On March 7, 2022, in Uncork & Create LLC v. Cincinnati Ins. Co., __ F. 4d ___ (4^th Cir,. 2022), 2022 U. S. App. LEXIS 5935 (March 7, 2022), the Fourth Circuit issued an opinion holding that losses resulting from business interruption due to government imposed Covid-19 shut- downs are not recoverable under insurance policy language requiring “physical loss” or “physical damage” to the premises.

In Uncork & Create LLC v. Cincinnati Ins. Co., __ F. 4d ___ (4^th Cir. 2022); 2022 U. S. App. LEXIS 5935 (March 7, 2022), the U.S. Court of Appeals for the Fourth Circuit issued its first published opinion addressing the issue of whether losses resulting from business interruption due to government imposed Covid-19 shut-downs are covered under insurance policy language requiring “physical loss” or “physical damage” to the premises. In that case, Uncork and Create LLC (“Uncork”) operated a “creative events” business at two art studio locations in West Virginia. On March 24, 2020, the Governor of West Virginia issued an executive order requiring that non-essential businesses temporarily cease operations because of the Covid-19 emergency. Uncork sought to recover losses for business interruption from the date of the Governor’s executive order, until it was permitted to reopen its art galleries, under a commercial property insurance policy issued by the Cincinnati Insurance Company.

 The Cincinnati policy’s property loss provision covered “direct loss” to covered property “caused by or resulting from any Covered Cause of Loss.” The policy defined “Covered Causes of Loss” as “direct,” “accidental physical loss or accidental physical damage.” Under the policy’s business loss provision, the policy stated that Cincinnati “will pay for actual loss of ‘Business Income’…due to necessary ‘suspension’ of [the insured’s] ‘operations’ during the period of restoration.’” The policy stated that the “suspension” must be caused by direct ‘loss’ to property,” “caused by or resulting from any Covered Cause of Loss,” as defined above.

 Uncork contended that its inability to operate its art studios as intended due to the Covid-19 closure qualified under the policy as a physical loss. Uncork asserted that “physical loss” can exist in the absence of structural damage to the covered property. The Fourth Circuit disagreed and affirmed the District Court’s granting of Cincinnati’s Fed. R. Civ. Proc. 12 (b)(6) Motion to Dismiss Uncork’s class action complaint seeking declaratory relief and damages for breach of contract.

In affirming the dismissal, the Fourth Circuit applied West Virginia principles of law for interpretation of insurance policies. The Court stated that the intention of the parties must be determined from the policy language itself. Where the policy term is unambiguous, the Court applies the plain meaning as written. To qualify as ambiguous, a policy provision must be “reasonably susceptible of two different meanings or [be] of such doubtful meaning that reasonable minds might be uncertain or disagree as to its meaning.” The Court stated that it must view the policy language as “a reasonable person standing in the shoes of the insured.”

The Fourth Circuit determined that the Cincinnati policy terms were not ambiguous. The Court ruled that as to Uncork’s premises, the plain understanding of the terms “physical loss” or “physical damage” is material destruction or material harm. As to the policy’s business loss provision, the Court stated that the business loss applies to loss of income due to a necessary suspension of operation during a period of restoration. Period of restoration is defined as the time needed to “repair, rebuild or replace” property, or locate a new property.  The need to repair, rebuild, replace, or expend time securing a new property is a precondition for coverage of lost income and expenses. The Court concluded that the Covid-19 shut- down did not cause material destruction of Uncork’s premises that physically altered the property, requiring repairs or replacement so that the premises could be used as intended.

The Court in Uncork & Create applied principles of West Virginia law relating to insurance policy interpretation and is not binding on U. S. District Courts for the District of Maryland applying Maryland law in diversity actions. However, the decision likely is predictive as to how the Federal Courts in Maryland will interpret similar policies when applying Maryland law. Maryland applies objective principles of contract and insurance policy interpretation. See Anderson v. Gen. Cas. Ins. Co., 402 Md. 236, 246, 935 A. 2d 746 (2007). At least one unreported decision from the U. S. District Court for the District of Maryland, applying Maryland law, has interpreted a commercial property insurance policy as not covering losses resulting from business interruption due to the Covid-19 shut- downs. See Hamilton Jewelry, LLC v. Twin City Fire Ins. Co., 2021 U. S. Dist. LEXIS 176430 (D. Md. September 16, 2021).