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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.

Supreme Court Decision

At the Supreme Court, the restaurants maintained their argument that “direct physical loss” included government orders targeting individual conduct on their properties, limiting the functions of their properties, and controlling how the restaurants could physically access and occupy the spaces. In essence, they had lost their direct, physical use of their property, which they argued plainly constituted a direct physical loss covered by their insurance policies. Cincinnati responded that “direct physical loss” cannot simply mean “loss of physical use,” and government COVID-19 orders regulated the activities of people rather than property, resulting in no physical changes to the restaurant properties themselves. Cincinnati compared the restaurants to a grounded teenager who lost car privileges and therefore only lost use of the car – not the car itself.

The Supreme Court rejected Cincinnati’s argument and responded with an analogy of its own: A “homeowner who cannot live in their house due to irremediable cat urine odor is not placated that their property is not ‘lost’ because it could be used as a home for cats.” According to the court, a “direct physical loss” of a property should include loss of the physical use for which that property is insured. When a property is no longer usable for its insured purpose, a “loss” has occurred. The court explained that the “overlap between property ‘use’ and ‘loss’ follows from a contextual and common-sense expectation that insurance should protect from threats to property that make it unusable for the purpose for which it is insured.”

In its ruling, the court emphasized North Carolina’s rules of contract interpretation favoring policyholders, including the need to follow the “reasonable expectation of the policyholder” and resolve ambiguities in the insured’s favor. The court noted that the insurer could have adopted language that clearly excluded the pandemic loss at issue. Cincinnati chose to be bound by terms that did not exclude viruses, despite 82.83% of business insurance policies containing such exclusions.

Ultimately, the court ruled for the restaurants because it could not determine that “the restaurants’ policies unambiguously bar coverage when government orders and threatened viral contamination deprived the policyholder restaurants of their ability to physically use and physically operate property at their insured business premises.”

The Impact

The North State Deli decision is the first decision from the Supreme Court applying North Carolina’s interpretive rules to the COVID-19 shutdown orders and reaffirms, even in that extraordinary context, that “provisions granting coverage must be read expansively, and provisions excluding coverage must be read narrowly.” In this way, North Carolina continues its reputation as a relatively policyholder-friendly jurisdiction. The court acknowledged that its broad interpretation of “direct physical loss” to include the impact of COVID-19 government orders takes a different path from other jurisdictions holding that “direct physical loss” requires some form of physical destruction of tangible property.

The absence of a virus exclusion in North State Deli was unmistakably critical to the outcome. Indeed, the Supreme Court addressed the other side of the coin the same day in the North State Deli companion case, Cato Corporation v. Zurich American Insurance Company. That case involved an all-risk commercial property insurance policy with nearly identical language covering “direct physical loss” of property, but the policy also included an exclusion for “contamination,” including “any condition of property due to the actual presence of any … virus.” The court reasoned that because a reasonable policyholder would read this language as including government orders compelling closure of the policyholder’s physical store, the policy in Cato Corp. did not cover losses resulting from COVID-19 shutdown orders.

The lesson could hardly be clearer: North Carolina policyholders are entitled to coverage under their insurance policies absent unambiguous policy exclusions limiting coverage for an otherwise covered peril.

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Well-established law requires that an insured be made whole before recoveries benefit an insurer. When an insured’s losses exceed policy limits, any additional recovery made by the insured should inure to the benefit of the insured to offset losses above policy limits. Only after the insured is made whole is the insurer entitled to reimbursement. But what happens when an insurance company covers only a part of an insured’s losses, and the insured later recovers additional funds? Is the insurer entitled to reimbursement from the insured’s recovery of uncovered losses?

That was the question confronted by the Northern District of Texas in the case National Union Fire Insurance Co. of Pittsburgh, Pennsylvania v. RealPage, Inc., 2024 WL 4116824 (N.D. Tex. Sep. 5, 2024). In a split decision, the court found that the insurer was entitled only to the insured’s subsequent recovery of losses directly resulting from a covered occurrence but remanded the case for further fact-finding. 

The insured, RealPage, headquartered in Richardson, Texas, helps property managers collect rent from tenants using an online platform. In 2018, hackers successfully diverted over $10 million from RealPage, with $9 million of the funds consisting of rental proceeds owed to RealPage’s customers. The remaining $1 million consisted of RealPage’s transaction fees. RealPage reimbursed its customers for the $9 million in rental proceeds and then sought coverage for the full $10 million under its commercial crime policy issued by National Union. National Union determined that its policy only covered the approximately $1 million in transaction fees – not the rental proceeds due to the customers – and eventually issued payment of $1.2 million to RealPage. RealPage sued, seeking coverage for the full amount of its losses. Both the Northern District of Texas and the Fifth Circuit ultimately agreed with National Union’s coverage determination, holding that only the transaction fees were covered.

In the meantime, the United States Secret Service investigated the theft, which ultimately led to the seizure of $2.9 million of the stolen funds. The Secret Service returned this money to RealPage.

National Union then demanded that RealPage reimburse it for the $1.2 million in coverage it provided, citing the Allocation of Recovery Provision (ARP). RealPage refused, and National Union sued for breach of contract. RealPage counterclaimed for a declaratory judgment that the ARP did not apply to recovery of uncovered losses and for violations of Texas Insurance Code 541.

Addressing the parties’ cross-motions for summary judgment on each count, the Northern District of Texas issued a split decision. In a win for RealPage, the court first determined that the policy’s ARP did not extend to recovery of uncovered losses. Specifically, the court found that the term “any recoveries,” as used in the ARP, necessarily referred only to recovery of losses directly resulting from a covered occurrence. The court further determined that – to the extent the recovered $2.9 million consisted of rental payments – those were not owed to National Union.

But the court determined that a genuine dispute of fact remained regarding whether the $2.9 million recovered by the Secret Service consisted solely of the stolen rent payments or if it also encompassed the stolen transaction fees for which National Union provided coverage. Based on this lingering factual issue, the court allowed National Union’s breach of contract claim to survive. The court dismissed RealPage’s claims under the Texas Insurance Code alleging National Union’s deceptive trade practices because RealPage alleged no damages beyond having to litigate the ongoing suit. Policyholders should carefully consider the recovery allocation provisions of their policies to see whether they may give undue benefits to the insurer at the expense of the insured. Sophisticated insureds with the desire and ability to pursue recovery beyond their available insurance should ensure that the allocation provisions won’t make the insurer the beneficiary of those efforts at the policyholder’s expense.

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As many policyholders are acutely aware, the insurance landscape is complex, with numerous insurers offering a wide range of available insurance programs.  While some coverage forms are standard, many are unique to specific industries and even to individual insurance companies. This diversity makes it critically important for policyholders to know the risks that their particular insurance policy covers and their responsibilities when seeking coverage. And often nowhere are these coverage nuances more crucial to properly understand than in determining what constitutes a “claim” under a given insurance policy and knowing how and when to provide notice of that claim to the insurer. This is especially true in the context of “claims-made” policies, which generally only provide coverage for claims made during the policy period. 

The Second Circuit’s recent decision in Match Group, LLC v. Beazley Underwriting Ltd., 2024 WL 3770709 (2d Cir. Aug. 13, 2024), highlights the significance of these issues and offers essential lessons that policyholders can leverage to better navigate their rights and obligations under claims-made policies, and to mitigate the risk of any missteps that may jeopardize the availability of their insurance coverage to protect against potential financial loss.

Match Group LLC v. Beazley Underwriting Ltd.

In Match Group, the parent company of the popular dating app Tinder was sued by John Mellesmoen, a product-development consultant who alleged that he was not paid for inventing the app’s “Super Like” feature. 

Mellesmoen’s attorneys sent Tinder a letter in February 2016, outlining Mellesmoen’s alleged meeting with Sean Radd, Tinder’s then-CEO, at a shopping mall where Mellesmoen first pitched his idea for the “Super Like” feature. The letter alleged Tinder stole Mellesmoen’s idea without compensating him and threatened suit against Tinder if it did not contact him to resolve his claims. Tinder did not provide the letter to its liability insurer. 

Mellesmoen later sued Tinder on August 18, 2016. Tinder provided notice of the lawsuit to its insurer on August 22 – two days after the end of the policy period.  The insurer denied coverage. While Tinder’s policy provided a notice “grace period,” which allowed Tinder to report claims up to 60 days after the end of the policy period, the grace period applied only to claims made within the last 60 days of the policy period. The insurer contended that Mellesmoen’s February 2016 letter constituted a “claim” under the policy, thereby obviating the protections of the policy’s grace period and rendering Tinder’s notice untimely. 

The policy defined a “claim” as a “demand . . . for money or services, including the service of a suit or institution of arbitration proceedings” or “a threat . . . of a suit seeking injunctive relief.” In its federal declaratory action, Tinder argued that while the letter was explicitly a “threat of a suit,” it did not seek injunctive relief.  And further, the letter was not a demand for money, service of a suit, or institution of arbitration, but rather simply an invitation to negotiate toward an amicable resolution of the dispute. According to Tinder, although Mellesmoen’s grievance might be resolved with the payment of money, his grievance might also be resolved another way – such as by providing Mellesmoen with recognition for his idea, or employment with Tinder, or by bestowing him with some other benefit besides money. The district court agreed with Tinder and denied the insurer’s motion to dismiss.

On review, the Second Circuit sided with the insurer, holding that Mellesmoen’s letter qualified as a “claim” under the policy, thereby triggering Tinder’s obligation to report the claim before the end of the policy period. The court reasoned that even though Mellesmoen did not outright demand a sum certain from Tinder, by stating in his letter that he had legal claims against Tinder that he believed he was entitled to compensation and that he would sue if Tinder did not contact him to resolve his claims, Mellesmoen was clearly seeking payment of money. 

While the Match Group case resulted in an unfortunate outcome for Tinder, it offers valuable lessons for other policyholders navigating the complexities of claims-made policies, particularly in understanding their obligations regarding claim identification and notice reporting.

Lesson 1: Understand the definition of a “claim.”

Policyholders must recognize that what constitutes a “claim” can vary significantly among policies. In Match Group, the court construed Mellesmoen’s letter as a claim because it indicated a right to compensation and threatened legal action. While a similar letter might not qualify as a “claim” under the provisions of other liability policies, policyholders should familiarize themselves with their policy’s definition of a “claim” to avoid missing critical reporting windows. 

Lesson 2: Know the notice reporting requirements.

Every claims-made policy will have specific notice provisions that dictate how and when claims should be reported to the insurer. And critically, not all notice provisions are created equal. For example, the market standard for claims-made notice reporting requirements is to provide a 60-day grace period that extends coverage to any claim made during the policy period so long as it is reported to the insurer within 60 days of the end of the policy period. However, some claims-made policies, as was the case with the Match Group policy, include non-standard grace periods that allow for reporting only of claims made during the last 60 days of the policy period. Match Group illustrates the coverage consequences of a policyholder’s failure to fully appreciate this potential difference.

Moreover, it is important for policyholders to recognize the impact of state laws on the calculation of their reporting deadlines. For example, in Match Group, the Second Circuit noted that New York’s General Construction Law Section 25 allows for “an extension of time when contractual performance is authorized or required on a weekend.” If a contract requires the performance of a condition on a weekend or public holiday, a party may have until the next succeeding business day “unless the contract expressly or impliedly indicates a different intent.” Tinder’s policy period ended on August 20, 2016 – a Saturday.  Because the district court concluded that the February 2016 letter was not a claim in the first place, it never analyzed the statute’s effect on the timeliness of Tinder’s notice to the insurer. The Second Circuit therefore remanded the case to the district court for further consideration of the issue. 

Understanding the interplay between state laws and insurance policy requirements is essential for ensuring compliance with reporting deadlines.  Policyholders must understand the impact of these nuances on their rights and obligations. By doing so, they can better protect themselves against potential pitfalls and maintain the coverage they need when faced with claims. 

Lesson 3: Audit and negotiate policy terms.

The Match Group case underscores the potential risks associated with non-standard notice reporting requirements for insureds under claims-made policies.  It also illustrates that the flexibility of market-standard notice provisions can offer essential protection to policyholders by providing broader reporting windows that account for unexpected delays in notifying insurers of a claim. Indeed, had Tinder’s policy included a standard 60-day grace period for claims reporting, the notice of suit to its insurer two days after the end of the policy period would have no doubt been timely.

To avoid similar issues, policyholders should regularly review their claims-made policies to pinpoint any stringent notice reporting requirements, such as those found in the Match Group policy. If they discover strict notice provisions, policyholders should feel empowered to negotiate for more favorable terms.  Aligning notice reporting requirements with market standards can enhance flexibility and safeguard coverage. Recognizing these differences is vital for policyholders to ensure they do not unintentionally compromise their coverage due to discrepancies between their policy’s terms and common industry practices.

Lesson 4: Document communications.

Clear documentation and communication with the insurer in claim reporting is essential. In the event of a dispute, having a well-maintained record of communications can support an insured’s position on timely reporting and compliance with policy requirements. Further, erring on the side of over-reporting potential claims (as notice of circumstances, for example) can be a prudent strategy depending on the availability of insurance limits, as it ensures that no claim goes unaddressed. Tinder’s failure in the Match Group case to provide notice promptly led to complications that likely could have been avoided with better documentation and reporting practices.

Lesson 5: Seek legal counsel.

Finally, when in doubt, seeking legal advice can prevent costly mistakes. Legal professionals can explain obtuse policy language and ensure that notice requirements are met, helping policyholders safeguard their coverage. The complexities of the Match Group case highlight the importance of consulting with experienced legal counsel to navigate insurance policies effectively. 

In sum, Match Group serves as a poignant reminder of the intricacies involved in navigating claims-made insurance policies. The decision underscores the necessity for policyholders to have a comprehensive understanding of their policies, particularly with respect to claim notice requirements. By recognizing these complexities and actively engaging with their policies, policyholders can safeguard against the risk of financial loss due to misunderstandings or misinterpretations of key coverage provisions. In an era where the nuances of insurance law can have significant legal and financial implications, ensuring that all obligations are met and that claims are appropriately reported can make all the difference. Ultimately, proactive management of insurance policies and a keen awareness of their terms will equip insureds to effectively maintain critical coverage and protect against potentially debilitating and otherwise avoidable financial loss.