The United States Court of Appeals for the 8th Circuit recently issued the first federal appellate court decision in the country on the issue of business interruption coverage for COVID-19 losses. In Oral Surgeons P.C. v. Cincinnati Insurance Company, No. 20-3211 (8th Cir. 2021) the 8th Circuit found under Iowa law that an oral surgery practice in Iowa was not entitled to business interruption coverage because it had failed to allege or demonstrate “physical loss” or “physical damage” to its premises.
The insurance policy at issue limited coverage for business interruption losses to those caused by “direct ‘loss’ to property,” defining “loss” as “accidental physical loss or accidental physical damage.” The 8th Circuit rejected the insured’s argument that since the policy applied to “physical loss or physical damage,” there must be a distinction between the two. Relying on (non-COVID) prior Iowa state law rulings interpreting the use of the word “physical” in this type of policy, the Federal appellate court held that “there must be some physicality to the loss or damage to property – e.g., a physical alteration, physical contamination, or physical destruction.”
Notably, the complaint at issue did not allege any physical alteration of property due to COVID-19, but rather relied generally on allegations that the dental surgery group suspended their non-emergency operations due to the pandemic and government restrictions. It remains unclear how the court would have ruled if the Complaint at issue had alleged such physical alteration.
The 8th Circuit decision is not binding on any state courts, whether in Iowa or otherwise. However, the 8th Circuit’s opinion does provide some clarity as to how federal courts may rule on the issue of “physical loss” and “physical damage,” with a particular emphasis here on the need to show “physicality” in the way in which a loss to property is alleged. Well over a hundred federal cases across the country have appeals pending. The decision also highlights what appears to be a strong trend in federal courts to dismiss these cases, compared to state courts. According to the University of Pennsylvania Carey Law School’s COVID litigation tracker, federal courts are almost 3 times more likely to dismiss a COVID 19 case brought by an insured than are state courts. (See here: https://cclt.law.upenn.edu/)
The “direct physical loss or damage” threshold is one that applies to many property and builder’s risk policies that might provide coverage for COVID-19 losses. As the first federal appellate case on point, this decision is extremely interesting, but hardly resolves the issue nationwide. As more appellate decisions, both federal and state, come out over the next 6-18 months, we anticipate a greater degree of clarity as to which arguments are more likely to be successful, and in which courts.
One last takeaway: The decision highlights the need to know what coverages you have (and what you do not have) under your existing portfolio. Insureds with coverage for contamination/illness (even under a sublimit) have fared far better than those under more standard insurance policies that apply to direct physical loss or damage. Be sure to periodically have your insurance structure reviewed by knowledgeable brokers and counsel to see if you have any avoidable gaps in your coverage.