North Carolina Court Holds That All Risk Policies Cover COVID-19 Business Income and Extra Expense Losses as a Matter of Law

On several occasions, my law partner Mark Packman and I have published articles discussing that initial COVID-19 insurance coverage decisions going the insurance industry’s way are not a silver bullet for insurers. We have explained that individual or consolidated claims should be assessed on their own merits because factors such as specific policy language, jurisdiction, and legal precedent in the applicable jurisdiction will all influence outcome.;

An October 9 ruling out of North Carolina further demonstrates those conclusions. In North State Deli LLC et al. v. The Cincinnati Insurance Co. et al., Case No. 20-CVS-02569, a collection of restaurants sought coverage for lost business income and extra expense resulting from COVID-19 shutdown orders under “all-risk” insurance policies. On summary judgment, the court held that the policies provide coverage for business income and extra expense for plaintiffs’ loss of use and access to the restaurants mandated by the shut down orders as a matter of law.

In a well-reasoned opinion, the court applied fundamental principles of insurance policy construction. First, the court recognized that “all-risk” policies cover all risks of loss unless the policy expressly excludes or limits such risks. Here, absent an exclusion or limitation, the policies provide coverage where the policyholder demonstrates direct “accidental physical loss” to property or direct “accidental physical damage” to property. Second, the court stated that undefined policy terms, in this case “direct,” “physical loss,” or “physical damage,” are to be given their ordinary meaning. Finally, the court acknowledged that ambiguous policy language must be construed in favor of coverage.

With these principles in mind, the court reasoned that the ordinary meaning of “direct physical loss” “includes the inability to utilize or possess something in the real, material, or bodily world, resulting from a given cause without the intervention of other conditions.” As applied to the policies at hand, the court stated that this describes “the scenario where business owners and their employees, customers, vendors, suppliers, and others lose the full range of rights and advantages of using or accessing their business property” and found that “[t]his is precisely the loss caused by the Government Orders.” Thus, the court held that “this loss is unambiguously a ‘direct physical loss’” covered by the policies. The court proceeded to state that, “in giving the ambiguous terms the reasonable definition which favors coverage, the phrase ‘direct physical loss’ includes the loss of use or access to covered property even where that property has not been structurally altered.”

The court further recognized that terms of an insurance policy are to be construed harmoniously, with every provision given effect. Here, the policies provide coverage for “accidental physical loss or accidental physical damage.” The court found the insurer’s argument that the policies require physical alteration to conflate “physical loss” and “physical damage” and that a reasonable policyholder could understand the terms to have separate meanings. The court reasoned that “physical damage” reasonably requires alteration to property but if that is also true of “physical loss” then the term “physical damage” would be rendered meaningless—a no-no in insurance policy construction.

Finally, the court noted that the policies do not contain a virus exclusion and that the other exclusions raised by the insurer were inapplicable based on the undisputed facts.

As discussed in our prior articles, policyholders and their counsel should not assume insurer-friendly decisions will preclude coverage, but rather should make careful investigation to determine the precise circumstances of their individual situations before deciding whether and where to proceed.