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Commentary from Counsel - First Policyholder Win on COVID-19 Business Interruption: North Carolina Court Sides with Restaurants
FIRST POLICYHOLDER WIN ON COVID-19 BUSINESS INTERRUPTION: NORTH CAROLINA COURT SIDES WITH RESTAURANTS
Tired of fielding questions about whether your clients’ business interruption coverage includes pandemicrelated closures and losses? And even more tired of handing out bad news each time? Well, there has finally been a court decision going the other way—though in a different state. In North State Deli, LLC, et al. v. Cincinnati Casualty Co., et al., a trial court in North Carolina sided with a group of restaurant owners claiming their “all risk” property insurance policies provided coverage for losses their business sustained due to various government orders mandating business closures and limiting nonessential travel due to the COVID-19 pandemic. The court determined that these losses constituted a direct physical loss under the terms of the policy. This decision appears to be the first policyholder win in such a case (against a backdrop of numerous decisions around the country going the other way) and will likely be appealed. Regardless, it will no doubt be cited in similar cases as a foothold for pandemic business interruption coverage.
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The North State Deli Case and Decision
The case’s plaintiffs are 16 restaurant operators from multiple North Carolina counties, all of which purchased “all risk” property insurance policies through Cincinnati Casualty Company. Plaintiffs sought a judicial declaration that the Cincinnati policies provided coverage for business losses sustained due to forced closures following state and local public health orders in the wake of the current pandemic. Specifically, plaintiffs alleged that the loss of business income during the shutdowns constituted direct physical loss under the terms of the policy. Cincinnati disagreed, arguing that the term “physical” means there must be some physical alteration to the property for the policies to provide coverage.
Ultimately, the court sided with the plaintiff restaurants, ruling that the Cincinnati policies provided coverage for the losses sustained by plaintiffs during mandatory closures. Importantly, the policies did not define the terms “direct,” “physical loss,” or “physical damage.” As a result, the court turned to common dictionaries such as Merriam-Webster, Black’s Law Dictionary, and Random House Unabridged Dictionary to ascertain the meaning of the relevant words and phrases. Based on these common definitions, the court assembled a definition for the phrase “direct physical loss” as including “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.” Thus, according to the court, “’direct physical loss’ describes the scenario where business owners and their employees, customers, vendors, suppliers, and others lose the full range of rights and advantages of using or accessing their business property.” At the very least, said the court, the policies were ambiguous, in which case their terms would be construed in favor of coverage. Either way, plaintiffs win.
Now What?
First and foremost, it is important to remember that this decision comes from a trial court in North Carolina. Therefore, at this point, the court’s ruling is only binding on the parties to the dispute. However, the case will almost certainly be appealed, at which point a North Carolina appeals court could issue a decision with precedential effect around the state and perhaps some persuasive value elsewhere.
More important for you and your clients is the signal this decision sends to insureds and insurers around the country. The outcome of this case will likely make similarly situated insureds more willing to bring these types of actions, leading to similar decisions in other jurisdictions.
To stay apprised of updates in this ever-changing legal landscape, stay in close contact with legal counsel. Doing so will allow you and your agencies to better understand how court cases like the one described above impact your clients, making you better advocates for them and their businesses.
The IIAW will of course be monitoring legal issues arising from the pandemic, so keep an eye on association updates and this column.
