Mashallah, Inc. v. W. Bend Mut. Ins. Co.

• Decision Date: 09 December 2021
• Docket Number: No. 21-1507,21-1507
• Citation: 20 F.4th 311
• Parties: MASHALLAH, INC., and Ranalli's Park Ridge, LLC, Plaintiffs-Appellants, v. WEST BEND MUTUAL INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

20 F.4th 311

MASHALLAH, INC., and Ranalli's Park Ridge, LLC, Plaintiffs-Appellants,

v.WEST BEND MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 21-1507

United States Court of Appeals, Seventh Circuit.

Decided December 9, 2021

Argued September 10, 2021

William E. Meyer, Jr., Vincent Paul Formica, Jr., Attorneys, Fuksa Khorshid, LLC, Chicago, IL, for Plaintiffs-Appellants.

Jason R. Fathallah, A. J. Fabianczyk, Attorneys, Husch Blackwell LLP, Milwaukee, WI, Michael Damon Hayes, Scott J. Helfand, Attorneys, Husch Blackwell LLP, Chicago, IL, for Defendant-Appellee.

Wystan M. Ackerman, Attorney, Robinson & Cole LLP, Hartford, CT, for Amici Curiae National Association of Mutual Insurance Companies and American Property Casualty Insurance Association.

Before Manion, Wood, and Hamilton, Circuit Judges.

Manion, Circuit Judge

In this case, as in several others decided today, businesses seek insurance coverage for losses and expenses they allegedly sustained as a result of the COVID-19 pandemic and government orders issued in response to it. Mashallah, Inc., and Ranalli's Park Ridge, LLC, filed claims under the property insurance policies they had with West Bend Mutual Insurance Company. But those policies, presciently for purposes of this litigation, contained express exclusions for losses and expenses caused by viruses. Based on these exclusions, West Bend denied the claims.

The businesses sued, alleging breach of contract or, if that should fail, entitlement to rebate of premiums. The district court granted West Bend's motion to dismiss the suit in its entirety under Rule 12(b)(6) for failure to state a claim, and the businesses appeal.

Because the district court properly determined that the virus exclusions barred coverage for the policyholders' purported losses and expenses and that the businesses failed to allege viable legal bases for rebate of premiums, we affirm.

I. Background

In an appeal from an order granting a motion to dismiss, we must accept all well-pleaded facts as true and draw all reasonable inferences therefrom in the plaintiffs' favor. White v. United Airlines, Inc. , 987 F.3d 616, 620 (7th Cir. 2021).

Mashallah sells handcrafted jewelry at its store in Chicago. Ranalli's operates a bar and restaurant known as Holt's in Park Ridge, Illinois. Both purchased all-risk commercial property insurance policies from West Bend, a mutual insurance company organized under the laws of Wisconsin. Mashallah's coverage ran from August 1, 2019, to August 1, 2020; Ranalli's coverage ran from October 8, 2019, to October 8, 2020. At the end of these terms, both Mashallah and Ranalli's renewed their policies.

The businesses operated successfully until the arrival of COVID-19. After emerging in China "in early 2020" and making its first confirmed appearance in the United States on January 20, 2020, a novel coronavirus spread across the nation, causing the COVID-19 pandemic.

Beginning in March 2020, Illinois Governor J.B. Pritzker and other government officials issued several orders aimed at stopping or slowing the virus's spread. In particular, on March 20, 2020, Governor Pritzker ordered all individuals living in Illinois to stay at home except to perform specified "essential activities" and ordered "non-essential" businesses to cease all but minimum basic operations. Exec. Order No. 2020-10 (Mar. 20, 2020). Restaurants were considered essential businesses and permitted to continue selling food but solely for off-premises consumption. That meant Ranalli's operations were restricted to filling takeout and delivery orders. Mashallah, a jeweler, was not classified as an essential business and had to cease its retail activities. As a result, both businesses sustained heavy financial losses.

They filed insurance claims with West Bend. The two policies’ coverage provisions are materially identical. As relevant here, West Bend agreed to pay for actual business income lost and necessary extra expenses incurred if they were caused by "direct physical loss of or damage to" the businesses’ properties.

Both policies also contain virus exclusions, worded slightly differently. In Mashallah's policy, West Bend stated it would "not pay for loss or damage caused directly or indirectly" by "[a]ny virus ... that induces or is capable of inducing physical distress, illness or disease." Ranalli's exclusion reads: "We will not pay for loss or damage caused by or resulting from any virus ... that induces or is capable of inducing physical distress, illness or disease."

Finally, the policies address the issue of premium rebates. "In return for the payment of the premium, and subject to all the terms of this policy," West Bend agreed "to provide the insurance as stated in this policy." If a premium was designated as an "advance premium," and if an audit showed that the premium paid in advance was greater than the "earned premium" for the policy period, West Bend committed to "return the excess."

West Bend denied the claims in April and May 2020, citing among other things the policies' virus exclusions. The businesses sued. Count I of the complaint seeks a declaratory judgment that West Bend is obligated to pay the claims under the terms of the policies. Count II alleges breach of contract and Count III asserts bad-faith denial of insurance claims in violation of 215 ILCS 5/155. If West Bend's denials of coverage are upheld, the complaint seeks alternative relief on behalf of a class. Count IV alleges that West Bend's retention of full premiums—despite decreased risks occasioned by the government-ordered reduction in insureds' business operations—constitutes unjust enrichment, requiring rebate. Count V further asserts that West Bend's retention of premiums in these circumstances violates the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA).

West Bend moved to dismiss under Rule 12(b)(6) for failure to state a claim. In addition to arguing that the businesses hadn't alleged "direct physical loss of or damage to" property necessary to invoke coverage, West Bend contended that the plain language of the virus exclusions precluded coverage. It further asserted that the unjust enrichment theory failed in the face of a valid contract and that the plaintiffs had not alleged any deceptive or unfair practice on West Bend's part.

The district court granted West Bend's motion. It bypassed the question of whether the businesses alleged direct physical damage or loss and instead concluded that the policies' virus exclusions foreclosed any potential coverage. The district court also determined that the unjust enrichment and ICFA claims failed as matters of law. And because it concluded that any attempt to amend the complaint would be futile, the district court dismissed the case with prejudice. This appeal followed.

II. Analysis

We review a district court's grant of a motion to dismiss on the pleadings de novo. Chaidez v. Ford Motor Co. , 937 F.3d 998, 1004 (7th Cir. 2019). "To avoid dismissal, the complaint must ‘state a claim to relief that is plausible on its face.’ " BancorpSouth, Inc. v. Fed. Ins. Co. , 873 F.3d 582, 586 (7th Cir. 2017) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ).

A federal court hearing a case under diversity jurisdiction "must attempt to resolve issues in the same manner as would the highest court of the state that provides the applicable law," id. , and the parties agree that Illinois law applies. "In the absence of Illinois Supreme Court precedent, we must use our best judgment to determine how that court would construe its own law," and we "may consider the decisions of the Illinois appellate courts." Neth. Ins. Co. v. Phusion Projects, Inc. , 737 F.3d 1174, 1177 (7th Cir. 2013) (quotation marks omitted).

Under Illinois law, the interpretation of an insurance policy, like any other contract, is a question of law. Sanders v. Ill. Union Ins. Co. , 441 Ill.Dec. 542, 157 N.E.3d 463, 467 (Ill. 2019). A court's "primary function" in that interpretation "is to ascertain and give effect to the intention of the parties, as expressed in the policy language." Id. Policy terms that are "clear and unambiguous" must be given their "plain and ordinary meaning." Id.

A.

Before resolving the substantive legal issues presented in this appeal, we address two of the businesses' preliminary criticisms with the district court's analysis. First, they contend that the district court improperly skipped the threshold question of whether coverage under the policies was established and proceeded directly to the effects of the virus exclusions. This, the businesses assert, contributed to the district court's second misstep, namely, failing to use the proper standard to determine whether the exclusions apply. We see no merit to either contention.

The businesses cite no authority for the proposition that Illinois law requires a court to resolve the scope of an insurance policy's coverage before addressing the applicability of a potentially relevant exclusion. Cf. Cohen Furniture Co. v. St. Paul Ins. Co. , 214 Ill.App.3d 408, 158 Ill.Dec. 38, 573 N.E.2d 851, 854–55 (1991) ("We need not address the defendant's argument concerning the scope of replacement cost insurance, since in any event we would find coverage excluded by the building laws exclusion.").

Nor, as a general legal matter, do we discern a problem with the district court's approach here. It's true that if an insured adequately alleges coverage under a policy, the burden shifts to the insurer to show that an exclusion applies. Addison Ins. Co. v. Fay , 232 Ill.2d 446, 328 Ill.Dec. 858, 905 N.E.2d 747, 752 (2009). But this burden-shifting approach does not demand a rigidly sequential order of analysis. For example, in the burden-shifting McDonnell Douglas framework for analyzing disparate-treatment employment-discrimination claims, this court has sometimes left unresolved the initial inquiry into whether a plaintiff has made a prima facie showing of...