A United States appellate court found, in a case brought by oral and maxillofacial surgeons, that business impairment due to COVID-19 restrictions imposed did not qualify for insurance payment because there was no direct physical loss to property. The position is no different in South African law, writes Donald Dinnie.
Dinnie, Director of Norton Rose Fulbright, writes:
There has been a plethora of COVID-19 policy coverage litigation cases across the United States.
Absent non-damage extensions under business interruption policies, the courts have had to consider whether government restrictions on businesses including shutdown orders constituted loss to property insured or constituted interruption of business caused by loss to property insured. That included deciding whether those restrictions on businesses constituted accidental physical loss or accidental physical damage to property.
Many judgments, at least at the preliminary stage of the hearings, have denied cover, holding that the shutdown orders do not constitute physical loss or damage and loss of use does not constitute physical loss.
In a recent Iowa Appellate Court decision – Oral Surgeons PC v The Cincinnati Insurance Company, in the United States Court of Appeals for the Eighth Circuit (No 20-30211) – the court was required to consider whether the insured’s claim for business interruption coverage, because of the suspension of non-emergency procedures due to the pandemic and related government imposed restrictions, was payable.
The restrictions imposed by the Iowa state governor forced the insured, which provided oral and maxillofacial surgery services at various offices, to stop performing non-emergency procedures. The insured claimed for losses it had suffered as a result of the suspension of those procedures.
The policy insured against lost income and extra expenses sustained due to the suspension of operations “caused by direct ‘loss’ to property”. The policy defined loss as “accidental physical loss or accidental physical damage”.
The court found that impairment of function is not direct physical loss to insured property because to hold otherwise would render the word ‘physical’ in relation to loss and damage meaningless.
The insured did not allege any physical alteration of the property and alleged no facts to show that it had suspended activities due to direct accidental physical loss or accidental physical damage.
On the same facts and policy wording the position is no different in South African law.
* Donald Dinnie is Director of Norton Rose Fulbright South Africa Inc.
Access the judgment via the link below.
The case
United States Court of Appeals For the Eighth Circuit
No. 20-3211
Oral Surgeons, PC, Plaintiff – Appellant
Versus
The Cincinnati Insurance Company, Defendant – Appellee
The Restaurant Law Center – Amicus on Behalf of Appellant(s)
American Property Casualty Insurance Association; National Association of Mutual Insurance Companies – Amici on Behalf of Appellee(s)
Appeal from United States District Court for the Southern District of Iowa – Central
Before Circuit Judges Loken, Wollman and Stras
Submitted on 14 April 2021 and filed on 2 July 2021.
Summary – Minus precedents and case references
Oral Surgeons, PC, offers oral and maxillofacial surgery services at its four offices in the Des Moines, Iowa, area. Oral Surgeons stopped performing non-emergency procedures in late March 2020, after the governor of Iowa declared a state of emergency and imposed restrictions on dental practices because of the COVID-19 pandemic. Oral Surgeons resumed procedures in May 2020 as the restrictions were lifted, adhering to guidance from the Iowa Dental Board.
Oral Surgeons submitted a claim to The Cincinnati Insurance Company (Cincinnati) for losses it suffered as a result of the suspension of non-emergency procedures. The policy insured Oral Surgeons against lost business income and
certain extra expense sustained due to the suspension of operations “caused by direct ‘loss’ to property.” The policy defines “loss” as “accidental physical loss or accidental physical damage.” Cincinnati responded that the policy did not afford coverage because there was no direct physical loss or physical damage to Oral Surgeons’s property. This lawsuit followed.
The district court granted Cincinnati’s motion to dismiss, concluding that Oral Surgeons was not entitled to declaratory judgment and that it had failed to state claims for breach of contract and bad faith.
Oral Surgeons maintains that the COVID-19 pandemic and the related government-imposed restrictions on performing non-emergency dental procedures constituted a “direct ‘loss’ to property” because Oral Surgeons was unable to fully use its offices. Oral Surgeons argues that the policy’s disjunctive definition of “loss” as “physical loss” or “physical damage” creates an ambiguity that must be construed against Cincinnati.
To give the terms separate meanings, Oral Surgeons suggests defining physical loss to include “lost operations or inability to use the business” and defining physical damage as a physical alteration to property.
Appellant’s Amicus Restaurant Law Center contends that “physical loss” occurs whenever the insured is physically deprived of the insured property. We must construe the policy to give effect to the intent of the parties.
Intent is determined by the language of the policy itself, unless there is ambiguity. Ambiguity exists “[o]nly when policy language is subject to two reasonable interpretations”.
The policy here clearly requires direct “physical loss” or “physical damage” to trigger business interruption and extra expense coverage. Accordingly, there must be some physicality to the loss or damage of property – eg, a physical alteration, physical contamination, or physical destruction.
The policy cannot reasonably be interpreted to cover mere loss of use when the insured’s property has suffered no physical loss or damage.
The unambiguous requirement that the loss or damage be physical in nature accords with the policy’s coverage of lost business income and incurred extra expense during the “period of restoration”. The “period of restoration” begins at the time of “loss” and ends on the earlier of:
(1) The date when the property at the “premises” should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
(2) The date when business is resumed at a new permanent location.
Property that has suffered physical loss or physical damage requires restoration. That the policy provides coverage until property “should be repaired, rebuilt or replaced” or until business resumes elsewhere assumes physical alteration of the property, not mere loss of use.
Oral Surgeons did not allege any physical alteration of property. The complaint pleaded generally that Oral Surgeons suspended non-emergency procedures due to the COVID-19 pandemic and the related government-imposed restrictions.
The complaint thus alleged no facts to show that it had suspended activities due to direct “accidental physical loss or accidental physical damage”, regardless of the precise definitions of the terms “loss” or “damage”.
We reject Oral Surgeons’ argument that the lost business income and the extra expense it sustained as a result of the suspension of non-emergency procedures were “caused by direct ‘loss’ to property.”
The policy clearly does not provide coverage for Oral Surgeons’ partial loss of use of its offices, absent a showing of direct physical loss or physical damage.
This appeal presents only the question whether the COVID-19 pandemic and the related government-imposed restrictions constitute direct “accidental physical loss or accidental physical damage” under the policy.
Iowa state and federal courts have uniformly determined that the COVID-19 pandemic and the related government-imposed restrictions do not constitute direct physical loss.
The judgment is affirmed.