Insurer Wins First Appellate Decision Addressing COVID-19 Business Interruption Coverage
By Melinda S. Kollross
In the first appellate decision nationwide addressing business interruption coverage for COVID-19 pandemic related losses, the Eighth Circuit ruled for the insurer, holding that Cincinnati Insurance Company does not have to pay an Iowa dental clinic for losses due to government-imposed COVID-19 restrictions. Oral Surgeons PC v. The Cincinnati Insurance Co., No. 20-3211 (8th Cir. July 2, 2021).
Oral Surgeons provides oral and maxillofacial surgery services at its four offices in the Des Moines, Iowa, area. It stopped performing non-emergency procedures in late March 2020, after the governor of Iowa declared a state of emergency and imposed restrictions on dental practices because of the COVID-19 pandemic. Oral Surgeons resumed procedures in May 2020 as the restrictions were lifted, adhering to guidance from the Iowa Dental Board.
Oral Surgeons submitted a claim to Cincinnati for losses it suffered as a result of the suspension of non-emergency procedures. The policy insured against lost business income and certain extra expense sustained due to the suspension of operations “caused by direct ‘loss’ to property.” The policy defines “loss” as “accidental physical loss or accidental physical damage.” Cincinnati responded that the policy did not afford coverage because there was no direct physical loss or physical damage to Oral Surgeons’ property. This lawsuit followed. The district court granted Cincinnati’s motion to dismiss, concluding that Oral Surgeons was not entitled to declaratory judgment and that it had failed to state claims for breach of contract and bad faith. Oral Surgeons appealed.
Reviewing de novo and applying Iowa law in this diversity action, the Eighth Circuit unanimously affirmed. The Eighth Circuit rejected Oral Surgeons’ contention that the policy’s disjunctive definition of “loss” as “physical loss” or “physical damage” creates an ambiguity that must be construed against Cincinnati. To give the terms separate meanings, Oral Surgeons suggested defining physical loss to include “lost operations or inability to use the business” and defining physical damage as a physical alteration to property. Amicus Restaurant Law Center contended that “physical loss” occurs whenever the insured is physically deprived of the insured property.
As the Eighth Circuit explained:
The policy here clearly requires direct “physical loss” or “physical damage” to trigger business interruption and extra expense coverage. Accordingly, there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction.
The policy cannot reasonably be interpreted to cover mere loss of use when the insured’s property has suffered no physical loss or damage.
The Eighth Circuit further noted that the unambiguous requirement that the loss or damage be physical in nature accords with the policy’s coverage of lost business income during the “period of restoration.” The Court cited its precedent interpreting “direct physical loss” under Minnesota law as instructive. Prior precedent rejected the argument that loss of use or function necessarily constitutes “direct physical loss or damage” as such an interpretation would allow coverage whenever property cannot be used for its intended purpose.
Learning Points: We expect Oral Surgeons to be widely cited in subsequent COVID-19 BI claim cases addressing the physical loss or damage requirement for business interruption coverage to exist. Because a virus exclusion was not at issue, the Eighth Circuit’s ruling shows that the insured must first establish a covered cause of loss—which must be physical—prior to the analysis of any exclusionary language. However, we also note that the Oral Surgeons complaint did not allege the presence of COVID-19 virus on the property, and thus policyholders will attempt to distinguish it in subsequent cases alleging that the presence of virus on premises constitutes physical loss or damage to covered property.