Cincinnati Insurance Co. need not cover an oral surgery practice’s Covid-related business losses, the Eighth Circuit ruled, scoring a huge win for insurers.
The U.S. Court of Appeals for the Eighth Circuit Friday became the first federal appeals court to directly address the issue of whether policies insuring physical loss or damage to a policyholder’s premises encompass lost income stemming from shutdowns aimed at slowing the spread of the coronavirus.
The dental practice’s policy covers income loss and extra expenses incurred during a “period of restoration,” thus implying physical damage, Judge Roger L. Wollman wrote for the court.
“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,” he said.
Businesses struggling financially during the pandemic have filed at least 1,906 lawsuits against their insurers after being denied coverage. Most lower courts have ruled in favor of insurers, heightening the stakes for companies as they await the results of over one hundred cases pending in the appellate courts.
The Eighth Circuit’s decision involved Oral Surgeons PC, a group of four oral surgery clinics in Iowa. After being forced to pause non-emergency dental procedures due to Covid-19 government mandates, Oral Surgeons sued Cincinnati Insurance after the dental group’s April 2020 claim under its all-risk insurance policy was denied.
The U.S. District Court for the Southern District of Iowa ruled in Cincinnati Insurance’s favor after the case was transferred there from Iowa state court.
Cincinnati Insurance parent Cincinnati Financial Corp. is the third most-sued insurer for Covid coverage, according to the University of Pennsylvania Covid Coverage Litigation Tracker. The company is believed to be the first insurer nationwide to have lost its bid to avoid paying for Covid losses, when a North Carolina state judge ruled against it in October 2020.
In its brief filed with the Eighth Circuit, Cincinnati Insurance argued that its policy requires “actual, tangible alteration of property” to invoke coverage, citing numerous court decisions with similar reasoning.
But Oral Surgeons focused on the policy’s definition of loss as “accidental physical loss or accidental physical damage” to property. The dental office contended the definition has two different meanings, opening the door for “loss” to include the loss of use of its premises.
The National Association of Mutual Insurance Companies and the American Property Casualty Insurance Association both filed amicus briefs on behalf of Cincinnati Insurance.
The Restaurant Law Center filed an amicus brief on behalf of Oral Surgeons, emphasizing the importance of the case to the restaurant industry. Restaurants lead in Covid loss lawsuits against insurers.
The Court rejected the idea that direct physical damage is different from direct physical loss, a key argument of policyholders in these kinds of cases, said Scott Seaman, a partner at Hinshaw & Culbertson LLP experienced in representing insurers and reinsurers.
“Obviously there’ll have to be a lot more decisions to figure out what the ultimate course of the Covid-19 coverage litigation wars will be, but so far so good for insurers,” he told Bloomberg Law.
The facts of this case were particularly good for Cincinnati Insurance because Oral Surgeons didn’t allege presence of the virus on its property, according to Tom Baker, University of Pennsylvania insurance professor who created the Covid Coverage Litigation Tracker.
But many policyholders in other litigation do allege contamination on their grounds, Baker said.
“And in fact, there’s language in the opinion that suggests contamination of property would qualify as physical loss or damage,” Baker said.
The Eighth Circuit opinion is “less significant than many assume” despite its precedence, according to Daniel Schwarcz, a University of Minnesota insurance law professor. That’s because insurance is regulated by state law, and the ultimate arbiter of state law are state supreme courts.
Federal courts such as the Eighth Circuit are “guessing” what the Iowa Supreme Court would’ve decided, Schwarcz said. Although thiscase is closed, how the larger set of Covid coverage disputes will be resolved on a state-by-state basis is up in the air.
State courts have been more sympathetic to policyholders, granting 59% of insurers’ motions to dismiss compared to 92%by federal courts, according to Baker’s litigation tracker. State courts aren’t bound to the Eighth Circuit’s opinion, even if federal district courts in the circuit are.
Both Schwarcz and Baker said they were frustrated with the Eighth Circuit’s intervention in the case. Instead, federal courts should certify Covid coverage cases to state supreme courts to expedite certainty for all insurers and businesses,they said.
“The delay is so problematic for everyone involved, so costly, it just makes sense as a practical matter to say, ‘Let’s not prolong this, let’s just get a definitive answer by sending this to the state Supreme Court,’” Schwarcz said.
The case is Oral Surgeons, PC v. Cincinnati Ins. Co., 8th Cir., No. 20-03211, 7/2/21.