On Friday, July 2, 2021, the Eighth Circuit Court of Appeals rendered a decision in Oral Surgeons, P.C. v. The Cincinnati Insurance Company, Case No. 20-3211 (8th Cir. July 2, 2021), upholding the decision of the trial court from the United States District Court for the Southern District of Iowa. Finding for Cincinnati, the Eighth Circuit held that a “loss” defined as “accidental physical loss or accidental physical damage” requires “some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction.” Accordingly, in order to trigger business interruption coverage under Cincinnati’s policy there was an “unambiguous requirement that the loss or damage be physical in nature,” which Oral Surgeons failed to plead, let alone prove.
Unmistakably, the Eighth Circuit’s decision hinged upon the word “physical” and a reluctance to rewrite the policy’s grant of coverage. Standing upon Eighth Circuit precedent, including Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400 F.3d 613, 616 (8th Cir. 2005), the court notes that it has previously found that “direct physical loss or damage” has not occurred merely because “property cannot be used for its intended purpose.” Permitting a mere “impairment of function and value . . . caused by government regulation” to constitute “direct physical loss to insured property” would impermissibly “render the word ‘physical’ meaningless.” (quoting Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006)).
Here, since Oral Surgeons failed to allege physical alteration of property or even physical contamination, there was no “physical loss” suffered. Rather, the complaint merely asserted “that Oral Surgeons suspended non-emergency procedures due to the COVID-19 pandemic and the related government-imposed restrictions”—insufficient to trigger coverage as a matter of law.
Finding support for the above in the policy’s definition of “period of restoration,” the Eighth Circuit indicates that “[p]roperty that has suffered physical loss or physical damage requires restoration,” and Cincinnati’s Policy only “provides coverage until property ‘should be repaired, rebuilt or replaced’ or until business resumes elsewhere,” which “assumes physical alteration of the property, not mere loss of use.”
Moreover, and with the potential for wide-ranging impact upon COVID-19 business interruption litigation and appeals nationally, we note that the Eighth Circuit held true to fundamental principles of insurance policy construction. Although the virus exclusion was not at issue in this case, this decision exemplifies that an insured must first establish a covered cause of loss prior to the analysis of any exclusionary language. Where there is no “physical loss,” there is no coverage.
A copy of the decision is available here. For further comment, please contact Partner Lee Siegel or Associate Ryan Maxwell from Hurwitz & Fine’s Insurance Coverage and Extra Contractual Liability practice group.