Policyholder loses first COVID-19 coverage appellate case
The decision follows a trend of courts determining that pandemic losses do not meet policy definitions of "direct physical loss."
On July 2, the U.S. Court of Appeals for the Eighth Circuit delivered a ruling in the first appellate court case regarding pandemic-related business interruption coverage that is sure to be a blow to insureds nationwide litigating with insurers over denied claims.
The Eighth Circuit ruled in Oral Surgeons PC v. The Cincinnati Insurance Co. that the lower court did not err in dismissing the suit brought by Oral Surgeons on the basis that it failed to plead any physical alteration to the property.
In Oral Surgeons’ appeal to the Eighth Circuit, it argued that nothing in the policy’s language supports the insurer’s position that a covered loss must involve tangible physical damage. The policyholder emphasized that the policy definition of loss included either accidental physical loss or accidental physical damage. Because the policy contained two distinct definitions, loss and damage must be two different concepts, and “loss” can encompass loss of the ability to use a property for business purposes.
Oral Surgeons argued that, at best, the policy language is ambiguous on its face, and under established insurance law, the policyholder’s interpretation of the ambiguous term must be used. The insurer, Cincinnati Insurance, further argued that the District Court judge should have given more weight to two out-of-state COVID-19 and business interruption decisions that went against Cincinnati: Studio 417 and North State Deli.
In the alternative, Cincinnati argued that the policy was designed to cover losses due to physical events such as “fire or storm.” It asserted that Studio 417 and North State Deli were wrongly decided, and numerous other courts had rejected the reasoning. Cincinnati contended that the policy language was unambiguous and “must be enforced as written” and said that the policyholder was asking the Eighth Circuit to isolate policy terms out of context “without regard to the original intention” of the policy wording in its entirety, which the court should not do.
The Eighth Circuit determined that Oral Surgeons failed to state claims for breach of contract and bad faith because the complaint alleged no facts to show that they suspended activities due to direct accidental physical loss or accidental physical damage. The court found that the complaint generally pled that the insured suspended non-emergency procedures due to the COVID-19 pandemic and associated restrictions. The court rejected Oral Surgeons’ argument that the loss of business income and extra expense sustained were caused by direct loss to the property.
Case analysis
Iowa state and federal courts have uniformly determined that the COVID-19 pandemic and related government-imposed restrictions do not constitute a direct physical loss. One of the reasons this argument fell through for the policyholder is that it could still perform surgery, but only at a limited capacity. The court found that the policy clearly did not provide coverage for the partial loss of use of the offices, absent a showing of direct physical loss or damage, of which there was none.
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