By A. Christopher Wieber (Law Office of Mark Scherzer)
In Osborne v. Paul Revere Life Insurance Co., 2024 U.S. Dist. LEXIS 41683 (E.D. Cal., Mar. 8, 2024), the U.S. District Court for the Eastern District of California upheld Paul Revere’s denial of benefits under dual policies — a disability income policy and a business overhead policy — issued to Dr. Gordon Osborn, a self-employed oral and maxillofacial surgeon who maintained a practice in Bakersfield, California. The District Court’s decision regarding Dr. Osborn’s claim for benefits under the disability income policy — based on his prophylactic cessation of work at the outset of the COVID-19 pandemic — is addressed in a separate blog post: If Working Puts My Health at Risk, Can I Make a Long-Term Disability Claim? The post here addresses the court’s holding that his business overhead insurance provided no coverage for costs incurred by Dr. Osborn from the moment he closed his practice to the moment he sold it as a consequence of his alleged disability.
Dr. Osborn suffered from asthma, allergic rhinitis, hypogammaglobulinemia, and hypertension — all “well-controlled” — but which nonetheless became an issue in March, 2020, when the onset of the COVID pandemic put him at “high risk” in the event he contracted COVID-19. Based on this risk and the temporary inability of his practice to obtain protective personal equipment (“PPE”), he stopped working on March 12 or March 13, and suspended his practice and sent all his employees home on Monday, March 16, 2020. Dr. Osborn continued to employ two practice managers, who worked remotely, sought to secure PPE, assisted with billing, accounts receivable and other administrative tasks, and, after Dr. Osborn made a firm decision to close his practice entirely, in June, 2020, assisted with tasks associated with winding down the practice (such as selling off equipment and supplies, transferring patients to other physicians, dismantling the office, etc.).
Under the terms of the business overhead expense policy:
The amount We will pay is equal to the Covered Monthly Expense You actually incur, while Totally Disabled. … This benefit will begin on the Commencement Date. … Under the BOE policy, Covered Monthly Expense means those fixed, monthly expenses incurred in Your Occupation that are ordinary and necessary in the operation of Your business or profession.
Pursuant to this provision, Dr. Osborn sought coverage for the wages and other expenses he incurred during the period from March 12th until the sale of his practice.
With regard to the disability income policy, the District Court found that Dr. Osborn was not disabled because the Covid-related no-work restriction he placed on himself was unnecessary. Neither of his treating physicians placed such an absolute restriction on him. Moreover, even in the absence of PPE (which, in any event, became available to his practice in July, 2020), there were other measures Dr. Osborn could have taken to minimize his exposure to COVID-19, while continuing his practice (such as requiring negative COVID tests from patients and taking temperatures prior to any medical appointment).
While the business overhead expense claim could also have been denied due to Dr. Osborn’s failure to establish his disability (a predicate for receipt of business overhead expense benefits), the District Court affirmed the denial of benefits on the ground that winding down costs could not reasonably be categorized as “ordinary and necessary in the operation of your business,” when the practice was ostensibly “closed” during the period the costs were incurred:
The language is clear that the BOE policy only covers expenses that are “ordinary” and “necessary” “in the operation of” Plaintiff’s business. Expenses incurred after the close of Plaintiff’s practice are not recoverable as necessary to the “operation” of his profession. See Wilson v. Monarch, 971 F.2d 312, 313 (9th Cir. 1992) (costs incurred by dentist after he sold his practice were not expenses relating to the “running” of his office). Here, Plaintiff stopped treating patients on March 12, 2020, and decided to permanently close his office in June 2020. See Martin v. Berkshire Life Ins. Co. of America, [2023 U.S. Dist. LEXIS 16379], 2023 WL 1368239, at *2 (S.D.N.Y. Jan. 31, 2023) (even where business was not formally dissolved, expenses incurred after plaintiff conceded he had ceased providing medical care to patients were not “necessary” to the “operation” of the business) (citing Wilson, 971 F.2d at 313). Plaintiff laid off most of his staff and kept two employees on payroll to assist in closing the practice. Wilson, 971 F.2d at 313 (the mere collection of accounts receivable does not constitute running an office or business). Plaintiff did not incur expenses in the operation of his business and his claimed expenses regarding the “winding down” of the business was not covered under the terms of the policy. Chenvert v. Paul Revere Life Ins. Co., [2004 U.S. Dist. LEXIS 14947], 2004 WL 1739718, at *1-2, 4 (D. Del. Aug. 2, 2004) (“The key word is ‘operation’, meaning ongoing. When Chenvert ceased operation of the dental practice, he no longer incurred expenses covered under the policy”).
Perhaps, had Dr. Osborn continued to see patients during the winding down period, he would have been on a better footing to assert that at least some of the expenses incurred after March 12, 2020, were necessary to the running/operation of his business. However, not only did Dr. Osborn see no patients after March 12th and quickly put his practice up for sale (in June, 2020), but he also listed his California home for sale, moved to his home in Colorado, took no steps to reopen or restart his business when PPE and N95 masks became available, made no effort to renew his dental license to practice in Colorado, and took no steps, whatsoever, to work as an oral surgeon in Colorado. At age 65, Dr. Osborn was undoubtedly viewed by the District Court as taking advantage of the COVID pandemic to initiate an earlier-than-planned retirement.
Bottom Line: If coverage for expenses associated with winding down a small firm, practice or business is desired, a doctor, dentist, lawyer, or other small business owner should be certain to purchase business overhead expense insurance that specifically includes such costs. Generic language covering the costs of “normal and necessary operations,” or of “running the business,” are likely to be interpreted by the insurance carrier (and the courts) as excluding any expenses generated by the business after it has ceased “normal operations,” but while it nonetheless remains in operation to conclude a winding down and sale.
~Legal Assistance for Business Overhead Expense Claims
If you’re thinking of filing a business overhead expense claim (or having problems with the one you’ve already filed), please contact our attorneys for legal assistance to ensure that your rights are fully protected. See “Disability Business Overhead Expense Insurance Coverage.”
