In the second federal appellate ruling on Covid-19 business losses, the Eleventh Circuit has joined the Eighth Circuit in holding that they do not trigger coverage because they do not involve “physical loss” or “physical damage” to property. In Gilreath Family & Cosmetic Dentistry Inc. v. Cincinnati Insurance Co., No. 21-11046, Slip. Op. (11th Cir. Aug. 31, 2021), the insured dentistry practice canceled routine and elective dental procedures at the beginning of the Covid-19 pandemic in response to state orders and CDC recommendations. Because these procedures made up the bulk of its business, the insured lost a substantial portion of its usual income. To recover that lost income, the insured filed a claim for business interruption coverage with its insurer.
The policy at issue provided “Business Income” and “Extra Expense” coverage for income lost “due to the necessary ‘suspension’” of the insured’s operations and for extra expenses it sustained during that suspension, but only if the suspension and expenses resulted from “direct ‘loss’ to property” at the insured premises, and only if that “loss” resulted from a “Covered Cause of Loss.” The policy defined “Covered Cause of Loss” as a “direct ‘loss’” not excluded or limited under the policy, and “loss” as “accidental physical loss or accidental physical damage.” The policy also provided “Civil Authority” coverage for business losses and extra expenses sustained as a result of a civil authority order prohibiting access to the insured’s practice when physical damage occurs to property in the area immediately surrounding the insured’s premises.
The insurer determined that the insured had not asserted any physical loss or damage to property, either at or off the dental practice’s premises, and thus denied the insured’s claim. In response, the insured sued on behalf of itself and similarly situated dental practices, alleging that the insurer had breached the policy. A district court dismissed the insured’s complaint, concluding that the complaint failed to state that any direct physical loss or damage to property had occurred. On appeal, the insured argued that the insurer breached its policy when it denied the insured’s claim for business interruption coverage.
Applying Georgia law, the Eleventh Circuit interpreted the term “direct physical loss or damage” to require “an actual change in insured property” that either makes the property “unsatisfactory for future use” or requires “that repairs be made.” Under this definition, the court held that the insured had alleged “nothing that could qualify, to a layman or anyone else, as physical loss or damage.” The court observed that the state’s shelter-in-place order did not damage or change the property in a way that required its repair or precluded its future use for dental procedures. In fact, the court noted, the insured still used its office to perform emergency procedures. Rejecting the insured’s argument that viral particles lingered in its enclosed space, the court “d[id] not see how the presence of those particles would cause physical damage or loss to the property.” Thus, the insured failed to state a claim under the policy’s “Business Income” or “Extra Expense” provisions. For the same reason, the court held that no coverage was triggered under the policy’s “Civil Authority” provision. Accordingly, the court affirmed the dismissal of the insured’s claims.
While insured businesses continue to challenge denials of coverage for business losses incurred in the wake of Covid-19, the only two federal appellate courts to address the issue have both held that no coverage is triggered under commercial property policies for Covid-19-related business losses because they do not involve “physical loss” or “physical damage” to property. In the Eleventh and Eighth Circuits, insurers denying coverage for such losses are now on even more solid ground.