HNRK Coverage Corner

On October 7, 2020, North Carolina Superior Court Judge Orlando F. Hudson, Jr. handed down an important victory for policyholders seeking business interruption insurance for losses arising from closures relating to the COVID-19 pandemic.  In North State Deli, LLC v. The Cincinnati Ins. Co., Case No. 20-CVS-02569, Judge Hudson granted summary judgment to a group of restaurants, ruling that state shutdown orders constitute a covered “direct physical loss” under the applicable property insurance policies.

As discussed in my article, “A Guide to Insurance Coverage for Business Losses Arising from the COVID-19 Pandemic”, which appeared in the Summer 2020 edition of NYLitigator, business interruption insurance typically appears as an add-on to commercial property insurance policies.  This coverage is designed to make the insured whole for lost income and additional expenses incurred during a period when business operations are interrupted because of a covered cause of loss.  Under one standard formulation, business interruption coverage is triggered by “physical loss of or damage to” the insured’s property. 

Insurers have sought to avoid coverage for COVID-19 business losses by taking a narrow view of the “physical loss” or “physical damage” requirement, arguing that some structural property damage is required.  However, as this decision shows, the case law supports a broader reading of the coverage. Judge Hudson concluded that the state-mandated closures caused a “physical loss” of the restaurant’s property, even if there was no “physical damage,” explaining:

[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" describes 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. Plaintiffs were expressly forbidden by government decree from accessing and putting their property to use for the income-generating purposes for which the property was insured. These decrees resulted in the immediate loss of use and access without any intervening conditions. In ordinary terms, this loss is unambiguously a "direct physical loss," and the Policies afford coverage. The parties sharply dispute the meaning of the phrase "direct physical loss." Cincinnati argues that "the policies do not provide coverage for pure economic harm in the absence of direct physical loss to property, which requires some form of physical alteration to property." Even if Cincinnati's proffered ordinary meaning is reasonable, the ordinary meaning set forth above is also reasonable, rendering the Policies at least ambiguous. Accordingly, in giving the ambiguous terms the reasonable definition which favors coverage, the phrase "direct physical loss" includes the loss of use or access to covered property even where that property has not been structurally altered. Moreover, it is well-accepted that the various terms of the policy are to be harmoniously construed, and if possible, every word and every provision is to be given effect.  Here, the Policies provide coverage for "accidental physical loss or accidental physical damage." Cincinnati's argument that the Policies require physical alteration conflates "physical loss" and "physical damage." The use of the conjunction "or" means-at the very least-that a reasonable insured could understand the terms "physical loss" and "physical damage" to have distinct and separate meanings. The term "physical damage" reasonably requires alteration to property.  Under 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.

North State Deli appears to be the first reported case holding that insureds are entitled to coverage for COVID-19 business interruption losses.  As previously discussed on this blog, in August, a federal judge in Missouri denied an insurer's motion to dismiss a lawsuit seeking business interruption coverage for losses arriving from the COVID-19 closures, and a bench ruling in New Jersey state court, came to a similar conclusion. The takeaway here:  Policyholders seeking business interruption coverage for losses arising from the pandemic should not take an insurer’s reflexive “no” for an answer, particularly where the policy does not expressly exclude virus-related causes of loss.