Appellate Court Reviewing First COVID Business Interruption Case

Appellate Court Reviewing First COVID Business Interruption Case

The Eighth Circuit is considering one of the most impactful insurance issues of all time: whether COVID-19 triggers business interruption coverage.

One of the most impactful insurance issues of all time is now being considered by the U.S. Court of Appeals for the Eighth Circuit: whether business closures due to the COVID-19 pandemic should trigger business interruption insurance coverage.

In March 2020, Iowa-based Oral Surgeons was forced to temporarily cease all nonemergency procedures because of a statewide stay-at-home order issued by Iowa’s governor as well as related guidance from Iowa’s dental board.

Oral Surgeons looked to its “all-risk” property insurance policy with Cincinnati Insurance Company to cover the losses. The policy lacked an exclusion for virus-related claims, but still, the insurer refused to cover the losses, prompting Oral Surgeons to file suit in June 2020. Cincinnati removed the case to Iowa federal court.

Oral Surgeons argued that its losses fell squarely within the policy language, which extended coverage for business income lost due to a suspension of operations attributable to a direct loss to the property. According to court documents, the policy defined the term “loss” as “accidental physical loss” or “accidental physical damage.”

Cincinnati moved to dismiss the case in July. The insurer argued that the policy’s terms only covered business income losses that were directly tied to tangible physical damage to the policyholder’s property, which did not occur.

U.S. District Judge Charles Wolle issued an order granting Cincinnati’s motion, deciding that Oral Surgeons had not sufficiently claimed that it suffered any physical or accidental loss. The judge noted several recent decisions from other courts that have all held that virus-related business closures do not constitute the type of direct physical loss that is covered by policies like the one in question.

Oral Surgeons appealed to the Eighth Circuit and argued in briefs that nothing in the language of the policy 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 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,” and it asserted that Studio 417 and North State Deli were wrongly decided, and the reasoning had been rejected by numerous other courts. 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 case is Oral Surgeons PC v. The Cincinnati Insurance Company. 

Case analysis

The two cases that Oral Surgeons thought the court should consider were Studio 417 and North State Deli. In Studio 417, Judge Steven R. Bough rejected the insurer’s assertion that its policies’ requirement of direct physical loss or damage can only be satisfied by a tangible alteration to the property. Judge Bough noted that Cincinnati’s position conflated “loss” and “damage” when those terms have distinct meanings and turned to the dictionary definition of loss which included “the act of losing possession” or “deprivation.” With that definition, Judge Bough held that Studio 417′s complaint sufficiently alleged a direct physical loss because they claimed the presence of COVID-19 on the premises prevented them from operating.

North State Deli was decided by Superior Court Judge Orlando F. Hudson Jr. of Durham County, North Carolina. In that case, Judge Hudson ruled that a group of restaurant owners was entitled to coverage from Cincinnati for pandemic-related losses after agreeing with the policyholders that the plain definition of “direct physical loss” includes an “inability to utilize property.”


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