Eighth Circuit Court of Appeals Rule in Favor of Insurers in Claim Alleging Physical Loss Due to COVID-19
The United States Court of Appeals for the Eighth Circuit delivered the first federal appellate court decision on the issue of business interruption coverage for COVID-19 losses. Oral Surgeons P.C. v. Cincinnati Insurance Company, No. 20-3211 (8th Cir. 2021). The Court found that as per the Iowa law, an oral surgery practice in the state was not entitled to business interruption coverage as it had failed to allege or demonstrate any “physical loss” or “physical damage” to its premises.
The insurance policy in question limits coverage for business interruption losses caused by “direct loss” to the property. The policy defined “loss” as “accidental physical loss or accidental physical damage”. The insured argued that since the policy applied to “physical loss or physical damage”, there would be a distinction between the two terms. The Court relied on prior Iowa state law rulings, which were not related to COVID, and found that the use of the word “physical” in this type of an insurance policy is interpreted as some physicality to the loss or damage to property. The complaint filed by the insured did not allege any physical loss or alteration of property which occurred due to COVID-19. The complaint rather relied on allegations that the dental surgery group suspended their non-emergency operations in lieu of the pandemic and the restriction imposed by the government.
The Court’s opinion provides clarity regarding how federal courts might rule on the issue of “physical loss” and “physical damage”, with an emphasis on the need to show “physicality” of the loss caused to the property in issue. The “direct physical loss or damage” threshold is applicable to many properties and builder’s risk policies that might provide coverage for COVID-19 losses.
The decision delivered by the Court further highlights the increasing trend in federal courts to dismiss such cases, as compared to state courts. In Studio 417 Inc. v. The Cincinnati Insurance Co., Case No. 20-cv-03127-SRB (W.D. Mo. Dec. 18, 2020), the U.S. District Court for the Western District of Missouri, Southern Division ruled in favor of the insured enterprises. It held that “physical loss” should be read broadly in order to encompass deprivation of use of property caused by natural phenomenon like a virus. However, it fails to resolve the issue and provide clarity on the same. On same lines, hundred other federal cases across the States are pending and it would be interesting to see how these cases are treated. Therefore, the states are divided in this issue. Oral Surgeons P.C. v. Cincinnati Insurance Company further highlights the importance of insured’s awareness about the insurance covers and the losses covered therein.