Iowa Supreme Court Sides with Insurers in COVID-19 Business Interruption Cases

In two decisions issued on April 22, 2022, the Iowa Supreme Court held that claims for COVID-19-related loss of use do not constitute covered “direct physical loss of or damage to property.”  

In Wakonda Club v. Selective Insurance Company of America, the Iowa Supreme Court interpreted “direct physical loss of or damage to property” as a matter of first impression.  Reasoning that the term “‘[p]hysical’ has to mean something,” the court held that “Iowa law requires there to be a physical aspect to the loss of the property to satisfy the requirement for a ‘direct physical loss of or damage to property.’”  Opinion at 13-14.  As such, the court found that “[t]he mere loss of use of property, without more, does not meet the requirement for a direct physical loss of property.” Id. at 15.  This conclusion, the court reasoned, was further supported by the text of the entire policy: given that the policy provided coverage for a “period of restoration,” during which the property “should be repaired, rebuilt or replaced,” the court reasoned that the policy “assumes physical alteration of the property, not mere loss of use.” Id. at 16-17 (quoting Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021)). 

Noting that Wakonda Club had “disavowed any knowledge that the COVID-19 virus was ever on its premises,” the court held the possibility of COVID-19 on Wakonda Club’s property, and the state civil authority orders that limited the use of that property, amounted to “mere loss of use . . . without a physical element” and therefore “defeat[ed] [the club’s] claim.” Id. at 18. And while the Iowa Supreme Court rested its reasoning on Iowa law, the court also noted that “every federal appellate court that has addressed the same or very similar language has likewise held that the mere loss of use of property does not constitute ‘direct physical loss of the insured’s property.’” Id.at 18-19.

The Iowa Supreme Court also rejected Wakonda Club’s argument for a different result based on the doctrine of reasonable expectations. The court found the policy’s “explicit requirement that the loss be a direct physical loss defeats any expectation that the policy provided coverage for any business interruption untethered from a physical loss of the property.” Id. at 21.

In Jesse’s Embers, LLC v. Western Agricultural Insurance Company, the Iowa Supreme Court applied its decision in Wakonda Club where another plaintiff attempted to rely solely on loss of use to state a claim for coverage. The court ruled that “the district court here properly granted summary judgment to [the defendant] with respect to the Business Income and Extra Expense provisions of the policy.” Opinion at 7. Similarly, the civil authority provisions of plaintiff’s policy did not apply where plaintiff’s claim was based on mere loss of access to surrounding properties. Id. at 8. This conclusion, the Iowa Supreme Court reasoned, was “reinforced by the numerous courts that have rejected civil authority claims where damage to adjacent properties was absent.” Id. at 9. The court also rejected plaintiff’s attempt to rely on the reasonable expectations doctrine, noting the plaintiff purchased an ‘all-risks commercial property’ policy that included business interruption coverage.” Id. at 11.