Back at the start of the pandemic, this Blog took a brief look at how the anticipated flood of business interruption insurance claims might play out under North Carolina Law: See here.
These cases are now winding their way through the North Carolina court system (but not the NCBC). Fox commercial litigator Greg Holland has detailed one of the first dispositive opinions on this issue:
Over the last several months, business interruption claims have been a hotly contested issue across the country. As the pandemic forced businesses to halt operations, many owners looked to their insurance policies seeking relief. Many found, however, that policies excluded coverage and claims were denied. The pandemic has been hard on many businesses. The restaurant industry has been particularly hard hit. See, e.g., https://www.businessinsider.com/85-of-independent-restaurants-could-permanently-close-in-2020-report-2020-6. Likewise, insurance companies face a surge in business interruption claims and coverage litigation.
As with all such litigation, coverage depends on the terms of the specific policy in question. Recently, a group of restaurants in NC filed a lawsuit against their insurance companies. The restaurants sought a declaratory judgment that their lost business income and extra expenses caused by the response to the COVID-19 pandemic – including government mandated shut-downs and stay-at-home orders – were covered under their business interruption insurance policies. The recent decision in North State Deli LLC, et al. v. The Cincinnati Insurance Co., et al., Civil Action No. 20-CVS-02569, pending in Durham County Superior Court, may pave the way for some eventual relief. A copy of the order is linked below. The Court decided that the policy term “direct physical loss” included losses stemming from the insured’s inability to operate due to government imposed restrictions.
The policies in question did not include a virus exclusion, but the insurance company denied coverage. The companies asserted that the purely economic losses were not covered, because the restaurants had not suffered an actual physical loss or alteration of their premises (such as when there is a fire or a flood). Other jurisdictions have interpreted similar provisions that way.
The policies in question provided the insurance company would pay for business interruption coverage for lost business income and extra expenses “due to the necessary ‘suspension’ of your ‘operations’ … caused by direct ‘loss’ to property at a ‘premises’ caused by or resulting from any Covered Cause of Loss.” A Covered Cause of Loss, according to the Court, was defined in the policies as a “direct loss unless the loss is excluded or limited therein.” Further, the policies defined “loss” to mean “accidental physical loss or accidental physical damage.” Thus, the Court concluded that the policies would afford coverage if a policy holder shows either direct accidental physical loss to property or direct accidental physical damage to the property.
Superior Court Judge Orlando Hudson (who many may recall as the presiding judge in the Netflix documentary, “The Staircase”) granted partial summary judgment to the restaurants. First, because the terms “direct,” “physical loss” or “physical damage” were not specifically defined in the policies, the Court looked to the ordinary meaning of those terms to interpret the policies. The Court determined that “the ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess something in the real, material, or bodily world, resulting from a given cause without the intervention of other conditions.” The Court ruled that the loss of using or accessing their business property was precisely the loss caused by the government orders, and thus was a direct physical loss.
Second, the Court noted that the parties disputed the meaning of the phrase “direct physical loss,” rendering the policy ambiguous at best (and ambiguous terms are to be construed in favor of coverage). Finally, the Court determined that in order to give meaning to all the terms of the policy, the insurance company’s argument that physical alteration or damage was required for coverage conflated the terms “physical loss” and “physical damage”. If a “physical loss” also required actual alteration or damage to the premises, the term “physical damage” would be rendered meaningless.
Presumably the insurance company will appeal. As noted, courts in other jurisdictions have ruled differently, and given the pandemic and the widespread attention these types of claims are receiving, this issue will continue to be hotly litigated across the country. When it comes to insurance coverage, words matter. Stay tuned.
–Gregory G. Holland