A Guide To The 1st Appellate Clash Over COVID-19 Coverage

By Jeff Sistrunk
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Law360 (April 13, 2021, 1:14 PM EDT) -- On Wednesday, the Eighth Circuit will become the first appellate court to consider whether COVID-19 closures trigger business interruption insurance when it hears an Iowa dental clinic's appeal of an order that Cincinnati Insurance doesn't have to cover its pandemic-related losses.

Here, Law360 breaks down the case in advance of the hearing.

What's at Stake

When it hears arguments Wednesday in Oral Surgeons PC v. The Cincinnati Insurance Co., the Eighth Circuit will become the first appellate court to weigh one of the most impactful insurance coverage issues of all time: whether property insurers should have to cover losses that health care providers, restaurants, retailers and other businesses have suffered due to government orders requiring them to shutter or curtail their operations amid the COVID-19 pandemic.

The appellate courts have emerged as the next battleground in the COVID-19 business interruption insurance wars, which encompass more than 1,600 lawsuits in state and federal courts nationwide, according to data compiled by the University of Pennsylvania Carey Law School. Appeals have already been filed in 95 of the over 330 cases in which courts have ruled on motions for dismissal or summary judgment, the school found. Oral Surgeons' appeal of an Iowa federal judge's order tossing its suit against Cincinnati was the first to be slated for oral argument.

As a potential trendsetter, Oral Surgeons' appeal has garnered extensive attention from the insurance bar and drawn amicus briefs on both sides.

The Restaurant Law Center, which represents the interests of more than 1 million restaurant owners, urged the Eighth Circuit to side with Oral Surgeons, arguing that the lower court's order and many more like it have misinterpreted key policy language and deprived scores of businesses of much-needed coverage for their pandemic-related losses.

Conversely, the American Property Casualty Insurance Association, writing in support of Cincinnati, said business interruption coverage was never intended to cover pandemics. The group warned that decisions favoring Oral Surgeons and similarly situated policyholders could stretch insurers beyond their breaking point and tank the insurance industry.

How We Got Here

Des Moines, Iowa-based Oral Surgeons was forced to temporarily cease all nonemergency procedures because of a statewide stay-at-home order issued by Iowa's governor in March 2020, along with related guidance from the state's dental board, according to court documents.

Oral Surgeons turned to its "all-risk" property policy with Cincinnati, which lacked a common exclusion for virus-related claims, to cover the resulting financial losses. But the insurer refused, prompting the dental clinic to file suit in Polk County, Iowa, court in June. Cincinnati later removed the case to Iowa federal court.

Oral Surgeons asserted that its losses fell squarely within the language of its policy, which extended coverage for business income lost due to a suspension of operations attributable to a direct loss to its property. The term "loss" was further defined in the policy as "accidental physical loss" or "accidental physical damage," according to court filings.

Cincinnati, however, swiftly moved to dismiss the suit in July. It contended that the policy's terms, taken together, only covered business interruption losses tied to tangible physical damage to Oral Surgeons' property, which did not occur.

In September, U.S. District Judge Charles Wolle issued a brief order granting Cincinnati's motion, opining that Oral Surgeons had not claimed it suffered any physical or accidental loss. The judge pointed to a host of recent decisions from other courts that have held that virus-related business closures do not constitute the type of direct property loss covered by policies like Cincinnati's.

Oral Surgeons appealed to the Eighth Circuit.

Oral Surgeons' Stance

In briefs filed with the Eighth Circuit, Oral Surgeons argued that nothing in the language of its policy supports Cincinnati's position that a covered loss must involve tangible physical damage.

The dental clinic emphasized that the policy defines loss to include either accidental physical loss or accidental physical damage. As a result, it said, loss and damage must be two distinct concepts, and the loss prong can encompass a loss of the ability to use a property for business purposes. At best, Oral Surgeons said, the policy language is ambiguous "on its face," and under black-letter insurance law, that means the policyholder's interpretation must be accepted.

"Oral Surgeons was unable to perform its business operations at the property because of the community spread of the virus, which amounted to the 'accidental physical loss' of the property and resultant loss of business income during the time period that restrictions were in place as recommended by the Iowa Dental Board and as ordered by the governor," the clinic argued.

Oral Surgeons further contended that Judge Wolle gave short shrift to a pair of out-of-state COVID-19 coverage decisions that went against Cincinnati.

In a case dubbed Studio 417 after one of the lead plaintiffs, a Missouri federal judge in August allowed a group of hair salons and restaurants to proceed with a proposed class action alleging Cincinnati wrongfully refused to cover their pandemic-related losses. In that decision, U.S. District Judge Stephen R. Bough rejected the insurer's assertion that its policies' core requirement of direct physical loss or damage can be satisfied only by a tangible alteration to property.

Judge Bough said Cincinnati's position conflates "loss" and "damage," when in fact the terms have distinct meanings. Since the policies do not define either term, Judge Bough turned to the dictionary definition of loss: the "act of losing possession" or "deprivation." Applying that definition, the judge held that the businesses' complaint sufficiently alleged a direct physical loss because they claimed the presence of COVID-19 on their premises hobbled their operations.

The same month, Superior Court Judge Orlando F. Hudson Jr. of Durham County, North Carolina, ruled outright that a group of restaurant owners was entitled to coverage from Cincinnati for pandemic-related losses. Judge Hudson agreed with the owners, led by North State Deli LLC, that the plain definition of "direct physical loss" includes an "inability to utilize" property. Cincinnati's appeal of that decision is pending.

Oral Surgeons told the Eighth Circuit that the reasoning of the Studio 417 and North State Deli rulings is directly applicable to its appeal and should result in reversal of Judge Wolle's ruling.

Cincinnati's Stance

Cincinnati countered that Judge Wolle's decision gave full effect to all the relevant terms in Oral Surgeons' policy, particularly the word "physical" in the definition of loss. The policy in question is designed to cover losses due to physical events such as a "fire or storm," the insurer said.

"In that context, it can cover loss of business income caused by physical loss or damage to property," Cincinnati contended. "The virus, and the disease it causes, hurts people but does not damage property."

The insurance company asserted that Studio 417 and North State Deli were wrongly decided and that their reasoning has been rejected by a number of other courts weighing COVID-19 business interruption coverage disputes. Dozens of courts have taken the view that physical loss equates to tangible damage and have dismissed policyholders' suits accordingly, the insurer said.

In the end, Cincinnati contended, the "unambiguous language of the policy must be enforced as written." The insurer said Oral Surgeons is asking the Eighth Circuit to isolate policy terms out of context "without regard to the original intention" of policy wording as whole, which the appellate court should not do.

"Nationwide, courts have recognized that sympathy is not a substitute for the rules of contract interpretation," Cincinnati argued. "Nor is it a basis to hold insurers liable for risks they did not underwrite and for which they did not receive a premium."


Oral Surgeons is represented by Randy J. Wilharber and Tyler S. Smith of Peddicord Wharton LLP.

Cincinnati is represented by Daniel G. Litchfield and Alan I. Becker of Litchfield Cavo LLP and Robert V.P. Waterman Jr. and David C. Waterman of Lane & Waterman LLP.

The Restaurant Law Center is represented by its own Angelo I. Amador and by John H. Mathias Jr., David M. Kroeger, Gabriel K. Gillett and Michael F. Linden of Jenner & Block LLP.

The American Property Casualty Insurance Association is represented by Lindsey Davis of Zelle LLP, Laura A. Foggan of Crowell & Moring LLP and Wystan M. Ackerman of Robinson & Cole LLP.

The case is Oral Surgeons PC v. The Cincinnati Insurance Co., case number 20-3211, in the U.S. Court of Appeals for the Eighth Circuit.

--Editing by Aaron Pelc and Jill Coffey.

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