Exhibit C — State Court Hearing Transcript (It's Nice, Inc. v. State Farm Fire and Casualty)

Record facts

U.S. District Court for the Northern District of Illinois · No. 1:20-cv-05965 · Doc. 22-3 · 2020-10-19 · Docket on CourtListener

Summary

Exhibit C, Document #: 22-3, filed October 19, 2020 in No. 1:20-cv-05965 in the U.S. District Court for the Northern District of Illinois: a transcript of videoconference proceedings in It's Nice, Inc. v. State Farm Fire and Casualty Co., No. 20 L 547, in the Circuit Court of the 18th Judicial Circuit, DuPage County, Illinois, held September 29, 2020 before Judge Bryan S. Chapman. The hearing concerns State Farm's 2-615 motion directed at the plaintiff's claim for business interruption coverage. Counsel for State Farm argues the complaint does not plead accidental direct physical loss and that the policy's virus exclusion bars coverage, while counsel for It's Nice argues Illinois law does not require a structural alteration. The transcript records the court stating that the dismissal should be with prejudice and that it will enter such an order.

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Full text

EXHIBIT C 
 
 
Case: 1:20-cv-05965 Document #: 22-3 Filed: 10/19/20 Page 1 of 41 PageID #:614

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Cheryl Ann Barone, CSR#84-001503
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IN THE CIRCUIT COURT OF THE 18TH JUDICIAL CIRCUIT 
DU PAGE COUNTY, ILLINOIS
IT'S NICE, INC., d/b/a 
HAROLD'S CHICKEN SHACK #83, an 
Illinois Corporation, 
 
Plaintiff,
-vs-
STATE FARM FIRE AND CASUALTY 
CO.,
Defendant.
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 No. 20 L 547 
 
2-615 Motion 
REPORT OF VIDEOCONFERENCE PROCEEDINGS 
had at the hearing of the above-entitled cause, before 
the Honorable BRYAN S. CHAPMAN, DuPage County, 
Illinois, recorded via Zoom and transcribed by 
Kristin M. Barnes, Certified Shorthand Official Court 
Reporter, commencing on the 29th day of September, 
2020.  
Kristin M. Barnes, CSR
Official Court Reporter
CSR No. 084-004026
Case: 1:20-cv-05965 Document #: 22-3 Filed: 10/19/20 Page 2 of 41 PageID #:615

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Cheryl Ann Barone, CSR#84-001503
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PRESENT:
FRANKLIN LAW GROUP, by
MR. RYAN ENDSLEY,
appeared on behalf of the Plaintiff; 
SUDEKUM, CASSIDY & SHULRUFF, CHTD., by
MS. FLORENCE M. SCHUMACHER and
MR. FREDERICK J. SUDEKUM, III, 
appeared on behalf of the Defendant. 
Case: 1:20-cv-05965 Document #: 22-3 Filed: 10/19/20 Page 3 of 41 PageID #:616

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THE COURT:  All right.  Good morning, Counsel.  
MR. ENDSLEY:  Good morning, your Honor.  
THE COURT:  All right.  This is 20 L 547, It's 
Nice, Inc. versus State Farm Fire and Casualty.  
We come on for a 2-615 motion in connection 
with It's Nice's claim for coverage under the policy.  
I've had a chance to read the motion, the 
corresponding briefing, and I know there had been some 
motions for leave to file supplemental authority.  I 
have had a chance to look at those motions.  
I assume both parties are okay with each side 
submitting their respective -- their respective briefs 
in support of their -- their respective authority in 
support of their positions.  
Is that a fair characterization?  
MR. ENDSLEY:  Yes, your Honor.  For It's Nice, at 
least. 
THE COURT:  Sure. 
MS. SCHUMACHER:  State Farm as well, your Honor, 
there's no objection.  
THE COURT:  All right.  Why don't we go ahead and 
have the parties state their names for the record. 
MS. SCHUMACHER:  Sure.  
Florence Schumacher and Rick Sudekum here on 
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behalf of State Farm. 
THE COURT:  Uh-huh.
MR. ENDSLEY:  Ryan Endsley on behalf of It's Nice, 
Inc. 
THE COURT:  Okay.  What I'd like to do here, guys, 
I have spent considerable time with the -- with the 
courtesy copies.  I've got my tabs.  Like I said, I've 
read the authority.  I've read the additional authority 
submitted.  
I don't necessarily need a regurgitation of 
the positions already taken in the briefs.  I feel like 
I have adequately familiarized myself with the parties' 
positions.  
I do want to give the parties a chance to 
make their record here.  I appreciate the issue and 
that it's kind of a fastly moving issue through the 
courts right now, and, as a result, I want to give the 
parties a chance a make their record.  
That said, I don't necessarily need, you 
know, sort of, your Honor, this is how insurance 
policies work.  I mean, tell me whatever you want to 
tell me.  I may have a question or two for the parties, 
but I'll let you make your record first.  
State Farm, it's your motion.  I'll let you 
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go ahead if there's anything you want to add. 
MS. SCHUMACHER:  Sure, your Honor.  
I am going to briefly run through our 
argument again, trying to sort of work in some of those 
cases that have come in more recently.  
I understand that the court is familiar with 
insurance policies in general, so we won't -- hopefully 
won't belabor you with too much elementary insurance 
law here.  
Obviously, the plaintiffs know -- or the 
court knows that the plaintiff is seeking to recover 
for a business interruption loss resulting from the 
COVID-19 pandemic and the executive orders.  
In our view, there are basically two main 
barriers to plaintiffs being able to state a cause of 
action.  The first is the lack of accidental direct 
physical loss and the second is the virus exclusion.  
The way I look at these, your Honor, it's 
sort of like -- the lack of accidental direct physical 
loss is like a 10-foot hurdle and the virus exclusion 
is like a brick wall.  So even if the plaintiffs could 
plead accidental direct physical loss, which they 
can't, they're going to run right into the virus 
exclusion and there's not going to be any coverage for 
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that reason either. 
THE COURT:  That was my -- that was the one thing 
I wondered a little bit about in reading your briefing, 
more the structure of your brief. 
MS. SCHUMACHER:  Right. 
THE COURT:  You led with the virus exclusion, and, 
to my mind, there's an insuring agreement here as a 
preliminary matter and we only get to the virus 
exclusion if the court finds that there is, in fact, 
accidental direct physical loss to the property in the 
first instance.  
You would agree with that?  
MS. SCHUMACHER:  I would, your Honor.  
THE COURT:  Okay.  
MS. SCHUMACHER:  You know, the court is 
familiar -- it's the trigger of coverage.  I mean, just 
like in a life insurance policy, until you have the 
death of the insured, there's no coverage to begin 
with.  
It's the same for these policies.  They're 
property policies, so their triggering coverage is 
accidental direct physical loss.  You know, you can't 
just skip this part.  It's the trigger of coverage.  
It's something that the plaintiff has the burden of 
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proof on.  
So, in this case, the covered property is the 
restaurant property, so the first question is, where is 
the accidental direct physical loss pleaded, and our 
response, obviously, is that it isn't.  
So, you know, just looking briefly at the 
complaint, you know, they allege that there was no 
virus on the property and their accidental direct 
physical loss argument is based on loss and use.  
But, you know, my first point is, it has to 
be accidental direct physical loss, and I think it's 
undisputed that there was no difference to this 
property physically on the day before these executive 
orders were issued than there was on the day after, so 
physically the property was exactly the same.  
So where's the loss?  Where's the loss 
they're arguing?  They're saying that loss of use is 
sufficient, that they couldn't use the property in the 
same way, and that somehow that constitutes accidental 
direct physical loss to the property, and we disagree 
with that position.  
So we believe that the Illinois law and all 
these cases that have recently come out correctly hold 
that loss of use of property without any physical 
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change to that property cannot constitute accidental 
direct physical loss. 
THE COURT:  Mr. Endsley, at the risk of stealing 
your thunder, I'm going to ask Ms. Schumacher 
why don't you go ahead and respond to the western 
district of Missouri cases that were cited by It's Nice 
where it looks like some district courts in the western 
district have found, you know, sort of a lack of 
definition in the policy for physical damage or loss 
of -- you know, what are the factual distinctions in 
those cases, if any -- 
MS. SCHUMACHER:  Right, right. 
THE COURT:  -- as to why the court should not find 
those cases persuasive here as opposed to some of the 
cases you've cited?  
MS. SCHUMACHER:  Sure.  
So the first thing I would say, the court 
says there are courts in the western district of 
Missouri.  What we actually have is one court -- it's 
the same judge in the two cases -- who has gone 
essentially the other way on this accidental direct 
physical loss question.  
Those cases are factually distinguishable on 
two main grounds.  The first is that the plaintiffs in 
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those cases argue that they had virus on the premises.  
So the plaintiff in this case has not even alleged that 
there was any virus present.  
The second distinction is in the policy 
language.  So the trigger of coverage in those 
policies, in the Studio 417 and the other case, were -- 
I think I've got the exact language here -- accidental 
direct -- or accidental physical loss or accidental 
physical damage.  
And so the court in Studio 417 felt that it 
had to somehow -- you know, focusing on that 
disjunctive or, the court found that it had to give 
separate meaning to physical loss and physical damage.  
That's not the case in our policy.  There's 
one trigger of coverage, which is accidental direct 
physical loss to property.  
We also have a virus exclusion, which wasn't 
present in those cases, but I know the court is asking 
me about physical loss.  
So I would say the first and the most 
important distinguishing factor is, obviously, the 
pleading in this case -- I think it's in paragraphs, I 
think, 25 and 36 of the complaint where the plaintiffs 
specifically deny that they had any virus present on 
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premises.  
And, again, I would disagree with Studio 417.  
I'm not sure even in their presence a virus is enough.  
Other courts have disagreed with that opinion as well, 
but I think for our purposes in our compliant we have a 
complaint that alleges the absence of the virus.  And 
then, obviously, we have a policy that doesn't have 
that or in there that the Studio 417 court seemed to 
think was determinative.  
THE COURT:  All right.  Anything else you want to 
add?  
MS. SCHUMACHER:  Just jumping briefly into the 
virus exclusion, your Honor, in case we get there, we 
have that anti-concurrent causation language which 
broadly excludes coverage when a loss would not have 
occurred in the absence of a virus.  
That language, that anti-concurrent causation 
language, has been upheld in Illinois.  The virus 
exclusion clearly applies in this case.  There is no 
requirement in that policy language that the virus be 
physically present on the property, like plaintiff 
alleges.  They're just adding language to the exclusion 
which isn't present.  The exclusion needs to be applied 
as written.  It unambiguously excludes a broad range of 
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losses.  Virus is one of them.  
Oh, the argument about, you know, the 
proliferation issue, that somehow those two 
subparagraphs of the virus exclusion need to be read 
together, that's just not correct.  The virus portion 
of that exclusion is separate.  It says that loss is 
excluded, current virus, bacteria, or other 
microorganism.  
So, again, I think it's -- I don't see how it 
could possibly be ambiguous:  I mean, this -- clearly 
we have a too late chain of causation here.  The virus 
caused the executive orders which caused the loss and 
it's excluded under the virus exclusion. 
THE COURT:  Okay.  Mr. Endsley, do you want to 
respond to anything that's -- do you want to respond 
with anything that's not in your brief?  Or if there's 
a point or two you want to emphasize, I'm happy to give 
you a chance to do so. 
MR. ENDSLEY:  Thank you, your Honor.  
So I just wanted to highlight a couple of 
things.  In particular, we -- you know, the Studio 417 
case, we have the same situation where State Farm 
elected not to define physical loss or damage.  And, in 
this case, while counsel has pointed out that this 
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policy only says physical loss, that's really the 
broader of the two.  Physical damage is what's probably 
more in line with what State Farm's position is, which 
is that a physical loss or damage must be a structural 
alteration.  
And the fact is that I think the Illinois 
courts have not limited themselves quite so much to 
structural physical alteration as State Farm would like 
the court to believe.  In particular, it's sort of an 
all squares are rectangles argument.  They cite cases 
which are saying, you know, a change in color or shape 
or appearance to the property is a physical loss or 
damage, which is true, but that's not the only type of 
physical loss.  
And I think sort of looking at the asbestos 
cases really sort of points that out, and State Farm's 
position really throughout the briefs has been that 
Illinois law requires a physical alteration to the 
structure, and that's just not really what Illinois 
case law actually says.  
The other thing I'd sort of like to 
highlight -- and this impinges a little bit on both the 
virus exclusion and the physical loss or damage -- and 
that's sort of the nature of an exclusion.  And I know 
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that this is, you know, kind of a basic insurance 
issue, but the fact is that an exclusion exists to 
exclude coverage which would otherwise be present.  
A virus cannot cause physical alteration to 
the building, as far as I'm aware.  If there's a way 
that it can be done, State Farm certainly hasn't 
articulated it.  So at least this policy, as written, 
clearly seems to contemplate nonphysical alterations 
which would otherwise be covered causes of loss.  
And that's a problem for the policy in a 
couple -- for State Farm in a couple of ways in that 
State Farm wants to apply the virus exclusion where it 
was not present.  Even in the absence of a virus 
exclusion, if the governor had never closed the 
building, It's Nice could never have made a claim 
for -- under this policy because the coronavirus 
existed somewhere.  You know, even if there is 
absolutely no virus exclusion in a different policy 
like that, there just wasn't anything affecting It's 
Nice's property.  
And separately, with the physical loss or 
use, when you're reading the policy, a number of these 
exclusions, including, you know, both the virus 
exclusion itself as well as the government closure 
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exclusion, really does contemplate under the policy 
exclusions for nonphysical, nonstructural altering 
causes of loss.  
And that, to me, reads -- particularly when 
State Farm has elected not to define loss or -- you 
know, physical loss, that's a problem for them because 
the policies seem to exclude things which wouldn't be 
covered anyway under State Farm's interpretation, and 
yet there they are.  
Reading the policy as a whole and 
constructing the ambiguities in favor of coverage, 
certainly at this point dismissal seems premature.  
THE COURT:  Counsel, do you have a response to the 
virus exclusion argument that the -- as I understand 
counsel's argument, it's that the virus -- if we were 
to take State Farm's proffered definition of physical 
as understood in insurance contracts, the virus 
exclusion would never fit that definition because it's 
never going to alter a physical structure.  
I'm going to go to paragraph 23 of your 
motion, page 10, where State Farm says, In cases 
interpreting the word physical in insurance contracts, 
physical is widely held to exclude alleged losses that 
are intangible or incorporeal, such as detrimental 
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economic impact, unaccompanied by distinct demonstrable 
physical alteration of property.  
So how is the virus exclusion consistent with 
that proffered definition of physical?  
MS. SCHUMACHER:  Well, my first response, your 
Honor, is I'm not sure we should assume that a virus 
could never alter a structure.  We're not familiar with 
every -- 
THE COURT:  Fair enough. 
MS. SCHUMACHER:  -- virus in the world, so I think 
that the exclusion -- you know, I look at it as sort of 
a belt and suspenders approach.  I mean, surely I think 
this virus is not causing physical damage, but that 
certainly doesn't mean that there's no virus that could 
ever develop that doesn't cause physical damage and 
bodily injury.  We don't know that.  So I think, in a 
sense, that the insurer clearly wanted to exclude this 
kind of loss.  
I think in the event that there is some 
unexpected virus that comes up in the future that could 
cause physical damage, I think the insurer is well 
within its right to, you know, exclude that in the 
event that that might happen some day.  
It's clearly in the policy.  The insured was 
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aware of it.  It's a broad exclusion.  And, again, I 
think their whole question is just based on the 
assumption that all viruses are going to be like this 
virus, and I just don't think that that's the case. 
THE COURT:  Counsel, Mr. Endsley, let me ask you a 
question.  
One of the things, as I've thought about this 
case a little bit, I'm worried a little bit or I'm 
concerned at least about, were the court to accept your 
argument as to loss of use, I'm concerned about a 
limiting principle or lack thereof in terms of what is 
the underwritten risk here.  
And there appears to be, to my mind, 
different types of coverage available for loss of use, 
whether it is, in fact, civil authority when you think 
about the cases right after 9/11 around the World Trade 
Center.  There's a lot of case law coming down in the 
southern district of New York in the second circuit 
involving business interruption where civil authority 
has retail shops shut down but you've got physical 
damage to other property, ingress/egress sorts of 
issues.  
Without the loss of use, sort of, well, 
there's physical accidental physical loss to property 
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if I can't access it, that strikes me, when I look at 
the policy in its entirety, to be potentially a very 
different risk than what may have been contemplated 
here.  
Is that a fair concern?  
MR. ENDSLEY:  So I think that is something of a 
concern.  But to alleviate that a little bit, we're 
dealing with a fairly unique set of circumstances and I 
think there sort of still is a principle here.  
If the governor's orders hadn't actually 
required closure, if they, you know, had limited how 
many patrons you could have in the restaurant or if 
the -- you know, the effect of the general governor's 
orders to shelter at home had been to reduce income, 
you know, if we were talking about loss of income, 
that's not a covered cause of loss.  
And, in fact, I think some of the cases cited 
by State Farm sort of indicate what the -- what the 
difference is -- and those would be the Anchor 
[phonetic] and Keach [phonetic] cases.  And, 
particularly, those focused on the difference between 
when something is actually completely closed down and 
when it's merely suffered, you know, a loss of business 
income, and there really is a significant difference 
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here.  
And the other thing I would sort of add, as 
far as a policy situation, is I think the tremendous 
number of lawsuits we've seen from this is sort of an 
indication that a lot of these insureds thought that 
this would have been covered, something like this, and 
learned only late in the game that it wasn't or at 
least the insurance company thought it wasn't.  
And I'd just sort of articulate again, you 
know, the basic principle that ambiguities in the 
policy are construed against the drafter.  State Farm 
was the one who got to say what this policy looked 
like, State Farm was the one who got to draft the 
language of the policy, and, frankly, had put a lot 
more thought into it than any of their insureds.  
So I think to say that, you know, this wasn't 
in the contemplation of the parties, it was at least a 
little bit.  State Farm has a number of exclusions 
which nearly but do not quite apply.  They were able to 
draft around this.  
And, frankly, exclusions exist in certain 
policies which do address this specific concern.  We've 
reviewed a couple of them from client -- from potential 
clients who wanted coverage and actually saying that if 
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there's a government closure order because of a 
pandemic, no coverage.  
So there are ways for the insurer to protect 
themselves from this, but in this case it's the insured 
who really had this dropped on them unexpectedly and is 
now having to litigate. 
THE COURT:  Well, certainly, obviously, companies 
and businesses around the world and certainly the 
country and certainly Illinois are faced with a 
remarkable predicament through largely no cause of 
their own, if at all, as a result of the pandemic.  
Let me be very clear.  I am not -- when I ask 
the question about the limiting principle, I am not 
suggesting that the court is trying to ascertain the 
intent of the parties at this point.  I'm simply trying 
to ascertain whether or not there's a reasonable 
interpretation on the other side.  
But wouldn't your argument, Mr. Endsley, be a 
bit stronger if the definition or if the insuring 
agreement language said insure for all accidental 
direct physical loss of covered property as opposed to 
to?  
In other words, it's talking about -- I'm 
concerned that we're reading direct physical to 
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property.  We're kind of just pretending that it 
doesn't say what it -- what it clearly says and we're 
kind of saying, well, loss of property or loss to 
property, same thing, whatever.  
Wouldn't you have a stronger argument if it 
said loss of property?  
MR. ENDSLEY:  In this case, I'm actually not sure 
that we would, your Honor.  
It's Nice still has the property, but the 
property suffered a loss of use and that was a loss to 
the property.  It's Nice hasn't -- you know, the 
property isn't gone.  It's Nice has, in fact, recently 
resumed business operations -- 
THE COURT:  So let me ask you a question.  
If I said, when I think loss to the property, 
I think the roof is blown off; okay?  That's what I 
think of just -- at the very least, at a superficial 
level.  
If you're telling me a closing of the doors 
by executive order is a loss to the property, help me 
understand why that's the same thing.  
MR. ENDSLEY:  Well, I think you're certainly 
correct that, you know, when we think of -- that is 
classic losses. 
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THE COURT:  That is, to my mind, closer to a loss 
of property.  It's a functional loss of property, not 
to property.  
MR. ENDSLEY:  I guess the best argument I can sort 
of think of, just off the spur of the moment, relates 
to the fact that the type of property it is is what 
affected the loss and that's -- because it's a 
restaurant, this was a different type of loss.  If this 
was just being used as residential housing, there is no 
loss to the property.  
So State Farm insured a particular type of 
business and a particular -- that particular type was a 
restaurant which was affected, and that impacted this 
property.  That was a loss to this specific property 
rather than a removal.  
So to some extent, you know, if it said loss 
of property, that, to me, almost suggests that 
something -- a little more of the structural alteration 
argument State Farm prefers, which is almost that 
something was removed from the property or just ceased 
to exist on the property -- because it was burned up or 
something -- whereas I think to property sort of 
suggests that it's anything that affects, you know, 
that business property.  It wasn't just the -- you 
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know, this wasn't just a title policy or something like 
that.  This was a business coverage policy.  
THE COURT:  It doesn't say anything is physical; 
right?  
MR. ENDSLEY:  It does say physical. 
THE COURT:  I mean, it's not any conceivable way 
you're unable to use the property in the way you see 
fit.  It's got to be direct physical loss.  And, I 
guess, your view is loss of use, there's a physical 
displacement; right?  That's -- 
MR. ENDSLEY:  Yes. 
THE COURT:  -- your position?  
Okay.  Ms. Schumacher, if there's anything 
you want to respond to, I'll give you the last word. 
MS. SCHUMACHER:  Sure.  There are many things.  
I'm going to try to stick to a couple.  
I think the Turek court actually discussed 
that physical loss to concept and I think it held that 
to implies contact and physical implies physical 
contact, direct physical loss to property.  
And I looked in the dictionary.  They gave 
examples like a right uppercut to the jaw or applying 
varnish to a surface.  Whatever theory they have about 
their loss not being able to use the property, that 
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simply is not physical loss to that property.  
And I just want to briefly touch on -- the 
court is concerned about the breadth of their 
interpretation.  So the first thing they said is, well, 
this is a different situation because the restaurant 
was required to be closed.  
I would point out that in the executive 
orders they did not close restaurants.  Restaurants 
were permitted to stay open for takeout or delivery.  
So regardless of whether they chose to close the 
restaurant, even under their complaint, they weren't 
required to.  So this is not a situation where 
restaurants were closed.  
The second and more broad point I would make, 
your Honor, is that under their theory of accidental 
direct physical loss, let's just say after COVID is 
over the restaurant is open until 1:00 a.m.  There's an 
ordinance that says restaurants have to close at 
midnight now.  According to their theory, they now have 
a loss of income claim because the restaurant has to 
close an hour early because, according to them, there 
doesn't have to be any physical impact; it just has to 
affect the use of their property.  
So, again, I agree with the court's concern 
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that their interpretation is way too broad and it 
brings many more things into coverage than are intended 
under a property policy which covers accidental direct 
physical loss and then loss of income once that's 
happened.  But you just can't skip that step.  
And I think that's all I have.  I know the 
court is familiar with all of this and there was a lot 
that was said, but I'd like to keep it as brief as I 
can.  So I think unless the court has any additional 
questions, I think we've made our point. 
THE COURT:  I think we -- I just want to make sure 
all the parties agree that regardless of the coverage 
form under the all risk policy, everyone agrees that 
direct physical loss is required; right?  
MR. ENDSLEY:  Yes. 
THE COURT:  That phrase, that is an insuring 
agreement that attaches to all.  You know, sometimes 
these all risk policies, there's all these amendments, 
you know, there's the general exclusions and then 
there's the exclusions within the broad form coverage 
and there's exclusions within that and those don't 
apply to the general -- you know, so that was my review 
of the policy, that there was no separate insuring 
agreement, everything goes back to Section 1 property 
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insuring agreements, direct physical loss requirement. 
MS. SCHUMACHER:  Yes. 
THE COURT:  Okay.  
MR. ENDSLEY:  Yeah, I believe there was a little 
bit of confusion that we were maybe trying to get 
coverage under the civil -- civil authority provision, 
but that was -- 
THE COURT:  Well, as I understand your argument, 
you'll take coverage wherever you can find it; right?  
MR. ENDSLEY:  Yes, that's correct.  
And that all relates back to the all risk 
direct physical loss. 
THE COURT:  Right.  Okay.  Very good.  Thank you.  
Okay.  The court is in a position to rule on 
this today.  The question presented by a 2-615 motion 
to dismiss is whether sufficient facts are contained in 
the pleadings that, if proved, would entitle the 
plaintiff to relief.  That's Evers versus Edwards 
Hospital, 247 Ill. App. 3d 717.  
A motion to dismiss under Section 615 admits 
all well-pleaded facts but does not admit conclusions 
of law or conclusions of fact not supported by 
allegations of specific fact.  
Exhibits -- I assume the policy was, in fact, 
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attached to the complaint?  
MS. SCHUMACHER:  It was -- your Honor, it was 
either attached or filed by agreement.  
I have two different cases.  One they 
attached a partial policy and then -- 
MR. ENDSLEY:  Yeah, I -- 
MS. SCHUMACHER:  Was yours the partial policy?  
MR. ENDSLEY:  Yeah, I believe it was attached by 
agreement.  
MS. SCHUMACHER:  Okay.
THE COURT:  The court is -- 
MR. ENDSLEY:  There was -- 
THE COURT:  The parties are asking the court to 
consider the policy, right -- 
MR. ENDSLEY:  Yes. 
MS. SCHUMACHER:  Yes, your Honor. 
THE COURT:  -- for purposes of this motion?  
All right.  So the policy is an exhibit to 
the complaint for purposes of this motion.  
Exhibits are part of the complaint to which 
they are attached and the factual allegations contained 
within an exhibit attached to a complaint serve to 
negate inconsistent allegations of fact contained 
within the body of the complaint.  
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I say that because, in some ways, this 
operates almost more like a 12(b)(6) than -- most 615's 
are sort of, if you haven't pled this element, you 
haven't pled that element, and this operates more sort 
of a -- whether or not there is a claim upon which 
relief can be granted based on the complaint itself.  
And, for that reason, I point out simply that 
the exhibits to the complaint, which, in this case, 
includes the policy, the parties have asked the court 
to consider that as well.  
Okay.  Having said all of that, the critical 
language here, first, is the direct physical loss 
language, and the court finds that direct physical loss 
unambiguously requires some form of actual physical 
damage to the insured premises to trigger coverage.  
The words direct and physical, which modify 
the word loss, ordinarily connote actual demonstrable 
harm of some form to the premises itself rather than 
force the closure of the premises for reasons 
extraneous to the premises itself or adverse business 
consequences that flow from such closure.  
Defense counsel -- I'm sorry, the insurance 
counsel points out here that Illinois courts have not 
squarely addressed direct physical loss in this 
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context, but I do want to note in cases interpreting 
the word physical in insurance contracts, physical is 
widely held to exclude alleged losses that are 
intangible or incorporeal in Illinois, such as 
detrimental economic impact unaccompanied by a distinct 
demonstrable physical alteration of the property.  
That's One Place Condo, LLC, versus 
Travelers, 2015 Westlaw, Northern District of Illinois, 
applying Illinois law.  
The other case here that, I think, is 
particularly useful is, in fact, Judge Gettleman's 
decision in the northern district of -- I want to get 
this right -- Sandy Point Dental v. Cincinnati 
Insurance.  This is 2020 Westlaw 5360465 dealing with 
very similar facts and similar policy language.  
In this case, the court finds, just as in 
that case, plaintiff simply cannot show any such loss 
as a result of either inability to access its own 
office or the presence of the virus on its physical 
surface, the latter of which here plaintiff fails to 
allege in its complaint.  
I don't think that's in dispute.  There's no 
argument that the coronavirus was, in fact, on the 
surface of the property.  The plaintiff has not pled 
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any facts showing physical alteration or structural 
degradation of the property, which is required to 
trigger coverage under this all risks policy.  
The court wants to note that in addressing 
this insuring agreement argument, this holding is 
consistent with other courts that have evaluated 
whether the coronavirus causes property damage 
warranting insurance coverage.  
Again, I want to reference 20 L -- I'm sorry, 
not 20 L.  2020 Westlaw 5360465.  That's Sandy Point 
Dental versus Cincinnati Insurance.  
I want to further note that Social Life 
Magazine versus Sentinel Insurance Company, denying a 
motion for preliminary injunction because the 
coronavirus does not cause direct physical loss; 
therefore, no coverage was required.  The coronavirus, 
quote, damages lungs.  It doesn't damage printing 
presses, close quote.  
Diesel Barbershop versus State Farm Lloyds, 
2020 Westlaw 4724305, Western District of Texas, 
August 13, 2020, granting a motion to dismiss because 
the coronavirus did not cause a direct physical loss 
and, quote, the loss needs to have been a distinct 
demonstrable physical alteration of the property, close 
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quote.  
I further want to direct the parties' 
attention to Gavrilides Management versus Michigan 
Insurance Company.  This is a state court of Michigan 
handing down a decision last month that was cited by 
State Farm in this case explaining that direct physical 
loss to property requires tangible alteration or damage 
that impacts the integrity of the property and 
dismissing the case because plaintiff failed to allege 
that the coronavirus had any impact to the premises.  
I want to point out that these are not 
controlling cases for purposes of an Illinois state 
court; however, the court finds that these cases just 
cited are, in fact, consistent with Illinois courts 
treating of physical damage under insurance policies.  
And, of course, there are meaningful 
differences at times between first and third party 
policies and first and third policy claims; however, 
the court finds that there is a consistent line of 
reasoning by Illinois courts as far as what physical 
damage must mean for purposes of insurance coverage in 
this case.  
In essence, to quote Judge Gettleman in the 
Sandy Point Dental Case, plaintiff here seeks coverage 
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for financial losses as a result of closure orders.  
And I don't think anybody really disagrees with that 
here.  
The coronavirus has not physically altered 
the appearance, shape, color, structure, or other 
material dimension of the property and, as a result, it 
doesn't come within the insuring agreement and, as a 
result, plaintiff has failed to plead a direct physical 
loss, which is a prerequisite for coverage.  
However, I do want to point out here that 
even if, even if, plaintiff had, in fact, been able to 
plead within the insuring agreement -- that this claim 
comes within the insuring agreement, the court does 
find that the virus exclusion applies.  
Now, the virus exclusion, which is Exclusion 
J under Section 1 of the policy, states as follows -- 
and there's important, what we'll call, lead-in 
language that I want to direct the parties' attention 
to.  The lead-in language under Section 1 exclusions, 
which applies to all coverage forms under this all 
risks policy, all coverage forms incorporate Section 1, 
the lead-in language states as follows:  We do not 
insure under any coverage for any loss which would not 
have occurred in the absence of one or more of the 
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following excluded events.  
We do not insure for such loss regardless of, 
A, the cause of the excluded event; or, B, other causes 
of loss; or, C, whether other causes acted concurrently 
or in any sequence with the excluded event to produce 
the loss; or, D, whether the event occurred suddenly or 
gradually, involves isolated or widespread damage, 
arises from natural or external forces, or occurs as a 
result of any combination of these, and it begins to 
list the exclusions.  
So the virus exclusion is Exclusion J.  The 
heading, which does not control, says fungi, virus, or 
bacteria.  Paragraph 1 states, Growth, proliferation, 
spread, or presence of fungi or wet or dry rot or, new 
paragraph, 2, Virus, bacteria, or other microorganism 
that induces or is capable of inducing physical 
distress, illness, and disease.  
For our purposes, those are the relevant 
provisions of the virus exclusion that needs to be 
addressed here.  First, the court finds that the 
growth, proliferation, spread, or presence is not 
required for purposes of applying the virus exclusion 
because that is in a separate paragraph designed to 
address fungus or fungi.  There are not just one but 
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two disjunctive or's in between fungus and virus 
because it goes fungus -- or states fungus or wet or 
dry rot or and then a new paragraph starting with the 
word virus enumerated as number two.  
So the court finds that it doesn't have to 
establish a growth of a virus, just simply the idea of 
a virus, the fact that a virus that is capable of 
inducing physical distress, illness, or disease.  
Even if -- if, in fact, this was some kind of 
physical -- accidental physical damage, physical loss 
coming within the insuring agreement, the virus 
exclusion applies because Subsection C of the lead-in 
language says this virus exclusion applies whether 
other causes, executive orders, acted concurrently or 
in any sequence with the excluded event to produce the 
loss.  
Here, I think everyone would agree absent the 
virus, absent the virus, there would be no executive 
orders, and so because C says this exclusion would 
apply even where the sequence of the ordering with 
other causes isn't entirely known or isn't entirely 
clear or happens one two or two one, it still applies.  
Furthermore, whether or not a virus could, in 
fact, alter the physical structure, I think that's a 
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much -- that's not entirely clear at all that a virus 
could.  
And that's plaintiff's -- or I'm sorry, 
insured's argument is the virus exclusion doesn't make 
any sense for a sort of physical alteration requirement 
of physical damage -- or a loss of, I should say -- 
physical loss because a virus would never alter the 
physical structure.  
The court doesn't agree with that.  Virus, 
bacteria, and microorganisms can exist in, in fact, a 
meaningful way, and I think there's a strain of thought 
out there that at one time was dominant -- it still may 
be true to a certain extent -- that this virus can 
exist on surfaces.  
So even if the loss of use because of 
coronavirus could constitute, the virus exclusion would 
still apply -- could constitute physical -- accidental 
physical loss, direct physical loss, I should say -- 
the virus exclusion applies.  
And so for those reasons, the court is going 
to grant the motion to dismiss.  
I want to point out -- or I do want to 
address the authority provided by Harold's Chicken -- 
It's Nice, Inc., d/b/a Harold's Chicken.  A couple 
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things, I think, are worth pointing out.  
One is the State Farm language here -- not 
only are those cases from the western district and, as 
a result, they're not controlling, the court believes 
or is of the opinion that the cases relied upon for its 
ruling today are more consistent with Illinois law as 
it exists with respect to this issue.  
Furthermore, the policy language was 
different in those western district cases.  And that's 
not to say that the result would be different if you 
had identical language, but I do think that's different 
language.  
And, moreover, and perhaps importantly, the 
court was evaluating a 12(b)(6) motion in which the 
insureds in that case allege the presence of COVID on 
the property.  And, to the court's mind, that is a -- 
that's a meaningful distinction here.  
And, again, there's no virus exclusion in 
that policy that the court would have had to have 
considered as well and we don't know what the court 
would have done in that case.  
But I do think, at least for purposes of the 
insuring agreement argument, those cases are 
distinguishable without regarding -- without, you know, 
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advising as to what the result would be in this court.  
But I do think those are different cases and they need 
to be treated differently as such.  
And so, for those reasons, the court is going 
to go ahead and grant the motion both with respect to 
the insuring agreement argument as well as with respect 
to the virus exclusion.  
I do want to point out, for the record, the 
insured does not seem to argue -- kind of seems to have 
one foot in and one foot out on civil authority.  
They're happy to find civil authority coverage if it 
exists, but they're not specifically asking for it.  
But I want to point out, for the record, 
that, as noted above, the policy's civil authority 
coverage applies only if there is a covered cause of 
loss, meaning direct physical loss, again, going back 
to direct physical loss to property other than the 
plaintiff's property.  
Just as the coronavirus did not cause direct 
physical loss to plaintiff's property here, the 
complaint has not and likely could not allege that the 
coronavirus caused direct physical loss to other 
property.  By the policy's own terms, the civil 
authority coverage then does not apply.  
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So with that having been said, I'm granting 
the motion.  You know, I'm kind of -- do the parties 
want a dismissal with prejudice?  
MS. SCHUMACHER:  Your Honor, we are asking for a 
dismissal with prejudice, the reason being their claim 
is for the loss of income due to the executive orders 
which is caused by the virus, and without alleging a 
completely different kind of claim, there's no set of 
facts that they're going to be able to allege that's 
going to avoid that result.  
The executive orders are full of references 
to the virus.  The chain of causation is strong.  The 
virus exclusion is present.  And, again, the same thing 
with the physical damage issue.  There's no claim that 
there was any structural alteration to the property.  
So I think in this case, your Honor, on that 
basis, I don't think there's any way they're going to 
be able to plead around either of those issues, and so 
we are asking for a dismissal with prejudice.  
THE COURT:  Mr. Endsley, any response to that or 
are you in agreement that this is time for other minds 
to evaluate this claim?  
MR. ENDSLEY:  Yeah, your Honor, that's probably 
correct.  I don't think we can change the pleading such 
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that -- to get around the issues that you're finding 
are insurmountable. 
THE COURT:  I don't disagree.  It is a 615, and so 
I do want to just at least give the parties the 
opportunity to request without -- whether or not I give 
that is a different issue, but it sounds like the 
parties are of one mind and the court is in agreement 
that this dismissal for this type of a 615 motion is 
and should be with prejudice, and the court will enter 
such an order.  
MS. SCHUMACHER:  Thank you, your Honor. 
THE COURT:  Okay. 
MR. ENDSLEY:  Thank you, your Honor.  
THE COURT:  Thank you, guys.  Thank you very much 
for your time and energy on this.  I want to commend 
the parties.  I know this is a very interesting issue 
under very -- a very unique set of facts.  
MS. SCHUMACHER:  Thank you, your Honor. 
MR. ENDSLEY:  Thank you, your Honor. 
THE COURT:  Thank you. 
(Which were all the proceedings had at 
the hearing of the above-entitled 
cause, this date.)
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39
IN THE CIRCUIT COURT OF THE 18TH JUDICIAL CIRCUIT
DU PAGE COUNTY, ILLINOIS
I, KRISTIN M. BARNES, do hereby certify that 
the foregoing Report of Proceedings, consisting of 
Pages 1 to 39, inclusive, was reported in shorthand by 
me via Zoom videoconferencing, and the said Report of 
Proceedings is a true, correct and complete transcript 
of my shorthand notes so taken at the time and place 
hereinabove set forth.
Official Court Reporter 
Eighteenth Judicial Circuit of Illinois
DuPage County
CSR License No. 084-004026
Case: 1:20-cv-05965 Document #: 22-3 Filed: 10/19/20 Page 40 of 41 PageID #:653

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