North Carolina Judge Rules that Restaurant’s COVID-19 Business Interruption Claim is Covered Despite No Physical Alteration to Property
One distinction that should be made in this case is that the Cincinnati policy does not contain the virus exclusion. Based on information we have obtained from IIABA, Cincinnati has stated in the past that they believe the virus exclusion is not necessary because of the pollution exclusion. Apparently, even ISO agreed with that position, but still decided a clarification was necessary. In 2006, ISO filed the virus exclusion to, in their words, avoid extending coverage that was never intended to be provided. Basically, ISO said that they could see the opportunity for someone to possibly extend coverage to a virus when they did not intend for such a loss to be covered due to the pollution exclusion. To avoid such an outcome, ISO removed all doubt and created the virus exclusion and made it a required endorsement. However, Cincinnati does not use the ISO form and instead uses proprietary forms that do not contain the same exclusion.
For more information on this case, see the article below. You should also be aware that this case has been appealed, and it will be interesting to see whether the appellate court upholds the ruling of the lower court judge.
NC Restaurants 1st To Get COVID-19 'Physical Loss' Coverage
By Mike Curley
Law360 (October 21, 2020, 8:10 PM EDT) -- A North Carolina judge has ruled that The Cincinnati Insurance Co. owes a group of restaurants coverage for their losses stemming from state-mandated COVID-19 shutdowns, a move that the group's attorneys say is the first decision to hold that shutdown orders to contain the virus caused a "physical loss."
Superior Court Judge Orlando F. Hudson Jr. said that the plain definition of the term "direct physical loss" includes an "inability to utilize … something in the real, material or bodily world, resulting from a given cause," and does not need physical alteration to trigger coverage.
Because the virus and government shutdown orders deprived the restaurant owners of the normal use of their property, the judge granted summary judgment to the restaurants, led by North State Deli LLC, on their claim for declaratory relief in an order published Oct. 7.
"Our clients and thousands of other businesses across North Carolina and the nation have paid untold amounts in premiums for business interruption coverage, which should provide coverage for the widely-known interruptions arising from COVID-19-related government shutdown orders," an attorney for the restaurants, Gagan Gupta of Paynter Law, told Law360 on Wednesday. "Judge Hudson's ruling affirms that insurance companies like Cincinnati are dodging their duty to provide this coverage."
The restaurants, like many other businesses over the last seven months, sought coverage from Cincinnati after being ordered by the government to curtail operations in an effort to prevent the spread of COVID-19 and were denied, prompting the suit against Cincinnati and an insurance agency.
Cincinnati argued that the coverage does not apply because the policy requires there to be physical alteration to the property — a common argument in COVID-19 business loss cases — but Judge Hudson ruled that this interpretation makes other terms in the policy meaningless.
The policy covers "accidental physical loss or accidental physical damage," the judge wrote, saying that "physical damage" reasonably refers to an alteration, and Cincinnati's interpretation of "loss" would make it redundant with "damage," while the courts must give every term in a contract meaning.
"The use of the conjunction 'or' means — at the very least — that a reasonable insured could understand the terms 'physical loss' and 'physical damage' to have distinct and separate meanings," the judge wrote.
At the least, he said, the dispute over the terms shows there is ambiguity, and any ambiguity must be construed in favor of the policyholder. The judge added that there is no virus exclusion in the restaurants' policies and found that the other exclusions Cincinnati cites do not apply as a matter of law.
"This ruling marks the first victory among the thousands of such lawsuits across the country," Gupta said in a statement. "It's a historic and powerful win for policyholders during this era of economic devastation for small businesses everywhere."
Representatives for Cincinnati and the insurance agent, Morris Insurance Agency Inc., could not immediately be reached for comment Wednesday.
Jason Rosenthal, an insurance coverage litigator at Much Shelist PC, told Law360 on Wednesday that Judge Hudson's decision lends credence to similar arguments that have been made in other cases, saying while it might not mark the turn of a tide, it shows that different judges in different jurisdictions can have varying interpretations of the policy language.
"If there is ambiguity in a policy, that is typically construed in favor of policyholders," said Rosenthal, who is not involved in the case. "Now that you have one or more decisions on that particular language, and even other policy language, I think it bodes well for policyholders going forward on that argument, and others that are being made."
He added that much depends on insurance law and how it differs among different states, noting that some jurisdictions have also held that physical alteration is not necessary to constitute "physical damage."
Judge Hudson's decision, he said, may conceivably lay the groundwork for similar arguments to be made by policyholders going forward.
The restaurants are represented by Gagan Gupta and Stuart M. Paynter of Paynter Law.
Morris Insurance is represented by Kendra N. Stark and Justin M. Puleo of Gordon & Rees LLP.
The case is North State Deli LLC et al. v. The Cincinnati Insurance Co. et al., case number 20-CVS-02569, in the State of North Carolina General Court of Justice for the County of Durham.