Member Article

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.