By Jeff Sistrunk

Law360 (April 14, 2021, 8:15 PM EDT ) Judges on an Eighth Circuit panel appeared skeptical Wednesday of an Iowa dental clinic's bid to force Cincinnati Insurance Co. to pay its losses due to COVID-19 closure orders, in the first appellate hearing on whether business interruption coverage applies to pandemic-related losses.

During a 30-minute video conference, two judges on the appellate panel challenged Des Moines, Iowa-based Oral Surgeons PC's counsel, Tyler S. Smith of Peddicord Wharton LLP, on his client's position that its "all-risk" property policy with Cincinnati covers the losses the dental clinic suffered when it was temporarily barred from conducting nonemergency procedures last year due to orders by the state's governor and dental board.

Oral Surgeons is aiming to reverse U.S. District Judge Charles Wolle's decision last September dismissing its suit against Cincinnati.

Smith said the requirement in Oral Surgeons' policy that lost business income be attributable to a direct loss to insured property — with loss further defined as "accidental physical loss" or "accidental physical damage" — is ambiguous and can be read to encompass the dental clinic's loss of the ability to fully use its premises. 

U.S. Circuit Judge David Stras pressed Smith on that point, emphasizing that the policy's loss definition states that any loss or damage must be physical. The judge opined that Oral Surgeons "suffered a loss in the colloquial sense" because it lost money, but said this "does not suffice as a physical loss in insurance parlance."

"There has to be something physical," Judge Stras said. "Somebody stole a machine. There was a brick thrown through a window. The roof was damaged in some way. I guess I am trying to figure out, is there anything physical in this case at all in the record that would, at least in my view of the case, support the argument that you are making?"

Smith said that Oral Surgeons' complaint alleged in two paragraphs that the general "community spread" of the novel coronavirus may have caused physical loss or damage to the clinic's property. But he added that, because the clinic's complaint was dismissed prior to any discovery taking place, "the evidence before the court of whether physical alterations to the property took place hasn't even been determined."

"As we know, it was very common for social distancing and various changes to take place to help stop that COVID spread," Smith said. "I am not saying we have alleged that the property had to be renovated necessarily, but I am saying because of orders and recommendations from local boards that certainly measures were taken on the physical premises of this property."

U.S. Circuit Judge James Loken later asked Smith why the panel should reject the reasoning of a December decision by a Kansas federal judge that dismissed clothing company Promotional Headwear International's COVID-19 business interruption suit against Cincinnati under a policy containing the same language as Oral Surgeons'. In the Promotional Headwear ruling, the Kansas jurist, U.S. District Judge Julie A. Robinson, found that the policy terms "direct" and "physical" require a structural change to the insured property.

In his response, Smith noted that courts in Illinois and Missouri addressing the same Cincinnati policy language at issue in Oral Surgeons' and Promotional Headwear's cases have rendered decisions favoring policyholders. Under a recent Eighth Circuit precedent called Vogt v. State Farm , a lack of uniformity in court rulings tackling the same policy terms is a clear indicator that the terms are ambiguous, he said.

But Cincinnati's attorney, Daniel G. Litchfield of Litchfield Cavo LLP, later countered that Oral Surgeons is trying to inject ambiguity into clear policy language.

Litchfield said the dental clinic has made much of the fact that its policy comprehensively defines loss, unlike many other standard-form property policies that require that a loss of business income be tied to "direct physical loss of or damage" to insured property, but do not define loss. However, he argued, this variation in policy language is a distinction without a difference.

At bottom, Litchfield contended, the "gist of all of Oral Surgeons' arguments" is to attempt to remove the word "physical" from its policy's loss definition. 

"And that would be inappropriate based on a long line of Iowa cases about how a contract is to be read," he said.

Litchfield further argued that Cincinnati's reading of the policy is supported by the fact that Oral Surgeons' lost business income coverage extends only through a "period of restoration" that ends when the insured property is rebuilt, replaced or repaired.

"That fits very nicely with the requirement of physicality, physical loss or physical damage," he said. "But it doesn't fit at all with the idea that, because there is a lessened number of appointments at a medical practice, that there would somehow be coverage when the requirement is for direct physical loss or damage."

In addition, Litchfield said that as of Wednesday, courts around the country have granted Cincinnati's motions to dismiss 22 other COVID-19 business interruption cases involving the same policy language.

"Should the court rule in Cincinnati's favor because of the count of cases? No, not just because of that. But it is because of the underlying reasoning why that count of cases is where it is," Litchfield said.

"It is where it is ... if one is looking at the ordinary meaning of these words, and reading them in context, and not taking out the word 'physical' and ignoring it, because it might be inconvenient to a policyholder's wanted outcome," he added. "If one follows those procedures, which are basic and core insurance law, state-to-state in America, it should be no surprise to anybody that the case count so overwhelmingly favors Cincinnati as opposed to policyholders."

State and federal appellate courts have emerged as the next battleground in the COVID-19 business interruption insurance wars, which encompass more than 1,600 lawsuits 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 the order tossing its suit against Cincinnati was the first to be slated for oral argument.

Oral Surgeons is represented by Tyler S. Smith and Randy J. Wilharber 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 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 Bruce Goldman.

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