Froedtert Health , Inc. v. Factory Mutual Insurance Company

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 22-2577
F ROEDTERT HEALTH , I NC., et al.,
Plaintiffs-Appellants,
v.
F ACTORY M UTUAL I NSURANCE C OMPANY ,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Eastern District of Wisconsin.
No. 2:21-cv-713 — Brett H. Ludwig, Judge.
____________________
A RGUED J ANUARY 24, 2023 — DECIDED J UNE 2, 2023
____________________
Before HAMILTON , S CUDDER , and J ACKSON -A KIWUMI , Cir-
cuit Judges.
SCUDDER , Circuit Judge. Before us is an appeal presenting a
difficult question of insurance coverage. Froedtert Health, a
Wisconsin-based healthcare system, seeks reimbursement for
$85 million in costs incurred during the early months of the
COVID-19 pandemic under an all-risks insurance policy is-
sued by Factory Mutual Insurance Company. The Factory
Mutual policy is complex in its structure and contains

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2 No. 22-2577
language in one place broadly excluding COVID-related
losses while, in another place, supplying limited coverage for
portions of those same losses. In the end, and after immersing
ourselves in the policy’s dense detail, we agree with the dis-
trict court that Froedtert failed to state a claim for coverage
beyond the $1 million it received under a limited coverage
provision for communicable diseases. So we affirm.
I
A
When the COVID-19 pandemic began, Froedtert found it-
self facing urgent and overwhelming demand to provide life-
saving care. Meeting that demand required substantial invest-
ments in personal protective equipment, waste disposal
mechanisms, and cleaning and sanitation supplies. Froedtert
also modified its emergency room layout and adapted its fa-
cilities to provide testing and screening for COVID-19. Like
many other hospitals, Froedtert changed the scope of availa-
ble services, including by pausing nonemergency, elective
procedures. In total, Froedtert spent $85 million on these
COVID-related costs.
Froedtert sought coverage for the entirety of these costs
under its all-risks policy with Factory Mutual. The insurer de-
nied the claim, determining that the COVID-related losses did
not constitute a direct physical loss triggering the general cov-
erage provision and $2 billion limit. But Factory Mutual did
pay Froedtert the maximum $1 million sublimit under a sep-
arate, additional coverage provision for losses from com-
municable disease response. Litigation then ensued.

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No. 22-2577 3
B
Froedtert filed this diversity action in federal district court
seeking a declaratory judgment establishing its coverage for
the entire amount of its insurance claim. Froedtert contended
that the policy’s general coverage provision applied to cover
the full $85 million of its claim, not just the $1 million it re-
ceived under the policy’s separate provision subject to the sig-
nificantly lower sublimit.
Factory Mutual moved to dismiss the case for failure to
state a claim, and the district court granted the motion. The
district court agreed with Factory Mutual that COVID-19 did
not cause physical damage or loss to Froedtert’s insured facil-
ities, as required for general coverage. The district court also
reasoned that even if the policy covered COVID-19 under its
general grant of coverage, these losses would be excluded by
the policy’s broad exclusion of losses from contamination.
Froedtert appeals.
II
A
The Factory Mutual insurance policy at issue—a so-called
all-risks policy—conferred broad coverage to Froedtert dur-
ing the period from July 1, 2019, to July 1, 2020, and allowed
for recovery (under its general provision) of up to $2 billion
per occurrence.
We start by describing the policy’s overarching structure.
It begins with a general grant of coverage that protects against
physical loss or damage to Froedtert’s insured property, both
real and personal. From there the policy excludes several
types of risks from the broad general coverage provision.

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4 No. 22-2577
Some exclusions concern specific types of property, includ-
ing, for example, losses related to electronic data, watercraft,
and animals. Other exclusions concern the means by which
the insured property was damaged, such as by nuclear reac-
tion or acts of terrorism. We will come to focus on one such
exclusion for losses from contamination.
In a separate, later section, the policy identifies additional
coverages that are provided beyond the general grant of cov-
erage. Payment under one of the 30-plus additional coverage
provisions does not alter the policy’s overall $2 billion limit,
and these provisions are themselves subject to exclusions.
This appeal requires a close look at the additional coverage
provision for “Communicable Disease Response.” Factory
Mutual determined that this provision provided $1 million in
coverage to Froedtert—the maximum available under the
specific sublimit for this additional coverage provision.
B
Wisconsin law governs this case, and both parties agree on
the cornerstone principles. Insurance policies are contracts
and, as such, we must interpret the Factory Mutual policy to
“give effect to the parties’ intent, construing the policy as it
would be understood by a reasonable person in the same po-
sition as the insured.” Colectivo Coffee Roasters, Inc. v. Soc’y Ins.,
974 N.W.2d 442, 446 (Wis. 2022). Ambiguities should be re-
solved in favor of the insured, here Froedtert. See Froedtert
Mem’l Lutheran Hosp. v. Nat’l States Ins. Co., 765 N.W.2d 251,
261 (Wis. 2009) (explaining that a term is ambiguous if sus-
ceptible to more than one reasonable interpretation). We are
mindful, too, that Wisconsin law requires us to read the policy
in its entirety: “A term that is potentially ambiguous when
read in isolation may be clarified by reference to the policy as

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No. 22-2577 5
a whole.” Wadzinski v. Auto-Owners Ins. Co., 818 N.W.2d 819,
826 (Wis. 2012).
Wisconsin courts generally follow a three-step process to
interpret insurance policies. First, the court determines
whether the policy provides an initial grant of coverage. Am.
Fam. Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, 73 (Wis.
2004). If the policy covers the claim, the court next looks to see
whether any exclusions apply. See id. Finally, the court con-
siders whether any portion of the policy would reinstate cov-
erage otherwise left out by the initial grant or by an exclusion.
See id. We follow that same analytical course here.
C
The particulars of Factory Mutual’s policy, including its
precise language, very much matter. Indeed, the only way to
decide a case like this is roll up our sleeves and wade into fine
details. Allow us an extra ounce of patience as we do so.
General Coverage. We begin with the policy’s general grant
of coverage. The policy insures Froedtert’s property up to
$2 billion “against all risks of physical loss or damage, except
as hereinafter excluded.” The policy does not expressly define
physical loss or damage, but several courts, including the Su-
preme Court of Wisconsin, have understood “physical loss”
requirements to exclude coverage for losses from the presence
of COVID-19. See, e.g., Colectivo Coffee Roasters, Inc., 974
N.W.2d at 447 (“[F]or a harm to constitute a physical loss of
or damage to the property, it must … alter the property’s tan-
gible characteristics.”); Sandy Point Dental, P.C. v. Cincinnati
Ins. Co., 20 F.4th 327, 333 (7th Cir. 2021) (concluding that “‘di-
rect physical loss’ requires a physical alteration to property”
under Illinois law).

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6 No. 22-2577
Indeed, our court recently interpreted the same all-risks
policy at issue here and concluded that COVID-19 losses do
not amount to a physical loss within the meaning of the pol-
icy’s general coverage provision for “physical loss or dam-
age.” See Stant USA Corp. v. Factory Mut. Ins. Co., 61 F.4th 524,
526 (7th Cir. 2023). Our decision in Stant does not resolve this
appeal, however. The losses at issue are different—Stant
sought reimbursement for business interruption losses from
the presence of COVID-19 at its customers’ properties,
whereas Froedtert seeks to recoup the costs it incurred to
maintain business operations given the presence of COVID-
19 at its facilities. And Factory Mutual’s responses are differ-
ent—Froedtert received partial coverage under the policy’s
provision conferring additional (though limited) coverage for
communicable disease–related losses, whereas Stant did not.
To its credit, Froedtert accepts the rulings of these courts
and does not contend that COVID-19 generally causes physi-
cal loss or damage. Froedtert instead argues that the specific
terms of the Factory Mutual policy require a more expansive
reading of physical loss to include losses from COVID-19.
At this early juncture in our analysis, then, suffice it to say
that we see no language within the four corners of the general
grant of coverage itself that leads us to believe that the parties
intended for physical losses to include losses from COVID-19.
We have not located any references to communicable dis-
eases, viruses, pandemics, or contamination within the pol-
icy’s general coverage provision, and Froedtert does not con-
tend that coverage is otherwise conferred based on a reading
of the general coverage provision in isolation. So, on the plain
text of the primary grant of coverage alone, we conclude that
losses from COVID-19 are not generally covered.

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No. 22-2577 7
Exclusions from General Coverage. The policy contains sev-
eral exclusions from general coverage, and one in particular
jumps off the page—losses from contamination. The policy
expressly excludes “any cost due to contamination including
the inability to use or occupy property or any cost of making
property safe or suitable for use or occupancy.” And the pol-
icy expressly defines contamination as “any condition of
property due to the actual or suspected presence of,” among
other things, a “virus.” Costs arising from changed property
conditions caused by COVID-19, a viral respiratory illness,
readily fall under this exclusion to general coverage.
The contamination exclusion indirectly reinforces our ini-
tial conclusion that the policy’s general coverage provision
does not cover losses from COVID-19. Put differently, even if
we read the general coverage provision alone to pick up losses
from COVID-19, Froedtert’s claim would still have to over-
come the policy’s broad contamination exclusion for
Froedtert to claim its full $85 million in losses. All of this leads
us to conclude—based solely (at this point in our analysis) on
our review of the policy’s general provisions and exclu-
sions—that the parties did not intend for COVID-19 losses to
fall within the policy’s general coverage and $2 billion limit.
The analysis gets much harder from here forward, how-
ever, as we must grapple with the contentions Froedtert ad-
vances based on the policy’s additional coverage provisions
and, even more specifically, the additional coverage provided
for losses from communicable diseases.
Additional Coverages. The provisions for additional cover-
ages follow the policy’s general coverage provision and re-
lated exclusions. This separate section for “Additional Cover-
ages” begins by explaining that “[t]his Policy includes the

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8 No. 22-2577
following Additional Coverages for insured physical loss or
damage.” The parties refer to this language as the “prefatory
language.” More than 30 additional coverage provisions then
follow.
Froedtert puts a spotlight on the policy’s additional cover-
age for “Communicable Disease Response.” This provision
provides coverage up to $1 million for “the reasonable and
necessary costs incurred by the Insured at such location with
the actual … presence of communicable disease for the …
cleanup, removal and disposal of the actual … presence of
communicable diseases from the insured property.” Com-
municable diseases are those “transmissible from human to
human by direct or indirect contact.” To trigger this addi-
tional coverage, access to the insured property must be re-
stricted for more than 48 hours, either by a government order
or a decision by an officer of the insured party.
At one level, Froedtert’s entitlement to coverage under this
communicable disease provision is uncontroversial. Factory
Mutual is quick to acknowledge that Froedtert qualified for
and indeed received this $1 million of additional coverage for
its COVID-19 losses incurred during the applicable policy pe-
riod. The much harder question concerns the relationship be-
tween the policy’s general coverage and the Additional Cov-
erages section. The question is difficult because, while the pol-
icy’s general provision supports a reading that COVID-19
losses are not physical losses under the policy, the prefatory
language delineating the policy’s additional coverages, in-
cluding for communicable disease, quite clearly seems to
deem those covered losses to be “physical loss or damage.” So
the issue becomes whether the substance of the prefatory lan-
guage has effect beyond and outside of the policy’s additional

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No. 22-2577 9
coverage provisions. We ultimately conclude that it does not.
Untangling that knot adds substantial complexity to our
analysis.
D
Froedtert urges us to define the meaning and scope of
“physical loss or damage” in the general coverage provision
by looking at the way the policy uses the same language in its
Additional Coverages section. Recall that the prefatory lan-
guage to the Additional Coverages section states that the de-
lineated coverages are “for insured physical loss or damage.”
Because communicable disease response is one type of addi-
tional coverage, Froedtert reasons that the $1 million payment
Factory Mutual made for communicable diseases necessarily
constitutes coverage for a type of “physical loss.” And if that
is so, Froedtert continues, it only makes sense to construe the
meaning of physical loss the same way when discerning the
scope of covered losses under the general grant of coverage.
Froedtert’s argument roots itself in policy language and
has considerable force. The plain meaning of the prefatory
language indicates that communicable disease response costs
are a type of physical loss, at least for purposes of the appli-
cation of the Additional Coverages delineated within the pol-
icy. Any other conclusion fails to give effect to the language
and its placement within the policy—as an overarching
(hence prefatory) paragraph applicable to each type of addi-
tional coverage.
Froedtert is right to then invoke the principle requiring a
holistic interpretation of the policy. Where “physical loss or
damage” is not expressly defined within the general coverage
provision, the policy’s identification of “communicable

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10 No. 22-2577
diseases” as qualifying physical losses seems to us to indicate
that those same losses constitute “physical loss or damage”
within the meaning of the policy’s general coverage provision
standing alone—before considering any exclusions to general
coverage. At the very least, we see the tension between the
general coverage provision and the Additional Coverages
prefatory language as exposing an interpretive ambiguity
that, if read in isolation, we would resolve in Froedtert’s favor
as the insured party.
But the analysis cannot stop there: it must go further and
account for the policy’s exclusions to general coverage.
Therein lies the insurmountable hurdle for Froedtert.
We do not see how an insured reading the policy holisti-
cally as we have would get through the general provision and
its exclusions to find general coverage given the policy’s ex-
pansive contamination exclusion. In clear and precise terms,
that exclusion broadly applies to the policy’s general coverage
to exclude any losses from contaminants, including viruses
like COVID-19. We see it as a bridge too far to conclude that
the prefatory language to the Additional Coverages section
would operate in a way that effectively limits the breadth of
the contamination exclusion, even if that same prefatory lan-
guage is fairly read to define the scope of what constitutes
“physical loss or damage” for purposes of the general cover-
age provision standing alone. The wording of the contamina-
tion exclusion does not depend on the definition of “physical
loss”—the provision’s broad exclusion of “contaminants,”
which expressly includes viruses, remains unaltered by the
prefatory language to the Additional Coverages section.
Froedtert points to no other text that changes our view that

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No. 22-2577 11
COVID-19 is a “virus” falling within the contamination exclu-
sion.
Our reading makes practical sense too. By their terms, the
Additional Coverages add coverage for losses not covered
elsewhere within the policy. That is the case here: COVID-19
losses fell outside the general coverage provision, if only
through the contamination exclusion, and instead were
added through a separate, later provision—the communica-
ble disease response provision within the policy’s Additional
Coverages section. Had COVID-19 losses constituted losses
not already excluded by the broad contamination exclusion,
the additional coverage for communicable disease response
would have provided no new coverage. The $1 million sub-
limit for communicable disease response costs further rein-
forces this view. The parties contemplated coverage for the
exact losses that Factory Mutual covered here—but they lim-
ited coverage to $1 million, a fraction of the broader $2 billion
limit under the policy’s general coverage provision.
Froedtert sees things differently. In its view, the contami-
nation exclusion is not enforceable because the policy effec-
tively is at odds with itself (or, at the very least, ambiguous)
in a way that must be read in favor of coverage. The tension
Froedtert sees is between the additional coverage for com-
municable disease response, which covers virus-related
losses, and the broad contamination exclusion, which ex-
pressly bars coverage for those same losses. If the contamina-
tion exclusion were enforceable, Froedtert urges, an insured
could never recover for communicable disease response costs
because any possible grant of coverage would be swept away
by the contamination exclusion. Because courts must inter-
pret policies to favor coverage over exclusions when the two

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12 No. 22-2577
conflict, Froedtert views the contamination exclusion as un-
enforceable.
We cannot agree. What Froedtert sees as broad tension we
see in much narrower terms—indeed, in terms that allow the
provisions to operate within their respective domains within
the policy and thus with independent effect.
Here is what we mean. The policy’s general coverage is
limited by accompanying exclusions, including the broad ex-
clusion for contamination losses. In a later section, the policy
then affords certain specified Additional Coverages, includ-
ing for communicable disease response costs. That additional
coverage is just that—additional coverage. It would not exist
if it was not expressly delineated in the Additional Coverages
section of the policy.
Perhaps it is easier to arrive at the same conclusion
through the lens of the contamination exclusion. That exclu-
sion is very broad and, by any measure, tells us that COVID-
related losses fall outside the policy’s general coverage. The
only way Froedtert can locate coverage for COVID-related
losses, then, is to find the coverage somewhere else in the pol-
icy. That somewhere else is within the separate Additional
Coverages section, which, at least for purposes of the com-
municable disease response coverage, stands separate and
apart from the policy’s general coverage and related exclu-
sions. We land on the same overarching takeaway: the Addi-
tional Coverages provisions operate with enough independ-
ence from the general coverage provision and its exclusions
to preclude the Additional Coverages prefatory language
from somehow relating back and redefining what constitutes
physical loss or damage for purposes of the policy’s general
coverage and its broad contamination exclusion.

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No. 22-2577 13
A more detailed point also warrants mention. Nested
within the contamination exclusion to general coverage is
more exclusionary language saying that the contamination
exclusion does not apply to losses “directly resulting from
other physical damage not excluded by this Policy.” We read
the phrase “other physical damage not excluded” as most nat-
urally referring to the prefatory language of the Additional
Coverages section, which defines the added coverages—in-
cluding for communicable disease response—as “physical
losses” for the purposes of that section. By its terms, then, the
contamination exclusion does not apply to the additional
grants of coverage expressly provided for later in the policy.
Certain language in the Additional Coverages provision
for communicable disease response further helps to resolve
the tension identified by Froedtert. The policy tells us that this
added coverage is subject to “applicable exclusions.”
Froedtert sees the policy’s general contamination exclusion as
one such applicable exclusion, leading to the tension it iden-
tifies. We disagree. The most reasonable interpretation of the
“applicable exclusions” language, one that “give[s] reasona-
ble meaning to the entire policy,” is that the contamination
exclusion is not one that the parties believed to be “applica-
ble” to the additional coverage, as any other conclusion
would render the added coverage for communicable disease
response an empty set. 1325 N. Van Buren, LLC v. T-3 Grp., Ltd.,
716 N.W.2d 822, 840 (Wis. 2006). The better approach is to
read the contamination exclusion’s express exception for
“physical damage not excluded by this Policy” as referencing,
however obliquely, the additional coverage conferred by a
provision like the one for communicable disease response.
That construction harmonizes the policy in a way that makes
the most sense of the broad contamination exclusion against

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14 No. 22-2577
the additional coverage for communicable disease response
costs.
Froedtert’s remaining arguments are variations of this
same idea—that certain language in the Additional Coverages
section changes the clear and plain meaning of the general
coverage provision and broad exclusion for viral contamina-
tion. But Froedtert’s many proffered interpretations are not
reasonable simply because they are possible. See Wilson Mut.
Ins. Co. v. Falk, 857 N.W.2d 156, 164 (Wis. 2014). And
Froedtert’s interpretive disagreement with Factory Mutual,
by itself, does not mean that the language is ambiguous. See
Sandy Point, 20 F.4th at 331. Nor does the very existence of a
difficult coverage question—like the one before us in this ap-
peal—prove the presence of ambiguity. Sometimes a hard
question is just hard.
In the end, Froedtert’s fatal error is its reliance on the Ad-
ditional Coverages provisions in isolation without reading
the policy as a whole. When we read the policy page-by-page
and section-by-section as we must and consider each grant of
coverage and its applicable exclusions, we see that none of
Froedtert’s suggested interpretations are reasonable.
For these reasons, we AFFIRM.

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