Estes v. Cincinnati Ins. Co.

• Court: U.S. Court of Appeals — Sixth Circuit
• Writing for the Court: MURPHY, Circuit Judge.
• Citation: Estes v. Cincinnati Ins. Co., 23 F.4th 695 (6th Cir. 2022)
• Decision Date: 12 January 2022
• Docket Number: No. 21-5587,21-5587
• Parties: Ryan P. ESTES, D.M.D., M.S., P.S.C., Plaintiff-Appellant, v. CINCINNATI INSURANCE COMPANY, Defendant-Appellee.

23 F.4th 695

Ryan P. ESTES, D.M.D., M.S., P.S.C., Plaintiff-Appellant,

v.CINCINNATI INSURANCE COMPANY, Defendant-Appellee.

No. 21-5587

United States Court of Appeals, Sixth Circuit.

Decided and Filed: January 12, 2022

ON BRIEF: Hans M. Pfaffenberger, MORGAN & MORGAN KENTUCKY, PLLC, Louisville, Kentucky, for Appellant. Matthew P. Cook, KERRICK BACHERT PSC, Bowling Green, Kentucky, G. David Rubin, LITCHFIELD CAVO LLP, Pasadena, California, Daniel G. Litchfield, Laurence J.W. Tooth, LITCHFIELD CAVO LLP, Chicago, Illinois, for Appellee. Laura A. Foggan, CROWELL & MORING LLP, Washington, D.C., for Amicus Curiae.

Before: GIBBONS, READLER, and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

Ryan Estes, a dentist, conducts his dental practice through a professional services corporation named Ryan P. Estes, D.M.D., M.S., P.S.C. This corporation, which we will call "Estes," operates two dental offices in Kentucky. In response to the COVID-19 pandemic, Kentucky temporarily barred healthcare corporations like Estes from providing nonemergency care. Estes lost substantial income as a result. The company sought to recover this money under a property insurance policy it had purchased from Cincinnati Insurance Company. The policy required Cincinnati Insurance to pay Estes for lost business income that results from a "direct" "physical loss" to its dental offices. Policy, R.23-4, PageID 763, 783. This appeal requires us to consider whether the COVID-19 pandemic or the Kentucky shutdown orders caused such a physical loss to Estes's offices so as to allow it to recover its lost income. We and other circuit courts have uniformly interpreted this "physical loss" language not to cover similar pandemic-related claims under the laws of many other states. Because we believe Kentucky's highest court would agree with these decisions, we affirm the dismissal of Estes's complaint.

I

Estes owns and operates two northern Kentucky dental offices, one in Florence and the other in Fort Thomas. Like many Kentucky businesses, Estes has unfortunately suffered significant business losses from the combined effects of the COVID-19 pandemic and follow-on government shutdown orders that restricted normal business activities. In mid-March 2020, Kentucky's state government prohibited healthcare professionals from performing nonemergency procedures. This order barred Estes from providing routine dental care for about six weeks until late April. Estes could, however, continue to provide emergency services during this time.

Before the pandemic, Estes purchased a policy from Cincinnati Insurance to insure its business property. This policy indicates that Cincinnati Insurance "will pay for direct ‘loss’ " to Estes's "Covered Property" (including its dental offices and the property within the offices) if that loss results from a "Covered Cause of Loss." Policy, R.23-4, PageID 748. The policy defines "Covered Causes of Loss" to mean any "direct ‘loss’ " except losses originating from expressly excluded sources, such as earthquakes or government seizures. Id. , PageID 750–58. Critically, moreover, the policy defines the ubiquitous word "loss" to mean "accidental physical loss or accidental physical damage." Id. , PageID 783.

The policy also covers certain economic losses that accompany the direct physical loss or damage to Estes's property. The policy's "Business Income" provision allows Estes to recover lost income that results from a "suspension" of its operations if this suspension is "caused by direct ‘loss’ " to Estes's property. Id. , PageID 763, 830. The policy's "Extra Expense" provision likewise permits Estes to recover expenses that Estes "would not have sustained if there had been no direct ‘loss’ to" its property. Id. , PageID 764, 830.

Three other policy provisions allow Estes to seek funds because of a loss at other properties. The "Civil Authority" provision allows Estes to recover lost income and extra expenses if an "action of civil authority" bars access to its dental offices because of "damage to" nearby properties caused by a "Covered Cause of Loss" (which, again, requires a "direct ‘loss’ "). Id. , PageID 750, 764, 831. The "Ingress and Egress" provision allows Estes to seek lost income and extra expenses if a "direct ‘loss’ " to "contiguous" property bars "ingress and egress" to its dental offices. Id. , PageID 833. Lastly, the "Dependent Properties" provision permits Estes to seek lost income if it has to suspend its dental operations because of a "direct ‘loss’ " to a "dependent property." Id. , PageID 801–02. The policy defines "dependent property" as "property operated by others" who deliver materials or services to Estes, accept Estes's goods or services, make goods for delivery to Estes's customers, or attract customers to Estes's business. Id. , PageID 802.

In the event of a covered "loss," the policy requires Estes to "[t]ake all reasonable steps to protect" its property "from further damage" and to keep records of these expenses. Id. , PageID 775–76. Estes alleges that this provision provides what it calls "sue and labor coverage" that allows it to recover the expenses it incurs to protect its property. Compl., R.9, PageID 35.

Once the pandemic hit, Estes relied on all of these provisions to claim payment for its lost income and extra expenses generated by the COVID-19 pandemic and the government shutdown orders. Cincinnati Insurance denied its claim. Estes sued, asserting claims for, among other things, breach of contract and bad-faith denial of coverage.

Cincinnati Insurance moved to dismiss Estes's complaint. The district court granted its motion, holding that the policy did not cover Estes's claims. Ryan P. Estes, D.M.D., P.S., P.S.C. v. Cincinnati Ins. Co. , 542 F. Supp. 3d. 585, 592–95, (E.D. Ky. June 4, 2021). Estes now appeals the district court's interpretation of the policy. We review the court's dismissal of its complaint de novo. See Wilkerson v. Am. Fam. Ins. Co. , 997 F.3d 666, 668 (6th Cir. 2021).

II

The parties agree on two issues important to this appeal—one about the relevant law, the other about the relevant policy language. As for the relevant law, they agree that we must apply Kentucky contract law. In Kentucky, the proper meaning of a disputed contract term presents a legal question for the court. See Foreman v. Auto Club Prop.-Cas. Ins. Co. , 617 S.W.3d 345, 349 (Ky. 2021). Kentucky courts interpret unambiguous terms to bear their unambiguous meanings, but they interpret ambiguous terms strictly against the insurer. See id. at 349–50. When deciding whether coverage language falls on the unambiguous or ambiguous side of this line, courts ask whether the insured could have "reasonably expected" the language to cover a given claim. Id. at 350. And they presume that the language takes the ordinary meaning that the "average person" would give it. Id. at 349 (citation omitted); see Thiele v. Ky. Growers Ins. Co. , 522 S.W.3d 198, 200 (Ky. 2017). So, for example, an average person would not reasonably view a homebuilder's faulty craftsmanship as an "accident" covered by a liability insurance policy. See Cincinnati Ins. Co. v. Motorists Mut. Ins. Co. , 306 S.W.3d 69, 72–76 (Ky. 2010). But the average person would reasonably view a motorcyclist's death from a crash as an "accidental" death covered by a life insurance policy, even if the motorcyclist was recklessly driving drunk when he crashed. See Fryman ex rel. Fryman v. Pilot Life Ins. Co. , 704 S.W.2d 205, 205–06 (Ky. 1986).

As for the relevant policy language, the parties agree that their dispute turns on the meaning of the phrase "direct" "physical loss." All of Estes's cited policy provisions require property (whether Estes's offices or nearby or dependent properties) to suffer a "direct ‘loss.’ " Policy, R.23-4, PageID 748, 750, 763–64, 775–76, 801–02, 830–31, 833. The policy defines the word "loss" in these provisions to mean "accidental physical loss or accidental physical damage." Id. , PageID 783. And Estes does not argue that any of its property has suffered "physical damage." We thus must ask: Did the COVID-19 pandemic or the ensuing government shutdown orders cause a "direct" "physical loss" to Estes's dental offices (or nearby or dependent properties)?

The parties disagree only in their application of Kentucky's contract-law principles to this specific question. Estes argues that the average person might believe that the COVID-19 pandemic or government shutdown orders caused a "direct" "physical loss" to its dental offices because Estes could not use the offices for nonemergency dental care. Cincinnati Insurance responds that the phrase "direct" "physical loss" unambiguously requires a physical alteration or deprivation of the property. The Kentucky Supreme Court has yet to consider how this common insurance language applies in this COVID-19 context, so we must do our best to predict which side of this linguistic debate that court would take. See United Specialty Ins. Co. v. Cole's Place, Inc. , 936 F.3d 386, 402 (6th Cir. 2019).

We are convinced that the Kentucky Supreme Court would agree with Cincinnati Insurance. The phrase "physical loss" would convey to the "average person" that a property owner has been tangibly deprived of the property or that the property has been tangibly destroyed. Foreman , 617 S.W.3d at 349 (citation omitted). If, for example, a thief stole the "[f]urniture" from Estes's dental offices, a person might say that Estes suffered a "physical loss" of the furniture. Policy, R.23-4, PageID 748. Or if a fire completely destroyed one of Estes's dental offices, a person might say that Estes suffered a "physical loss" of the building and its contents.

But the average person would not say that Estes suffered a "physical loss" of its dental offices when describing the harms that befell it in this case. COVID-19 did not destroy its dental offices, and the government shutdown orders did not dispossess it of them for a single day. See ...