A trial level court in North Carolina recently found coverage under first-party property insurance policies for the insured restaurants’ COVID-19-related business income losses. In North State Deli, LLC et al. v. Cincinnati Ins. Co., et al., Case No. 20-CVS-02569 in the General Court of Justice, Superior Court Division, County of Durham, Judge Orlando F. Hudson, Jr. granted partial summary judgment to the plaintiff-insureds, finding that plaintiffs’ business income losses resulting from the governmental shutdown of its business constituted a “loss” to property, sufficient to trigger coverage under the Cincinnati policies. Although similarly situation insureds will undoubtedly rely on this decision in support of their claims for coverage, it is important to note that the North State Deli decision relies heavily on the specific policy language at issue, and that the policies in question did not contain a virus exclusion. Accordingly, a deeper analysis is required before determining the impact of this ruling.
In North State Deli, a group of restaurants brought a lawsuit seeking business income coverage under their first-party property insurance policies. Beginning in March 2020, Plaintiffs were forced to suspend business operations when various North Carolina governmental authorities issued stay-at-home orders due to the impact of COVID-19. Plaintiffs filed an insurance claim with Cincinnati, seeking coverage for the lost business income resulting from the suspension of operations. The policies provided that Cincinnati would pay for business interruption coverage as follows:
(1) Business Income
We will pay for the actual loss of ‘Business Income’ and ‘Rental Value’ you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct ‘loss’ to property at a ‘premises’ caused by or resulting from any Covered Cause of Loss.
“Covered Cause of Loss” was defined as “direct ‘loss unless the ‘loss is excluded or limited.’ Further, ‘loss’ was defined to mean “accidental physical loss or accidental physical damage.” Cincinnati denied coverage, arguing that the policy did not cover pure economic harm without direct physical loss to property. Since there was no physical alteration of the property, Cincinnati reasoned there was no coverage for physical loss to property and, therefore, no coverage for business income losses. Plaintiffs disagreed, and filed the instant lawsuit.
On August 3, 2020, Plaintiffs filed a motion for partial summary judgment seeking a declaratory judgment that the government orders constituted covered perils that caused “direct ‘loss’” to property. Therefore, according to Plaintiffs, Cincinnati must pay for the resulting loss of business income. Specifically, Plaintiffs argued that the government orders forced them to lose the physical use and access of their restaurants, which Plaintiffs believed, constituted “direct physical loss”. As noted above, Cincinnati argued that the policy does not provide stand-alone business income coverage. According to Cincinnati, some form of physical alteration of the property was required to trigger business income loss. Since there was no such physical alternation, Cincinnati argued that its declination of coverage was proper.
Judge Hudson granted Plaintiffs’ motion for two reasons:
- The policy lacked a definition of the terms “direct”, “physical loss”, or “physical damage”, and when considering the dictionary definitions of these terms, it was reasonable to conclude that Plaintiffs experienced a “direct physical loss”; and
- Even if Cincinnati’s interpretation of these terms, requiring a physical alteration of the property, was also reasonable, the terms were, at best, ambiguous, and, under North Carolina law, ambiguities in insurance policies were to be resolved in favor of the insured.
With regard to the former, Judge Hudson curiously did not cite to North Carolina case law interpreting these terms, preferring instead to consult dictionary definitions of the terms. After reviewing several different dictionary definitions, the Court arrived at the understanding that:
[T]he 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. In the context of the Policies, therefore, ‘direct physical loss’ described the scenario where businessowners and their employees, customers, vendors, suppliers, and others lose the full range of rights and advantages of using or accessing their business property. This is precisely the loss caused by the Government Orders…In ordinary terms, this loss is unambiguously a ‘direct physical loss,’ and the Policies afford coverage.
North State Deli, LLC et al. v. Cincinnati Ins. Co., et al., at p. 6. With regard to the latter, Judge Hudson held that, generally, Cincinnati’s interpretation of the language, in which physical alteration of the property was required to trigger coverage, was reasonable. This, however, only meant that there were two reasonable interpretations of the coverage, which, under North Carolina law, rendered the policy ambiguous. According to the Court, North Carolina law requires that ambiguities be construed in favor of the insured.
Finally, the Court also keyed on the inclusion of the word “or” in the coverage grant for “accidental physical loss OR accidental physical damage.” Relying on well-settled law that requires all the terms of an insurance policy to be read together, and giving effect to each word, Judge Hudson determined that the two terms, loss and damage, must have distinct and separate meanings. The Court conceded that under a dictionary definition of “physical damage”, alteration to property is required. But, “[u]nder Cincinnati’s argument, however, if ‘physical loss’ also requires structural alteration to property, then the term ‘physical damage’ would be rendered meaningless. But the Court must give meaning to both terms.” Id. at p. 7.
Lastly, the Court held that none of the policies’ exclusions applied. First, the Court noted that the policies did not contain a virus exclusion. Then, without any explanation, the Court ruled that the other exclusions relied upon by Cincinnati (“Ordinance and Law, “Acts or Decisions”, and “Delay or Loss of Use”) were inapplicable as a matter of law. Finding no applicable exclusions, and in light of its analysis of coverage under the policies, the Court granted Plaintiffs’ motion.
While North State Deli is a victory for insureds in the battle for coverage for COVID-19-related business income losses, the decision raises many issues that will likely be the subject of future litigations. The Court’s failure to review North Carolina case law interpreting “physical loss or damage”, its reliance solely on dictionary definitions of terms, and its ruling against applying any of the policies’ exclusions without explanation of its reasoning stand out as critical issues to monitor going forward. Further, the Court’s reliance on the specific policy language in question may limit the precedential value of Judge Hudson’s ruling. Finally, and perhaps most critical for insurers to note, the inclusion of a virus exclusion would likely have rendered much of Judge Hudson’s analysis moot. Nevertheless, insurers should expect to see references and citations to North State Deli going forward in all COVID-19-related business interruption litigations.