Big Win for Restaurant Policyholders in COVID-19 Litigation in North CarolinaA 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.

Court Denies Efforts to Consolidate COVID-19 SuitsThe 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.

Unlike the insureds, who took different positions, the insurers unified in their opposition to centralization.

The panel recognized that these coverage cases were not suited for centralization as they “share only a superficial commonality.” The panel noted the lack of common defendants, specific insured industry groups, and common insurance policies:

There is no common defendant in these actions — indeed, there are no true multi-defendant cases, as the actions involve either a single insurer or insurer-group (i.e., related insurers operating under the same umbrella or sharing ownership interests)… Furthermore, these cases involve different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states.

The panel recognized that “[t]hese differences will overwhelm any common factual questions.”

The panel also noted that the use of standardized forms did not support centralization, because insurers use numerous “standard” forms endorsed to address the needs of particular insureds.

The panel did leave open the possibility of insurer-specific MDLs limited to a single insurer or group of related insurers but did not create those MDLs on the record before it. The panel directed parties in actions involving Certain Underwriters at Lloyd’s, London; Cincinnati Insurance Company; the Hartford insurers; and Society Insurance to show cause why those actions should not be centralized. We will update this blog post as the panel rules on those potential MDLs.

Insureds seeking coverage for COVID-19 business interruption losses should be mindful of these potential MDLs and factor their impact into your overall coverage strategy. Consult with coverage counsel before determining whether to support or oppose any particular MDL effort to ensure that you consider all of the risks and benefits associated with centralization in an MDL.

Significant Result for Policyholders in COVID-19 Coverage LitigationJudge 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.