As we have previously reported, numerous businesses throughout the United States have filed lawsuits against their property insurance companies seeking coverage for business interruption losses related to the COVID-19 pandemic and resulting shutdowns. The vast majority of courts have ruled against these businesses and in favor of the insurers, holding that there is no coverage for such financial losses under standard property policies, which require “direct physical loss or damage” in order to trigger coverage.
Recently, the United States Court of Appeals for the Eighth Circuit issued the first appellate decision in the country on this issue, affirming a decision in favor of an insurer. In Oral Surgeon, P.C. v. The Cincinnati Insurance Company, an Iowa-based dental practice sought coverage from its property insurer for financial losses that occurred after it was mandated to close due to state-wide COVID-19 restrictions. The insurer rejected the claim on the ground that the business losses were not caused by any direct physical loss or damage to the dental practice’s property. The lower court granted the insurer’s motion to dismiss the lawsuit, ruling the dental practice was not entitled to coverage under the policy because it did not properly plead a claim.
On appeal, the Eighth Circuit (applying Iowa law) affirmed the lower court’s decision in favor of the insurer. The court rejected the dental practice’s argument that its losses resulting from suspension of nonemergency procedures were caused by “direct loss to property.” As many courts have held throughout the country, the court found that the insurance policy’s language in this regard was not ambiguous; it expressly requires direct physical loss or damage in order to trigger business interruption and extra expense coverage. Under Iowa law, as in many other jurisdictions, physical loss or damage to property means “a physical alteration, physical contamination, or physical destruction.” The requirement excludes losses that are “intangible or incorporeal.” Here, the court concluded, the dental practice did not allege “any physical alteration of property” since it attributed its financial losses to the COVID-19 shutdowns and not any physical alteration, contamination, or destruction of its property.
The Eight Circuit’s decision in this case is significant because it is the first federal or state appellate court decision in the country addressing the issue of business interruption coverage for COVID-19 losses, which may signal how other appellate courts will rule. That being said, it should be noted that the decision was limited to the parties’ pleadings and thus may have limited precedential value. Each business interruption coverage case will turn on the particular facts and policy language at issue, and policyholders and insurers must continue to monitor how courts rule in such cases.
If you have any questions regarding the content of this alert, please contact Sanjeev Devabhakthuni, counsel, at sdevabhakthuni@barclaydamon.com; Theresa Oliver, summer associate, at toliver@barclaydamon.com; or another member of the firm’s Insurance Coverage & Regulation Practice Area.