North Carolina Supreme Court Holds in Favor of Coverage for COVID-19-Related Business Shutdown Losses
On December 13, the Supreme Court of North Carolina held that a group of restaurants and bars were entitled to insurance coverage for profit losses they suffered as a result of COVID-19-related government orders that suspended or curtailed their business operations.
In N. State Deli, LLC v. Cincinnati Ins. Co., the insured restaurants and bars sought a declaratory judgment that their profit losses were covered under “all-risk” policies issued by Cincinnati Insurance Company and Cincinnati Casualty Company (Cincinnati). The “all-risk” policies covered “direct ‘loss’ to covered property.” The primary issue was whether the suspended or curtailed business operations and the insureds’ resulting lost profit constituted a “loss” under the policies. The policies defined “loss” as “accidental physical loss or accidental physical damage.” The trial court originally held that the insureds’ suspended business operations and lost profit constituted a covered “loss” under the policies, a decision that was reversed by the North Carolina Court of Appeals.
The North Carolina Supreme Court disagreed with the Court of Appeals and held that the suspended business operations and profit losses were indeed a “loss,” and therefore covered under the policies. The Supreme Court held that the policies’ definition of “loss” - “accidental physical loss or accidental physical damage” – was, in its view, ambiguous and that credible arguments could be made for and against its application to the insureds’ suspended operations and lost profits. The Supreme Court stated that it was following established principles of insurance policy interpretation in resolving what it perceived as an ambiguity in favor of the insureds.
In reaching its conclusion, the Supreme Court also considered that the policies did not contain an exclusion for virus related risks, contrasting Cincinnati’s policies to other “all-risk” policies that excluded virus related risks. The Supreme Court also appeared to view the fact that the policies included a business income coverage supplement that insured against lost business income sustained from the suspension of business operations as an additional factor in favor of coverage.
Of note, the language in the Cincinnati policies vary from the standard Insurance Services Office (ISO) language used by many insurers, including language related to the policies’ definition of “loss” and “period of restoration” sections, which were dispositive for the decision. The Supreme Court specifically limited its decision only to the precise language at issue. Thus, arguments may be raised as to the applicability of this decision to policies with differing language.
It is unclear whether Cincinnati will petition for a rehearing.
We will continue to monitor this case and any related decisions. Please contact Kevin O’Brien, Nick Heintzman or any member of Phelps’ Insurance team if you have questions or need advice or guidance.
