What Does the First COVID-19 Appellate Decision Mean?

It was bound to happen sooner or later.  Finally, an appellate court has weighed in on a COVID-19 property damage coverage dispute.  This first appellate decision goes into the insurer win column. So what does it mean for future cases?

In Oral Surgeons, P.C. v. The Cincinnati Insurance Co., No. 20-3211 (8th Cir. Jul. 2, 2021), an oral surgical practice in Iowa was forced to suspend non-emergency procedures from March 2020 until May 2020 after the Iowa governor issued an emergency declaration restricting dental practices because of the COVID-19 pandemic.  The practice filed a claim with its insurer for the loss of business during the suspension.

The practice had an insurance policy that insured it against lost business income and certain extra expense sustained due to the suspension of operations “caused by direct ‘loss’ to property.” The policy defined “loss” as “accidental physical loss or accidental physical damage.”  The insurer rejected the claim because there was no direct physical loss or damage the practice’s property.  The practice sued for breach of contract and bad faith.

The Iowa federal district court granted the insurer’s motion to dismiss, finding that the practice was not entitled to a declaratory judgment and that it failed to state claims for breach of contract or bad faith.  On appeal, the 8th Circuit affirmed.

The arguments made by the practice were like arguments made by policyholders nationwide.  Simply put, the pandemic and governmental restrictions were a direct loss to property because the practice was unable to fully use its offices.  The practice argued that the policy was ambiguous because of the disjunctive “or” between direct physical loss and direct physical damage.  Accordingly, construing the policy against the insurer, direct physical loss must include lost operations or the inability to use the business, whereas direct physical damage means physical alteration to property.

The appellate court rejected each of these arguments.  Focusing on Iowa law, the court held that the policy clearly required direct physical loss or physical damage to trigger the business interruption and extra expense coverage.  Thus, held the court, “there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction (citations omitted).”

While this decision is consistent with the majority of decisions throughout the U.S, including those in Iowa, some caveats should be noted.  First, this appeal presented only the question whether the COVID-19 pandemic and the related government-imposed restrictions constituted direct “accidental physical loss or accidental physical damage” under the policy.  Second, the policyholder did not allege any physical alteration of property. 

There are several cases on appeal that have allegations that COVID-19 caused physical alteration to the property.  The decisions in those appeals may be different because allegations of physical alteration of the property is significantly different from allegations of loss of use because of governments orders. Many of those cases, however, must go through summary judgment or trial before they will get to the appellate courts. The burden of proof that the novel coronavirus caused physical alteration to property is a difficult one to meet.

But for those cases where the allegations focus not on physical alteration but argue that COVID-19 and governmental orders caused a loss of use that comes within the coverage grants in property policies for business income and extra expense, this case is likely to find it self in good company in the majority of jurisdictions.

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