Sunday, January 19, 2025

North Carolina Supreme Court Adheres to Settled Interpretive Principles Finding COVID-19 Business Interruption Losses Are Covered, NC Supreme Court: Government-Ordered Business Closures During COVID-19 Lockdowns Constitute “Direct Physical loss” Under Insurance Policy Lacking Virus Exclusion, and other C-Virus related stories

North Carolina Supreme Court Adheres to Settled Interpretive Principles Finding COVID-19 Business Interruption Losses Are Covered:
On December 13, 2024, the North Carolina Supreme Court refused to follow the herd of poorly and in many cases, erroneously-reasoned decisions and applied settled rules of insurance policy interpretation to find Cincinnati Insurance Company owes coverage to a group of restaurants suffering business interruption losses stemming from the COVID-19 pandemic. While the North Carolina Court’s decision in North State Deli, LLC v. The Cincinnati Insurance Co., may come too late for many, the decision nevertheless offers reassurance that some courts remain willing to stand firm on fundamental guiding principles.
Background
Cincinnati insured a group of restaurants under all-risk commercial property policies, each of which afforded coverage for “direct physical loss to property not excluded by the policies” and resulting business interruption loss. Unlike many similar all-risk policies in place when the COVID-19 pandemic hit, the Cincinnati policies at issue did not contain virus exclusions. After the restaurants were ordered to close as a consequence of the pandemic, or chose to close on their own due to the dangers posed by COVID-19 and its causative virus, and losses of business income began to mount, the restaurants tendered claims to Cincinnati seeking coverage for those losses and the costs to alter their businesses to permissible and safe operation.
The central issue before the Court was whether “physical loss” occurred when government orders related to COVID-19 placed temporary restrictions on the use of and access to the restaurant’s physical property. The insurer argued, as it and other insurers have in similar cases across the country, that the temporary physical closures are not the type of direct “loss” contemplated by the policy. The restaurants argued that the closures are a covered property “loss” under the policy’s ordinary meaning. The trial court entered summary judgment in favor of the restaurants. On appeal, the court of appeals reversed, find that the losses were excluded under the policies. The North Carolina Supreme Court reversed the court of appeals based on what the Court explained to be “long-standing rules of insurance contract interpretation.”
Applying those rules, the North Carolina Supreme Court found the term “direct physical loss,” which was undefined in the policy, susceptible to multiple reasonable interpretations. The Court concluded that the term could reasonably be interpreted to include the inability of an insured to use its property as intended. As the Court explained, such a loss reasonably “occurs when property is no longer usable for its intended purpose, as a policyholder would reasonably expect.” --->READ MORE HERE
North Carolina Supreme Court: Government-Ordered Business Closures During COVID-19 Lockdowns Constitute “Direct Physical loss” Under Insurance Policy Lacking Virus Exclusion:
On December 13, the North Carolina Supreme Court gave policyholders a partial victory in long-running litigation over business interruption coverage for shutdowns during the COVID-19 pandemic. In North State Deli v. Cincinnati Insurance Co., the court unanimously agreed with the plaintiff restaurants and bars that their insurance coverage for “direct physical loss” included the effects of COVID-19 government orders restricting the use of and access to the restaurants’ physical property because “direct physical loss” includes loss of the physical use for which their properties were insured. This ruling is notable as it goes against the grain of decisions in other jurisdictions finding that such orders depriving access to properties do not, by themselves, result in direct physical loss. The decision in North State Deli highlighted the absence of a virus exclusion in the insured’s policy, however, and on the same date the court refused to find coverage in a companion case, Cato Corp. v. Zurich Am. Ins. Co., involving an express exclusion for viral contamination. Taken together, the decisions emphasize insurers’ obligations to establish that unambiguous exclusions or limitations in their policies allow them to deny coverage.
Background
In March 2020, the government of North Carolina responded to the outbreak of the COVID-19 virus by, among other actions, ordering the closure of bars with no food service and limiting restaurant operations to carry-out, drive-through, and delivery operations. As the understanding of the pandemic evolved, subsequent orders loosened these restrictions somewhat, but continuing limitations remained enforceable by criminal prosecution.
Unsurprisingly, these mandated closures and use restrictions caused severe declines in business income for restaurants and bars throughout the state, with many temporarily or permanently closing their doors. Fortunately for the businesses in this case, their commercial property insurance included business interruption coverage for a shutdown of operation due to “direct physical loss” not otherwise excluded by the policy. The extensive list of exclusions from the policy spanned six pages and included everything from war to local construction ordinances, but, importantly, it did not include viruses.
The Lawsuit
Concerned that Cincinnati Insurance would deny coverage for the losses, the restaurants filed suit. At issue was whether government COVID-19 orders constituted perils covered under the policies that caused “direct physical loss” to property and therefore required Cincinnati to pay the resulting lost business income and related expenses.
The trial court agreed with the restaurants that “direct physical loss” included the COVID-19 government orders, which were not expressly excluded from the policy. Cincinnati appealed to the court of appeals, which unanimously reversed the trial court’s order and found for Cincinnati on the basis that “loss of business” did not constitute “direct physical loss” because no physical harm had been done to the restaurants’ properties. The restaurants appealed to the Supreme Court of North Carolina. --->READ MORE HERE
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