Guidance On COVID-19 Business Interruption Claims By The US Court Of Appeal

• Published date: 26 July 2021
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Coronavirus (COVID-19), Insurance Laws and Products, Trials & Appeals & Compensation, Operational Impacts and Strategy
• Law Firm: Dentons
• Author: Ms Deepshikha Dutt, Douglas B. B. Stewart and Rebecca Curcio

The United States Court of Appeals for the Eighth Circuit recently released the first US appellate-level decision concerning a COVID-19 claim for business interruption coverage. The appellate court upheld the lower court's decision that there is no physical loss or damage resulting from suspension of business operations due to government-imposed restrictions arising from the pandemic, necessary to trigger coverage under the policy.

The insured, Oral Surgeons P.C. ("Oral Surgeons"), is a corporation providing oral and maxillofacial surgery at four locations in Des Moines, Iowa. Oral Surgeons stopped performing non-emergency procedures between late March and May 2020, in response to the governor declaring a state of emergency, which, amongst other things, imposed restrictions on dental practices. Oral Surgeons was able to continue performing emergency services during this time. It made a claim to its insurer, The Cincinnati Insurance Company ("TCIC"), for the resulting lost business income and extra expenses that it sustained.

The policy issued by TCIC contained a "property damage" requirement, which stipulated that coverage for lost business income and certain extra expenses would only be provided where the suspension of business operations was "caused by direct loss to property." "Loss" is defined in the policy as "accidental physical loss or accidental physical damage."

The insurer denied coverage on the basis that they lacked any physical impact to the insured's property causing any lost business income or extra expenses. The insured argued that its inability to fully use its four offices constituted a "direct" "loss" to property within the meaning of the policy. The insured did not allege any physical alteration to their property.

The Court of Appeals found that there was a clear requirement in the policy to establish direct physical loss or damage to trigger the business interruption and business expense coverage. It held that this requirement meant the insured must be able to demonstrate "some 'physicality' to the loss or damage of property." It expanded on "physicality" as meaning alteration, contamination or destruction. It found that the physicality requirement meant that "mere loss of use" of the property, without any accompanying physical loss or damage to the property, did not trigger coverage for business interruption and business expense coverage.

In reaching this conclusion, the Court relied on earlier Iowa state and federal court decisions...