Covid-related business interruption coverage and government restrictions

In brief - In a tremendous win for American insurers, United States Court of Appeals for the Eighth Circuit Court recently ruled that an insurance company was not required to indemnify a dental clinic for losses incurred as a result of government imposed COVID-19 restrictions. 

The case of Oral Surgeons, P.C. v. Cincinnati Insurance Company, No. 20-3211 (8th Cir. July 2, 2021), addresses one of the central issues under Covid-related business interruption policy claims: can government restrictions on the use of business premises constitute "damage"?

Background 

Oral Surgeons, P.C is a dental surgery with four offices in the Des Moines, Iowa area. In late March 2020, they stopped performing non-emergency procedures as a result of the Iowa governor declaring a state of emergency as a result of the COVID-19 pandemic and imposing restrictions on dental practices. Oral Surgeons was able to resume business as normal from May 2020 when the restrictions lifted. 

 
Oral Surgeons submitted a claim to The Cincinnati Insurance Company (Cincinnati) for lost business income and additional expenses incurred as a result of the COVID-19 related restrictions on their ability to perform non-emergency dental procedures. Oral Surgeons argued that they had suffered a direct loss to property as a result of the restrictions as it was unable to fully use its offices. The relevant policy defined "loss" as "accidental physical loss or accidental physical damage".
 
Cincinnati argued that the policy did not respond as the restrictions did not result in any physical loss or damage to the property. 
 
The district court had granted Cincinnati's motion to dismiss the proceedings. 

Decision

The district Eighth Circuit Court affirmed the decision of the district court, finding that the policy did not respond as there was no physical loss or damage as a result of the government restrictions. The Court agreed with Cincinnati that the policy required direct "physical loss" or "physical damage" to trigger business interruption coverage and that there must be some "physicality to the loss or damage of property" such as physical alteration, contamination or destruction. The Court stated that the policy did not provide coverage for the partial loss of use of its offices in the absence of direct physical loss or damage. 
 
While Iowa state and federal courts have found that COVID-19 related government restrictions do not constitute direct physical loss, we understand that this marks the first American federal appeal court to look at this question. However, the Court was only required to look specifically at whether the government-imposed restrictions constituted direct "accidental physical loss or accidental physical damage" under the Cincinnati policy. 

Impact 

The Australian Financial Complaints Authority has approved a second test case in the Federal Court of Australia looking at a number of trigger clauses, including whether government restrictions amount to damage triggering coverage under business interruption policies. While the Eighth Circuit Court's decision may provide some guidance as to how to construe similarly worded policies in the Australian market, it is not binding on Australian courts or insurers. Ultimately the Federal Court's decision in the second test case will depend on the proper construction of specific policy wordings in issue. There is no doubt that this will remain a hotly contested issue globally as the Courts continue to examine various business interruption policies.