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 that held that the COVID-19 pandemic and the related restrictions imposed by various governments did not constitute direct physical loss within the meaning of the standard property damage requirement. The Court of Appeals referenced the following findings in its decision:
- “…Coverage for ‘loss’ or ‘damage’ at least requires the presence of a physical condition on or affecting the property located at the insured premises.” (Lisette Enters., Ltd. v. Regent Ins. Co., No. 4:20-cv-00299, 2021 WL 1804618, at *1–2 (S.D. Iowa May 6, 2021), appeal docketed
- “…Direct physical loss or damage requires tangible alteration of property and that loss of use alone is insufficient.” (Gerleman Mgmt., Inc. v. Atl. States Ins. Co., No. 4:20-cv-183, 2020 WL 8093577, at *5 (S.D. Iowa Dec. 11, 2020), appeal docketed
- “[Insured] claims no injury to or destruction to realty or other loss physical in nature and therefore [its claim is] not covered under the policy.” (Wakonda Club v. Selective Ins. Co. of Am., No. LACL148208, slip op. at 6 (Iowa Dist. Ct. Polk Cnty. March 3, 2021), appeal docketed
The Court of Appeals also relied on the policy wording in support of its interpretation and intent of the parties. The policy stipulated that it would only provide lost business income and incurred extra expense coverage during the “period of restoration.” The definition of this phrase indicates that the restoration period ends on the earlier of:
- The date that the property is repaired, rebuilt or replaced
- The date when business is resumed at a new permanent location
The Court inferred from this definition that only property that has suffered physical loss or damage requires restoration or necessitated a new location, and that mere loss of use was not captured by the property damage requirement.
This is the first US appellate decision providing an interpretation on policy wording in a COVID-19 business interruption claim. The precedential value of this decision, and others in this context, is always limited to the wording of this policy, including, importantly, exclusions and extensions of coverage. That being said, this decision will nonetheless be relied on where there is a property damage prerequisite to business interruption coverage.
These requirements have been interpreted by a multitude of lower American courts in various states as an obligation on behalf of the insured to demonstrate some sort of tangible impact or change to the insured property. Such decisions have also rejected the idea that COVID-19, by virtue of its presence and existence alone, causes physical damage or loss to the insured’s property.
A UK summary judgment decision considering a similar property damage requirement reached the same conclusion, finding that the policy required something more than merely transient deprivation to amount to “loss.”
We would expect that both of these decisions would have persuasive value in the determination of these issues by Canadian courts.
 See e.g. Zwillo V, Corp. v. Lexington Ins. Co., No. 4:20-cv-00339-CV-RK, 2020 WL 7137110 (W.D. Mo. Dec. 2, 2020; Henry’s Louisiana Grill, Inc., et al., v. Allied Insurance Company of America, No. 1:20-CV-2939-TWT, 2020 WL 5938755 (N.D. Ga. Oct. 6, 2020).
 See TKC London Limited v Allianz Insurance plc,  EWHC 2710 (Comm).