A Superior Court Judge in Durham County, North Carolina recently ruled in favor of a number of restaurants in their collective action against Cincinnati Insurance for loss of business income due to the Covid-19 pandemic in a case captioned North State Deli, LLC, et al. v. The Cincinnati Insurance Company, et al., Case No. 20-CVS-02569.

In a departure from courts across the country, the presiding judge held that government orders restricting the policyholders’ use of their restaurants constituted “direct physical loss” thus triggering the policies’ Business Income coverage. The court reasoned that the phrase “direct physical loss” “includes the inability to utilize or possess something in the real, material, or bodily world, resulting from a given cause with the intervention of other conditions” and therefore “describes the scenario where business owners…lose the full range of rights and advantages of using or accessing their business property.” The court went on to say that “direct physical loss” did not require structural alteration to property, as argued by Cincinnati, since that situation is encompassed within the policies’ coverage for “direct physical damage” and the policies must be interpreted to give effect to all terms and provisions. The policies in question did not contain a virus exclusion, and the court found that other exclusions in the policies (“Ordinance or Law”, “Acts or Decisions”, and “Delay or Loss of Use”) did not apply to bar coverage.

The same argument presented here, that government orders restricting use of property constitute “direct physical loss of or damage to” covered property, has been considered and rejected by a number of courts nationwide in lawsuits involving pandemic-related business income claims. See, e.g., Rose's 1, LLC v. Erie Ins. Exchange, No. 2020 CA 002424 B, 2020 WL 4589206 (D.C. Super. Aug. 06, 2020) (holding governmental orders, standing alone, do not constitute direct physical loss under an insurance policy); Malaube, LLC v. Greenwich Ins. Co., No. 20-22615-CIV, 2020 WL 5051581 (S.D. Fla. Aug. 26, 2020) (holding that Florida governmental orders mandating an insured restaurant to close indoor dining to mitigate the spread of COVID-19 did not satisfy the requirement of direct physical loss); 10E, LLC v. Travelers Indem. Co. of Connecticut, No. 2:20-CV-04418-SVW-AS, 2020 WL 5359653, at *5 (C.D. Cal. Sept. 2, 2020) (“An insured cannot recover by attempting to artfully plead temporary impairment to economically valuable use of property as physical loss or damage.”); Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305 (W.D. Tex. Aug. 13, 2020) (same); Turek Enterprises, Inc. v. State Farm Mut. Auto. Ins. Co., No. 20-11655, 2020 WL 5258484 (E.D. Mich. Sept. 3, 2020) (same).

The holding in this case is also arguably at odds with North Carolina precedent. See Gellman v. Cincinnati Ins. Co., 602 F. Supp. 2d 705, 710 (W.D.N.C.), aff'd, 357 F. App'x 512 (4th Cir. 2009) (holding that the term “direct physical loss” did not include non-physical losses to the building itself); Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Corp., 486 S.E.2d 249, 251-52 (N.C. App. 1997) (refusing to allow business interruption coverage where loss was due to inability to access the property rather than any physical damage to the building). Further, the Commissioner of the North Carolina Department of Insurance, in an April 17, 2020 letter to business owners, advised that “[s]tandard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses” due to potentially devastating financial consequences from such a concentrated loss that would threaten the very existence of the business interruption insurance market. https://files.nc.gov/doi/documents/mike-causey-letter-to-business-owners-covid-19.pdf

This North Carolina decision is an obvious outlier. There are many cases considering the same argument made here, in Covid-19 and other contexts, in which courts have held oppositely. See, e.g., Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014) (“The words ‘direct’ and ‘physical,’ which modify the phrase ‘loss or damage,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.”). Regardless, this decision is worth at least noting in the evolving Covid-19 business income coverage landscape.

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