Oral Surgeons, P.C. v. The Cincinnati Insurance Co. ( 2021 )

United States Court of Appeals
For the Eighth Circuit
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No. 20-3211
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Oral Surgeons, P.C.
lllllllllllllllllllllPlaintiff - Appellant
v.
The Cincinnati Insurance Company
lllllllllllllllllllllDefendant - Appellee
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The Restaurant Law Center
lllllllllllllllllllllAmicus on Behalf of Appellant(s)
American Property Casualty Insurance Association; National Association of
Mutual Insurance Companies
lllllllllllllllllllllAmici on Behalf of Appellee(s)
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Appeal from United States District Court
for the Southern District of Iowa - Central
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Submitted: April 14, 2021
Filed: July 2, 2021
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Before LOKEN, WOLLMAN, and STRAS, Circuit Judges.
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WOLLMAN, Circuit Judge.
Oral Surgeons, P.C., offers oral and maxillofacial surgery services at its four
offices in the Des Moines, Iowa, area. Oral Surgeons stopped performing non-
emergency procedures in late March 2020, after the governor of Iowa declared a state
of emergency and imposed restrictions on dental practices because of the COVID-19
pandemic. Oral Surgeons resumed procedures in May 2020 as the restrictions were
lifted, adhering to guidance from the Iowa Dental Board.
Oral Surgeons submitted a claim to The Cincinnati Insurance Company
(Cincinnati) for losses it suffered as a result of the suspension of non-emergency
procedures. The policy insured Oral Surgeons against lost business income and
certain extra expense sustained due to the suspension of operations “caused by direct
‘loss’ to property.” The policy defines “loss” as “accidental physical loss or
accidental physical damage.” Cincinnati responded that the policy did not afford
coverage because there was no direct physical loss or physical damage to Oral
Surgeons’s property. This lawsuit followed. The district court1 granted Cincinnati’s
motion to dismiss, concluding that Oral Surgeons was not entitled to declaratory
judgment and that it had failed to state claims for breach of contract and bad faith.
Reviewing de novo and applying Iowa law in this diversity action, we affirm. See
Sletten & Brettin Orthodontics, LLC v. Cont’l Cas. Co., 782 F.3d 931, 934 (8th Cir.
2015) (standard of review).
Oral Surgeons maintains that the COVID-19 pandemic and the related
government-imposed restrictions on performing non-emergency dental procedures
1
The Honorable Charles H. Wolle, United States District Judge for the
Southern District of Iowa.
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constituted a “direct ‘loss’ to property” because Oral Surgeons was unable to fully use
its offices. Oral Surgeons argues that the policy’s disjunctive definition of “loss” as
“physical loss” or “physical damage” creates an ambiguity that must be construed
against Cincinnati. To give the terms separate meanings, Oral Surgeons suggests
defining physical loss to include “lost operations or inability to use the business” and
defining physical damage as a physical alteration to property. Appellant’s Br. 41.
Amicus Restaurant Law Center contends that “physical loss” occurs whenever the
insured is physically deprived of the insured property.
We must construe the policy to give effect to the intent of the parties. Boelman
v. Grinnell Mut. Reinsurance Co., 826 N.W.2d 494, 501 (Iowa 2013). Intent is
determined by the language of the policy itself, unless there is ambiguity. Id.Ambiguity exists “[o]nly when policy language is subject to two reasonable
interpretations.” T.H.E. Ins. Co. v. Est. of Booher, 944 N.W.2d 655, 662 (Iowa
2020); see Cairns v. Grinnell Mut. Reinsurance Co., 398 N.W.2d 821, 824 (Iowa
1987) (“Ambiguity exists if, after the application of pertinent rules of interpretation
to the face of the instrument, a genuine uncertainty results as to which one of two or
more meanings is the proper one.” (cleaned up)). “Generally speaking, the plain
meaning of the insurance contract prevails.” Est. of Booher, 944 N.W.2d at 662.
The policy here clearly requires direct “physical loss” or “physical damage” to
trigger business interruption and extra expense coverage. Accordingly, there must
be some physicality to the loss or damage of property—e.g., a physical alteration,
physical contamination, or physical destruction. See Milligan v. Grinnell Mut.
Reinsurance Co., No. 00-1452, 2001 WL 427642, at *2 (Iowa Ct. App. Apr. 27,
2001) (concluding that “direct physical loss or damage” “unambiguously referred to
injury to or destruction of” insureds’ property and finding support for the conclusion
“in the fact that the loss or destruction must be physical in nature”); see also The Phx.
Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, 823 (S.D. Iowa 2015) (“The common
usage of physical in the context of a loss therefore means the loss of something
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material or perceptible on some level.”); 10A Steven Plitt et al., Couch on Insurance
§ 148:46 (3d ed. 2021) (“The requirement that the loss be ‘physical’ . . . is widely
held to exclude alleged losses that are intangible or incorporeal and, thereby, to
preclude any claim against the property insurer when the insured merely suffers a
detrimental economic impact unaccompanied by a distinct, demonstrable, physical
alteration of the property.” (footnotes omitted)). The policy cannot reasonably be
interpreted to cover mere loss of use when the insured’s property has suffered no
physical loss or damage. See Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400 F.3d
613, 616 (8th Cir. 2005) (“Once physical loss or damage is established, loss of use
or function is certainly relevant in determining the amount of loss, particularly a
business interruption loss.”); Infogroup, 147 F. Supp. 3d at 825 (“While a loss of use
may, in some cases, entail a physical loss, the Court does not find ‘loss of use’ and
‘physical loss or damage’ synonymous.”).
The unambiguous requirement that the loss or damage be physical in nature
accords with the policy’s coverage of lost business income and incurred extra expense
during the “period of restoration.” The “period of restoration” begins at the time of
“loss” and ends on the earlier of:
(1) The date when the property at the “premises” should be repaired,
rebuilt or replaced with reasonable speed and similar quality; or
(2) The date when business is resumed at a new permanent location.
Property that has suffered physical loss or physical damage requires restoration. 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.
Our precedent interpreting “direct physical loss” under Minnesota law is
instructive here. See Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834-4-
(8th Cir. 2006); Pentair, 400 F.3d 613. The policy in Pentair covered “all risk of
direct physical loss of or damage to property described herein.” 400 F.3d at 614.
Pentair filed an insurance claim after an earthquake caused a two-week loss of power
to Taiwanese factories that supplied products to a Pentair subsidiary. Pentair shipped
the delayed products via airfreight, at great expense. We upheld the district court’s
determination that the power outages merely shut down manufacturing operations,
which did not cause direct physical loss of or damage to Pentair’s supplier’s property.
Id. at 616. We rejected the argument that loss of use or function necessarily
constitutes “direct physical loss or damage,” explaining that such an interpretation
would allow coverage to be “established whenever property cannot be used for its
intended purpose.” Id.The policy in Source Food Technology similarly covered certain losses caused
by “direct physical loss to Property.” 465 F.3d at 835. Source Food filed an
insurance claim after beef product manufactured in Canada could not be imported
into the United States because of an embargo. Source Food was unable to fulfill
orders, was forced to find a new supplier, and lost its best customer as a result of its
inability to deliver beef product. The beef product was not “physically contaminated
or damaged in any manner,” however. Id. at 838. We rejected the argument that
“impairment of function and value of a food product caused by government regulation
is a direct physical loss to insured property,” because to hold otherwise “would render
the word ‘physical’ meaningless.” Id. at 836, 838. Minnesota law is not materially
distinguishable from Iowa law, and we conclude that the reasoning set forth in Pentair
and Source Food Technology applies here.
Oral Surgeons did not allege any physical alteration of property. The
complaint pleaded generally that Oral Surgeons suspended non-emergency
procedures due to the COVID-19 pandemic and the related government-imposed
restrictions. The complaint thus alleged no facts to show that it had suspended
activities due to direct “accidental physical loss or accidental physical damage,”
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regardless of the precise definitions of the terms “loss” or “damage.” We reject Oral
Surgeons’s argument that the lost business income and the extra expense it sustained
as a result of the suspension of non-emergency procedures were “caused by direct
‘loss’ to property.”2
The policy clearly does not provide coverage for Oral Surgeons’s partial loss
of use of its offices, absent a showing of direct physical loss or physical damage.3
“[W]here no ambiguity exists, we will not write a new policy to impose liability on
the insurer.” Nat’l Sur. Corp. v. Westlake Invs., LLC, 880 N.W.2d 724, 734 (Iowa
2016); see Boelman, 826 N.W.2d at 501 (“We will not strain the words or phrases of
2
This appeal presents only the question whether the COVID-19 pandemic and
the related government-imposed restrictions constitute direct “accidental physical loss
or accidental physical damage” under the policy.
3
Iowa state and federal courts have uniformly determined that the COVID-19
pandemic and the related government-imposed restrictions do not constitute direct
physical loss. Lisette Enters., Ltd. v. Regent Ins. Co., No. 4:20-cv-00299, 2021 WL
1804618, at *1–2 (S.D. Iowa May 6, 2021) (Iowa Court of Appeals’s decision in
Milligan “is consistent with the principle that coverage for ‘loss’ or ‘damage’ under
Iowa law at least requires the presence of a physical condition on or affecting the
property located at the insured premises.”), appeal docketed, No. 21-2238 (8th Cir.
June 4, 2021); Gerleman Mgmt., Inc. v. Atl. States Ins. Co., No. 4:20-cv-183, 2020
WL 8093577, at *5 (S.D. Iowa Dec. 11, 2020) (“It is a settled matter in Iowa law that
direct physical loss or damage requires tangible alteration of property and that loss
of use alone is insufficient.”), appeal docketed, No. 21-1082 (8th Cir. Jan. 12, 2021);
Palmer Holdings & Invs., Inc. v. Integrity Ins. Co., 505 F. Supp. 3d 842, 856 (S.D.
Iowa 2020) (same), appeal docketed, No. 21-1040 (8th Cir. Jan. 7, 2021); Whiskey
River on Vintage, Inc. v. Ill. Cas. Co., 503 F. Supp. 3d 884, 899 (S.D. Iowa 2020)
(same), appeal docketed, No. 20-3707 (8th Cir. Dec. 29, 2020); Wakonda Club v.
Selective Ins. Co. of Am., No. LACL148208, slip op. at 6 (Iowa Dist. Ct. Polk Cnty.
March 3, 2021) (“Wakonda claims no injury to or destruction to realty or other loss
physical in nature and therefore [its claim is] not covered under the policy.”), appeal
docketed, No. 21-0374 (Iowa Ct. App. Mar. 16, 2021).
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the policy in order to find liability that the policy did not intend and the insured did
not purchase.”).
The judgment is affirmed.
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