Appellate Court Refuses to Re-Write Policy to Provide Coverage Not Paid For by the Insured
Eighth Circuit Requires Physical Loss to Property
No Insurance Policy Insures Against Every Possible Loss
Oral Surgeons, P.C., 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. When their insurer refused to pay Oral Surgeons sued.
In Oral Surgeons, P.C. v. The Cincinnati Insurance Company, The Restaurant Law Center Amicus on Behalf of Appellant(s), American Property Casualty Insurance Association; National Association of Mutual Insurance Companies Amici, No. 20-3211, United States Court of Appeals For the Eighth Circuit (July 2, 2021) the Eighth Circuit was asked by Oral Surgeons and some Amici to find the loss of use of its offices was physical loss and Oral Surgeons were entitled to business interruption benefits.
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. Oral Surgeons sued. The district court granted Cincinnati’s motion to dismiss, concluding that Oral Surgeons was not entitled to declaratory judgment and that it had
Oral Surgeons alleged 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 argued 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. Amicus Restaurant Law Center contended that “physical loss” occurs whenever the insured is physically deprived of the insured property.
An appellate court 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 only when policy language is subject to two reasonable interpretations. Generally speaking, the plain meaning of the insurance contract prevails.
The Cincinnati policy 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. Oral Surgeons needed to prove, therefore, that a physical alteration, physical contamination, or physical destruction of its property brought about a loss.
The common usage of “physical” in the context of a loss therefore means the loss of something material or perceptible on some level. 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 Eighth Circuit refused to find “loss of use” and “physical loss or damage” synonymous. Rather, they are opposites.
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 from the date of the physical damage to the insured’s property until the insured restores the damaged property to use. The “period of restoration” begins at the time of “loss” and ends on the earlier of:
- The date when the property at the “premises” should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
- 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. When the only reason the property was not used was an order of a governmental agency is not a physical loss, or physical damage. In fact, the property where Oral Surgeons practiced was unchanged during the entire time they could not perform Oral Surgery.
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.”
The policy clearly does not provide coverage for Oral Surgeons’s partial loss of use of its offices, absent a showing of direct physical loss or physical damage. Where no ambiguity an appellate court will not write a new policy to impose liability on the insurer.
There is no question that the orders closing businesses due to fear of spreading Covid-19 caused damage – a loss of business income – to Oral Surgeons and all other businesses who were forced to close down by order of the state or some entity. That order did not damage the property that was the subject of the insurance and there was no need to restore it since once the order was pulled the business of Oral Surgeons was able to begin immediately. No insurance policy insures against every possible loss. The loss claimed by Oral Surgeons was one for which no insurance benefits were available.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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