In a recent ruling, the Eleventh District Court of Appeals ruled that an insured’s failure to claim “direct physical loss or damage” to property was fatal to their COVID-19-related business interruption claim. Although addressed ad nauseam by the district courts – with the overwhelming majority failing to find cover – the Eleventh Circuit’s unpublished decision appears to be only the second federal appellate opinion on the matter. The other, the 8th district ruling in Oral Surgeons, PC v Cincinnati Insurance Co., also involved a dental office and found no cover for COVID-19 business losses as there was no direct physical loss or property damage.
At Gilreath Family & Cosmetic Dentistry Inc., the insured (Gilreath) was a Georgia dental office that canceled routine and elective dental procedures due to federal COVID-19 guidelines and on-site lodging arrangements. In an attempt to regain lost revenue, Gilreath filed a business interruption claim with his insurer, Cincinnati Insurance Co., requesting business revenue, additional expense, and civil coverage in its property policy.
The business income and additional expense coverage in the policy required Cincinnati to pay for loss of income “due to the necessary” suspension “of Gilreath’s operations and for additional expenses while the suspension and expenses were the result of a” direct “loss. Property damage ”at the insured dental practice and the“ damage ”can be traced back to a“ covered cause of damage ”. The policy defined “cause covered” as “direct ‘damage’” that is not otherwise excluded or limited, and defined “loss” as “incidental physical loss or incidental physical damage”. The civil law provision was used when “an insured cause of damage caused damage to property other than the insured property”, which led to a civil authority forbidding access to the dental practice and the surrounding area.
Cincinnati determined that Gilreath had alleged no physical loss or damage to its own or other property and denied Gilreath’s claim. Gilreath’s subsequent breach of contract lawsuit was dismissed by the District Court on the basis that Gilreath had not alleged direct physical loss or property damage.
On appeal, the Eleventh Circuit applied Georgia law and ultimately concluded that Gilreath had not made a valid business interruption claim. The court initially determined that the provisions on business income and additional expenses would only apply if the COVID-19 pandemic and the associated housing orders caused direct “accidental physical loss” or “damage” to the property. According to the court, the Georgia Supreme Court had already ruled that the common meaning of “direct physical loss or damage” required an actual change to the insured property that either rendered the property unsatisfactory for future use or required repairs. The court stated that “Gilreath has made no claim that would qualify as physical loss or damage to any layperson or anyone else” because the on-site placement arrangements did not cause any damage or alteration to property. In fact, the court pointed out that although routine procedures were postponed, Gilreath still used its offices to conduct emergency procedures. The court also rejected Gilreath’s argument that his office was an enclosed space for virus particles to reside in, instead taking the view that virus particles, even if present, would not cause physical damage or loss to property. As a result, the court ruled that Gilreath’s lawsuit did not include a claim for business income and additional expenses.
Similarly, with regard to the civil provision, the court found that coverage was contingent on a “covered cause” that damaged property outside the building. Since Gilreath did not claim physical damage to property outside the building, the court ruled that Gilreath was not eligible for coverage under the civil law provision and upheld the district court’s decision.
