A North Carolina trial court recently found coverage under first-party property insurance policies for COVID-19-related loss of business income from insured restaurants. In North State Deli, LLC et al. vs. Cincinnati Ins. Co., et al., Case No. 20-CVS-02569 In the General Court of Justice, Division of the Superior Court, County Durham, Judge Orlando F. Hudson, Jr. granted partial summary judgment to the claimants, holding that the losses of the plaintiffs’ business income resulting from the government shutting down his business was a “loss” to the property sufficient to trigger coverage under Cincinnati’s policies. Although, in a similar situation, policyholders will undoubtedly rely on this decision in support of their claims for coverage, it is important to note that the Northern State Deli This decision relies heavily on the specific language of the policy involved, and that the policies in question did not contain a virus exclusion. Therefore, further analysis is required before determining the impact of this decision.
In Northern State Deli, a group of restaurants filed 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 government authorities issued stay-at-home orders due to the impact of COVID-19. The plaintiffs filed an insurance claim with Cincinnati, requesting coverage for 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 suffer as a result of the necessary “suspension” of your “operations” during the “restoration period”. The “suspension” must be caused by a direct “loss” of property in a “premises” caused by or resulting from any covered cause of loss.
The “covered cause of loss” has been defined as a “direct loss unless the“ loss is excluded or limited ”. In addition, the term “loss” has been defined to mean “accidental physical loss or accidental physical damage”. Cincinnati denied coverage, arguing that the policy did not cover pure economic damage without direct physical loss of property. Since there had been no physical modification of the property, Cincinnati found that there was no coverage for material losses to the property and, therefore, no coverage for loss of business income. . The complainants disagreed and filed the instant complaint.
On August 3, 2020, the plaintiffs filed a motion for partial summary judgment seeking declaratory relief that the government orders were covered perils that caused direct “loss” to property. Therefore, according to the plaintiffs, Cincinnati must pay for the resulting loss of business income. Specifically, the plaintiffs argued that government orders forced them to lose physical use and access to their restaurants, which the plaintiffs said 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 property modification was necessary to trigger a loss in business income. Since there was no such physical alternation, Cincinnati argued that its coverage variation was appropriate.
Hudson J. allowed the plaintiffs’ motion for two reasons:
- The policy did not contain a definition of the terms “direct”, “physical loss” or “physical damage” and, considering the definitions of these terms in the dictionary, it was reasonable to conclude that the applicants had suffered “direct physical loss”. “; and
- While Cincinnati’s interpretation of these terms, requiring a physical modification of the property, was also reasonable, the terms were, at best, ambiguous and, under North Carolina law, ambiguities in the policies of insurance should be resolved in favor of the insured.
Regarding the first, Judge Hudson oddly did not cite North Carolina jurisprudence interpreting these terms, preferring instead to consult the definitions in the dictionary of terms. After examining several different dictionary definitions, the Court came to the conclusion that:
[T]The ordinary meaning of the term “direct physical loss” includes the inability to use or possess anything in the real world, material or bodily, resulting from a given cause without the intervention of other conditions. In the context of policies, therefore, “direct physical loss” describes the scenario in which business owners and their employees, customers, vendors, suppliers and others lose all rights and benefits associated with the use or access to their business assets. This is precisely the loss caused by government orders … In ordinary terms, this loss is unambiguously a “direct physical loss”, and the policies provide coverage.
North State Deli, LLC et al. vs. Cincinnati Ins. Co., et al., to the P. 6. With respect to the latter, Hudson J. held that, generally, the Cincinnati interpretation of the language, in which the physical modification of the property was necessary to trigger the coverage, was reasonable. However, that only meant that there were two reasonable interpretations of the coverage, which under North Carolina law made the policy ambiguous. According to the court, North Carolina law requires that ambiguities be interpreted in favor of the insured.
Finally, the Court also insisted on the inclusion of the word “or” in the coverage for “accidental physical loss OR accidental physical damage”. Relying on a well-established law which requires that all the terms of an insurance policy be read together and giving effect to every word, Hudson J. determined that the two terms, loss and damage, must have separate meanings and separated. The Court recognized that under a dictionary definition of “physical damage”, a change in ownership is required. Corn, “[u]However, according to Cincinnati’s argument, if “physical loss” also requires a structural change in property, then the term “physical damage” would lose its meaning. But the Court must give meaning to both terms. Identifier. to the P. 7.
Finally, the court ruled that none of the policy exclusions applied. First, the Court noted that the fonts did not contain a virus exclusion. Then, without any explanation, the Court ruled that the other exclusions cited by Cincinnati (“Ordinance and Law,“ Acts or Decisions ”and“ Delay or Loss of Use ”) were unenforceable in law. Finding no applicable exclusions, and in light of its analysis of coverage under the policies, the Court allowed the plaintiffs’ motion.
While Northern State Deli is a victory for policyholders in the battle to cover lost business income from COVID-19, the ruling raises many questions that will likely be the subject of future litigation. The Court’s failure to review North Carolina case law interpreting “physical loss or damage”, its reliance only on dictionary definitions, and its ruling against the application of one of the policy exclusions without explanation of its reasoning stand out as critical issues to be brazenly watched. In addition, the Court’s reliance on the specific political language in question may limit the precedent value of Justice Hudson’s decision. Finally, and perhaps most importantly for insurers, the inclusion of a virus exclusion would likely have rendered much of Judge Hudson’s analysis moot. Nonetheless, insurers should expect to see references and citations to Northern State Deli move forward in all business disruption litigation related to COVID-19.