air or property. This physical change makes contact with affected surfaces unsafe and potentially deadly. In turn, the physical change of the affected surface or material causes tangible and severe property loss and damage. The properties are dangerous and cannot be used unless and until the COVID-19-related conditions are fully rectified.

36. Medical and scientific research also has established that SARS-CoV-2 virions and COVID-19 spread through indoor airborne transmission. When individuals carrying SARS-CoV-2 virions talk, cough, or sneeze, they expel aerosolized droplet nuclei that remain in the air, accumulate in buildings, and-like dangerous fumes-make the premises unsafe and unusable.

37. Airborne particles likewise are known to have spread into a facility's heating and ventilation ('HVAC') system, leading to transmission of SARS-CoV-2 virions from person to person. Ambient air that was previously safe to breathe, but can no longer be safely breathed due to SARS-CoV-2 aerosols, has undergone a physical alteration. The Environmental Protection Agency has recommended that facilities make improvements to their ventilation and HVAC systems by, for example, increasing ventilation with outdoor air and air filtration.

38. Fomites, droplets, droplet nuclei, and aerosols containing SARS-CoV-2 virions are not theoretical, informational, or incorporeal, but rather are dangerous physical objects that have a tangible existence. Their presence within an insured property causes physical loss of and damage to property by necessitating remedial measures that include, without limitation, repairing or replacing air filtration systems, remodeling and reconfiguring physical spaces, removal of fomites by certified technicians, and other measures."

¶ 7 The defendants filed a motion to dismiss the complaint under section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2022)), arguing that controlling Illinois case law had established that the presence at a premises of the virus that causes COVID-19 does not constitute "direct physical loss or damage to property" for purposes of insurance policy provisions that incorporate such a requirement. See ABW Development, LLC v. Continental Casualty Co., 2022 IL App (1st) 210930, ¶ 30; Sweet Berry Cafe, Inc. v. Society Insurance, Inc., 2022 IL App (2d) 210088, ¶ 43. They further argued that the allegations set forth above about how the virus causes physical damage at a microscopic level were insufficient to amount to an allegation of direct physical loss or damage to property, including because the virus could be easily removed from surfaces by cleaning and did not require any property to be repaired or replaced.

¶ 8 The trial court granted the motion to dismiss, finding that the complaint failed to allege physical injury or damage to property as required to trigger coverage under the policies and controlling case law. The court reasoned that the gist of the allegations was that the virus adheres or bonds itself to the surfaces with which it comes into contact, thereby making the surface capable of infecting people that touched it. However, the fact remained that the surface itself was not altered, as the virus could be removed with disinfectants and otherwise dies naturally within hours or days. Once the virus is removed, the surface exists unchanged from its previous state. Based on this reasoning, the trial court therefore dismissed the plaintiff's complaint with prejudice. It also granted a separate motion to dismiss by defendant Westport on the grounds that its policy required suit to be brought against it only in New York. The plaintiff now appeals these rulings.

¶ 9 II. ANALYSIS

¶ 10 A motion to dismiss under section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2022)) challenges the legal sufficiency of a complaint and asserts that the plaintiff has failed to state a cause of action. Village of Kirkland v. Kirkland Properties Holdings Co., 2023 IL 128612, ¶ 44. In ruling on such a motion, a court must accept as true all well-pleaded facts in the complaint, along with any reasonable inferences that may arise from them. Kanerva v. Weems, 2014 IL 115811, ¶ 33. The critical inquiry is whether the complaint's allegations, when construed in the light most favorable to the plaintiff, are sufficient to establish a cause of action upon which relief may be granted. Id. A cause of action should not be dismissed under section 2-615 unless it is clearly apparent from the face of the pleadings that no set of facts can be proven that would entitle the plaintiff to recovery. Id. The standard of review is de novo. Id.

¶ 11 As explained below, the issue presented in this appeal is a familiar one: whether the losses allegedly suffered by the plaintiff's business in the COVID-19 pandemic result from "direct physical loss or damage *** to property," under policies...