The United States Court of Appeals for the Eighth Circuit recently became the first appellate court to weigh in on the litany of lawsuits filed by businesses seeking coverage for business interruption resulting from COVID-19-related restrictions. Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021). In a big win for insurers, the Eighth Circuit affirmed the district court’s grant of the insurer’s Motion to Dismiss, finding the lack of physical damage to the business fatal to the insured’s claim for coverage.

Oral Surgeons, P.C. originally filed a lawsuit against Cincinnati Insurance Company (CIC) in the Iowa District Court for Polk County. Oral Surgeons argued that it lost the use of its property when the State of Iowa mandated a restriction on all non-emergency dental procedures. Like many businesses, Oral Surgeons sought to recover under the business interruption provision of the policy. It asserted claims for a declaratory judgment that the policy covered its claim, breach of contract, and bad faith denial of the claim. The case was removed to the Southern District of Iowa, Central Division on July 16, 2020. Oral Surgeons, P.C. v. Cincinnati Ins. Co., 491 F. Supp. 3d 455 (S.D. Iowa 2020). CIC filed a Motion to Dismiss on July 23, 2020.

The Southern District of Iowa granted the Motion to Dismiss on September 29, 2020. In a one-page opinion, the court reasoned that the term “loss” referred to accidental physical loss or damage. Oral Surgeons, however, did not allege any physical or accidental loss. Moreover, the majority of courts evaluating similar claims for COVID-19-related business interruption have determined that “virus-related closures of business do not amount to direct loss to property,” as required for coverage under the policy. The court dismissed the case with prejudice, assigning costs to Oral Surgeons. Oral Surgeons filed a Notice of Appeal on October 20, 2020.

Oral Surgeons argued on appeal that its inability to “fully use its offices” was a direct loss to property. It further argued that the policy’s definition of “loss” as “physical loss” or “physical damage” created an ambiguity. To resolve the ambiguity, Oral Surgeons suggested “defining physical loss to include ‘lost operations or inability to use the business’ and defining physical damage as a physical alteration to property.”

The Eighth Circuit was not convinced. The Court determined that the policy unambiguously requires that any loss or damage be physical, citing extensive case law in support. It also cited the policy’s coverage for extra expense incurred during a “period of restoration” while the physical damage to the business is repaired. The measurement of damages by the period of restoration indicates that physical loss or damage requires restoration. Because Oral Surgeons alleged no physical alteration of or damage to property, the Eighth Circuit affirmed the dismissal on July 2, 2021.