Bucking the Trend, North Carolina Supreme Court Finds Insureds State Claim for COVID-19 Losses

    Departing from the multitude of decisions that have determined there is no coverage for losses due to the COVID-19 pandemic, the North Carolina Supreme Court found that various bars and restaurants that were closed during the pandemic under government orders stated a claim for coverage when suing their insurers. North State Deli, LLC, et al. v. The Cincinnati Insurance Company, et al., 2024 N.C. LEXIS 970 (N.C. Dec. 13, 2024). 

    Plaintiffs were restaurants and bars (collectively, restaurants) subjected to public health orders issued by state and local governments aimed at stopping the spread of the COVID-19 virus. The orders forced restaurants to close or curtail business operations. Later orders kept restaurants closed except for preparing food for off-premises consumption. 

    The restaurants held "all risk" property policies and supplemental business income policies with Cincinnati Insurance Company. The policies promised to cover all risks that were not expressly excluded. Notably, viruses or contaminants were not excluded. The policies provided coverage for the slowdown or cessation of business activities if the losses stemming from the government-ordered shutdowns were a "direct" physical loss or . . . physical damage" to property caused by a covered risk. 

    The trial court granted summary judgment to the restaurants. The ordinary meaning of "loss" included the "act of losing possession." "Direct" and "physical" connoted a causal relationship between a source and a material object. The trial court further noted that "or" in "physical loss or . . . physical damage" suggested "loss" could not also require structural alteration to property or else "damage" would be rendered meaningless. Moreover, the trial court determined that since the policy did not exclude the cause of the restaurants' losses, government shutdowns due to a virus had to be included. Further, knowledge of the risks of viruses, together with knowledge that other policies excluded virus risks while these policies did not, underscored that a policyholder would reasonably understand the absence of such an exclusion as an affirmative grant of coverage.

    The Court of Appeals, however, concluded that no "direct physical loss of or damage to" property occurred from loss of use of or access to property, and reversed the trial court.

    The issue before the North Carolina Supreme Court was whether the phrase "direct physical loss" to property as used in the policies covered the restaurants' loss of physical use or and access to their property due to virus-related government orders. The court's task was to interpret the ordinary meaning of "direct physical loss" in the context of the policies. 

   Cincinnati argued that the COVID-19 virus and corresponding government orders regulated the activities of people, not property, and that the restaurants experienced no physical change to the business property itself. The court, however, noted that property "loss" occurred when it was no longer usable for its insured purpose, as a policyholder would reasonably expect. Thus, when the restaurants lost physical use of their properties as restaurants due to the pandemic orders, they experienced a direct physical loss. 

    Further, the varying exclusions from covered causes of loss underscored that the restaurants reasonably expected their losses in these circumstances to be covered. Because the policies excluded certain kinds or government zoning regulations, government ordinances, government seizures, and war and military actions, an insured could reasonably expect virus-related government orders that were not an excluded cause of loss and were covered under the policies.

    While Cincinnati's interpretation of "direct physical loss" to property was also reasonable, there was an ambiguity that was to be construed in the restaurants' favor. Therefore, the restaurants stated a claim for coverage due to a "direct physical loss" to property under their policies, and they were entitled to partial summary judgment as the trial court concluded.