Oral Surgeons Get Drilled in Eighth Circuit Ruling on COVID Coverage

ABSTRACT: The Eighth Circuit holds that temporary cessation of non-emergency procedures due to COVID-19 government restrictions does not constitute ‘direct physical losses' under insurance policy.

The Eighth Circuit recently upheld a ruling by the Southern District of Iowa granting a Motion to Dismiss a policyholder’s lawsuit for failure to state a claim, finding that the policyholder failed to allege facts that showed a direct physical loss that would trigger coverage under the policy.

In Oral Surgeons v. Cincinnati Insurance, the policyholder owned and operated oral surgery clinics in and around Des Moines, Iowa. The Oral Surgeons brought suit against the insurer for breach of contract and bad faith in its denial of coverage for losses suffered as a result of the suspension of non-emergency procedures due to COVID-19. The COVID-19 pandemic and subsequent government restrictions forced the clinic to cease its nonemergency procedures from March 2020 until the restrictions were lifted in May 2020. Oral Surgeons alleged that the government restrictions constituted a direct loss to property because Oral Surgeons was unable to fully use its offices. Oral Surgeons argued further that the term “loss”, defined in the disjunctive as “physical loss” or “physical damage”, in the policy, creates an ambiguity and should therefore be construed against the insurer.

The Court of Appeals rejected the policyholder’s arguments, reasoning that the policy as whole refers to “loss” as being physical in nature. Interpreting the policy to require a direct “physical loss” or “physical damage” to trigger business interruption and extra expenses coverage. The court primarily referred to the portion of the policy title “period of restoration” which exclusively discussed physical alterations to the building such as repair or relocation. Nowhere in the policy discussed intangible loss, such as mere loss of use.

The Court of Appeals relied on Pentair v. American Guaranty & Liability Insurance and Source Food Technology v. U.S. Fidelity & Guaranty Company to justify their reasoning. The court likened the clinics’ loss of use of its offices to the policyholder in Pentair who experienced a power outage that shut down one of its supply factories in Taiwan. Although the power outage led to a significant increase in shipping costs, the court said a manufacturing shutdown was temporary and did not cause a direct physical loss of or damage to Pentair’s supplies property. Therefore, the temporary shutdown did not constitute a direct physical loss. To hold otherwise would allow coverage to be established whenever property cannot be used for its intended purpose.

 Similarly, in Source Food Technology, a beef embargo prevented Source Food from receiving a major shipment, which ultimately caused the company to lose its biggest customer. The insurance company denied coverage because the shipment of beef was not physically contaminated or damaged therefore, not a direct physical loss.  Eighth Circuit compared the government’s COVID-19 restrictions in the present case to the beef embargo between the U.S. and Canada. A governmental regulation, although it impairs the function and value of a product, does not constitute direct “physical loss”.

Applying Iowa and federal law the court found that the government’s COVID-19 restrictions do not constitute direct physical loss. Further, the policyholder did not allege physical alteration of property in their complaint and the policy did not cover Oral Surgeons’ partial loss of use of its office without some type of direct physical damage.  Additionally, the Court of Appeals did rejected the policyholder’s argument that the word ‘loss’ is ambiguous, stating, “where no ambiguity exists, the Court will not write a new policy to impose liability on the insurer.”

Following in the footsteps of the U.S. District Court for the Eastern District of Michigan’s ruling that the Government closures do not trigger business interruption coverage and the Western District of Missouri’s ruling that a policyholder could not prevail on claims that were denied under a policy’s Pollution Exclusion clause, the Eighth Circuit found that the government’s COVID-19 restrictions do not constitute direct physical loss and the “loss” is not ambiguous.

That said, there is no shortage of COVID-19 business interruption cases being filed around the country, where coverage has been denied, and the insured has filed suit.  See, for example, the lawsuit recently filed by beloved Kansas City barbeque joint, Joe’s Kansas City, against Lloyd’s of London. We will keep our readers apprised of further major developments in this area.