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First Decision from a Federal Appellate Court Favors Insurers

First Decision from a Federal Appellate Court Favors Insurers
By Centers for Better Insurance • Issue #53 • View online
COVID-19 Business Interruption Coverage

Earlier today the United States Court of Appeals for the 8th Circuit released the first federal appellate decision considering a business interruption claim arising out of COVID-19.
In this case, the policyholder is an oral surgery practice with four offices in and around Des Moines, Iowa. The practice “suspended non-emergency procedures due to the COVID-19 pandemic and the related government-imposed restrictions” from late March until May 2020.
The insurance policy covered business interruption due to “accidental physical loss or accidental physical damage” to property.  The policyholder argued that “physical loss” and “physical damage” should be read to have different meanings:
  • Physical loss includes an inability to use the property; and
  • Physical damage means a physical alteration of the property.
The Court rejected this argument reasoning that with either physical loss or physical damage “there must be some physicality to the loss or damage of property” such as “physical alteration, physical contamination, or physical destruction.”
Reinforcing this conclusion, the Court found that end of the “period of restoration” – the date when the property should be “repaired, rebuilt or replaced” – during which business interruption benefits are payable “assumes physical alteration of the property, not mere loss of use.”
While an important decision, it is a narrow one.
The formulation of the wording at the center of this appeal (“direct accidental physical loss or accidental physical damage to property”) is somewhat unusual. For example, the standard ISO formulation is “direct physical loss of or damage to property.”
In a footnote the Court cautioned that the appeal was limited to the specific wording in this policy suggesting at least a possibility other wording formulations could lead to a different result. Further, the appeal did not explore the undefined term “property” which at least a few trial courts have recently read expansively to include the right to occupy or use the property.
Perhaps the most limiting aspects of this decision are the facts themselves. The policyholder never alleged the virus was present in its facilities or its workers or patients were exposed or sickened. It also appears the practice was able to continue using its offices to perform emergency procedures suggesting that any loss of use of the offices had been merely partial.
This is the first of many appellate decisions involving different policy wordings, different allegations of fact, and different courts.
Oral Surgeons, P.C. v. The Cincinnati Insurance Co., Case No. 20-3211 (8th Cir. July 2, 2021) is available here.
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