Federal court dismisses claim by Conrad Hotel in downtown Indy for insurer to cover COVID-19 losses

An Indianapolis hotel that shut down temporarily – and at one point completely – last year due to plummeting occupancy rates during the height of the COVID-19 pandemic has struck out in a fight with its insurance company over a breached contract after a Southern Indiana District Court judge ruled for the insurer.

When the effects of COVID-19 hit downtown Indianapolis in 2020, several hotels were impacted, including the Conrad Hotel. The Conrad’s occupancy rates dropped “into the single digits” following Indiana’s public health disaster emergency status coupled with state orders that prohibited non-essential travel, canceled large gatherings, and limited hotel use to lodging and carryout services.

At one point, just six of the hotel’s 247 rooms were occupied and the hotel suspended all operations by April 2020. It lost “virtually all of its business income” while incurring “significant additional expenses for cleaning and disinfecting the [p]roperty.”

The hotel’s owners, Circle Block Partners, LLC and Circle Block Hotel, LLC, had purchased a commercial property insurance policy from insurer Fireman’s Fund Insurance Company, to cover the property. But the insurer denied Circle Block’s filed property insurance claims for losses, prompting the owners to sue in Indiana state court, alleging breach of contract and seeking a declaratory judgment of coverage under the policy.

After removing the case to the U.S. District Court for the Southern District of Indiana, the insurer moved to dismiss the complaint for failure to state a claim.

District Judge James P. Hanlon granted Fireman’s Fund’s motion in a July 27 order, denying as moot Circle Block’s motions for oral argument and to compel.

The district court dismissed Circle Block Partners, LLC, Circle Block Hotel, LLC v. Fireman’s Fund Insurance Company, 1:20-cv-02512 with prejudice, finding the hotel owners did not offer “any meaningful indication of how it would plead differently” if given the opportunity or how that could change the outcome.

Hanlon declined to agree with the hotel owner’s contentions that its losses were covered under one or more of five policy provisions that require “direct physical loss or damage” to either the property or to “a dependent property.” The provisions included coverage for business income and extra expense, business access, communicable disease, civil authority and dependent property coverage.

“Fireman’s Fund contends that ‘direct physical loss or damage to property’ requires ‘direct destruction or physical alteration of property.’ In contrast, Circle Block argues that ‘direct physical loss’ can mean a ‘quantifiable loss in the property’s usefulness or function for normal purposes,’ so the phrase is at least ambiguous,” Hanlon wrote for the district court.

Hanlon concluded that reasonably intelligent policyholders would not think that the word “physical” has no meaning and should be ignored when interpreting the ordinary meaning of the phrase “direct physical loss or damage to property.”

“Reasonably intelligent policyholders similarly would not think that a policy requiring ‘direct physical loss or damage to property’ would provide coverage where there is no physical damage to the insured property but only a loss or reduction of the property’s usefulness or function for normal purposes. The ordinary meaning of the phrase ‘direct physical loss or damage to property’ does not provide coverage for economic losses caused by the COVID-19 pandemic in the absence of any physical harm to the Conrad’s building or the items located within it,” Hanlon wrote.

Similarly, Hanlon found that because the Conrad’s loss in business caused by the pandemic did not arise from an alteration in the appearance, shape, color, composition, or other material dimension of the property, it was therefore not a “direct physical loss” to the property.

The Southern Indiana District Court also declined to agree with the hotel’s allegations of additional physical loss or damage to the property and its internal contents because of the “physical SARS-CoV-2 particles . . . attached to the Conrad property.”

“But the Policy requires ‘direct physical loss or damage to property,’ not merely a physical substance on property. Although the virus may have been present on surfaces at the Conrad Hotel as alleged, Circle Block has not plausibly alleged that the virus caused the type of harm to the building itself or items within it that is necessary to show ‘direct physical loss or damage to property,’” it wrote.

Cases cited by Circle Block to support its argument were for naught, the district court concluded, noting that other substances that courts have found to satisfy similar contractual language requiring physical harm “generally involve persistent physical contamination that requires repair or replacement, rather than cleaning and disinfecting, to remediate.”

“At bottom, Circle Block has not plausibly alleged claims that satisfy the Policy’s requirement for a ‘direct physical loss’ to property and thus its claims must be dismissed,” Hanlon concluded.

Final judgment in the case will be issued by separate entry.

Circle Block is represented by MacGill, P.C. in Indianapolis. Fireman’s Fund Insurance Co. is represented by Kightlinger& Gray LLP in Indianapolis and DLA Piper LLP.