A North Carolina court has required Cincinnati Insurance Company to provide business interruption and extra expense coverage to 16 North Carolina restaurants that lost the use of and access to their properties due to COVID-19 civil authority orders (see North State Deli, LLC, et al. v. Cincinnati Insurance Co. et al.). The court agreed with the restaurants that governmental orders mandating suspension of operations, imposing stay-at-home requirements, and restricting travel caused them a covered physical loss because they lost the physical use and access to their premises.
Applying well-settled insurance interpretation principles, the North Carolina court looked to dictionary definitions of undefined words in the all-risk commercial property policy. The restaurants pointed to the policy’s business interruption coverage for losses sustained due to a necessary suspension of operations caused by direct “loss” to the property, as well as extra expense. The policy defined “loss” as “accidental physical loss or accidental physical damage,” but did not define “direct,” “physical loss,” or “physical damage.” The court concluded that “direct physical loss” includes the circumstances in which businessowners lose “the full range of rights and advantages of using or accessing their business property.” Because the government orders forbade the restaurants from accessing and putting their property to use for “the income-generating purposes for which the property was insured,” resulting in the immediate loss of use and access to the premises, the restaurants sustained a “direct physical loss” for which the policy afforded coverage.
Cincinnati’s interpretation of “direct physical loss,” as requiring tangible physical damage did not obviate coverage because that interpretation – even if reasonable – did not override the restaurants’ reasonable interpretation, rendering the policy language ambiguous and requiring the court to construe the language in favor of coverage. The court also explained that a reasonable insured would interpret the coverage for “physical loss” and “physical damage” to have distinct and separate meanings, with “physical loss” including loss of use. Otherwise, the term “physical damage” would be rendered meaningless.
The policy incorporated “Ordinance or Law” and “Delay or Loss of Use” exclusions, among others, but omitted any virus exclusions. None of the exclusions voided coverage.
This favorable decision is a reminder to policyholders that policy terms and the facts surrounding losses differ and that most courts will consider the terms and facts favorably to insureds. Policyholders should not be discouraged by recent decisions granting insurers’ motions to dismiss. To the contrary, most policyholders with property coverage for business interruption losses should submit claims. And policyholders should not abandon coverage due to virus exclusions, because many policies incorporate coverage extensions that are not subject to those exclusions. If the coverage is denied (the almost universal insurer response), policyholders should seek advice from coverage counsel to determine whether policy terms and the particular circumstances warrant additional communications with, and potentially litigation against, the insurance company.
The Panel on Multidistrict Litigation has rejected efforts to centralize pretrial proceedings in actions in Pennsylvania and Illinois seeking insurance coverage for business interruption losses resulting from COVID-19. The request for MDL-status was hotly contested, with insureds in more than 175 coverage actions responding to the centralization motions. Some insureds supported centralization in either Pennsylvania or Illinois, while others sought centralization elsewhere – including in California, Florida, Missouri, New Jersey, and Washington. Other insureds opposed centralization altogether. Yet other insureds suggested centralization on a state-by state, regional, or insurer-by-insurer basis.
Judge Stephen Bough and the federal court in the Western District of Missouri entered an important order yesterday in a case brought by Studio 417, a hair salon, and several restaurants against Cincinnati Insurance Company. The order denied the insurer’s motion to dismiss, finding the plaintiffs’ COVID-19 coverage allegations were sufficient to move forward. This is an early ruling in the case and subject to change after discovery, but this is a significant step for policyholders pursuing property coverage arising from COVID-19. Most significantly, the court found adequate allegations of “direct physical loss” and noted that the policy offered coverage for “accidental physical loss or accidental physical damage.” Holding that it must give meaning to all terms in the policy, the court found that if “physical loss” was interpreted to mean “damage,” then one of those terms would be meaningless. In other words, the loss of access to or use of the property should be enough to trigger coverage under a standard property policy. It will be interesting to follow this case and to see how it impacts other similar motions pending in courts around the country. Notably, we are aware of at least three decisions on this issue that have favored the insurers. The Studio 417 case appears to be the first win for policyholders and confirms the uncertainty to be resolved over the coming months and years. If your business has a potential COVID-19 claim, you should talk to your insurance professional or a coverage attorney to make sure you’ve adequately considered and addressed your policy’s notice requirements.