Policyholders Notch Victory in Fight for COVID-19-Related Business Interruption Insurance Coverage

For many months now, the insurance industry has repeatedly proclaimed that COVID-19-related business interruption claims cannot possibly satisfy the "direct physical loss or damage" requirement for insurance coverage for business interruption losses. However, this month a North Carolina Superior Court in North State Deli, LLC v. The Cincinnati Insurance Co. expressly rejected this insurer coverage position when the court granted summary judgment to a group of sixteen North Carolina policyholders regarding their COVID-19-related business interruption insurance claims. Case No. 20-CVS-02569 (N.C. Gen. Ct. Justice, Durham Cnty.).

In North State Deli, sixteen North Carolina restaurant owners whose restaurants were shuttered due to COVID-19 civil authority closure orders were denied business interruption insurance coverage by their commercial property insurance company. In the ensuing coverage litigation, the parties disputed the meaning of the insurance policy phrase "direct physical loss," with the insurance company contending that the phrase requires actual "physical alteration to property." Expressly rejecting this insurer argument, the North Carolina court explained that construing the phrase "physical loss" to require actual physical alteration to property would improperly "conflate" the phrases "physical loss" and "physical damage" used in the insurance policies, so as to render the term "physical damage" meaningless.

Instead, the court determined that the plain and ordinary meaning of the phrase "direct physical loss" includes "the inability to utilize or possess something in the real, material, or bodily world" and therefore "describes the scenario where business owners…lose the full range of rights and advantages of using or accessing their business property." Importantly, the court explained that the phrase "direct physical loss" includes "the loss of use or access to covered property even where that property has not been structurally altered." Applying this plain and ordinary meaning, the court determined that "[t]his is precisely the loss caused by the Government Orders."

In so ruling, the court in North State Deli joins a growing list of courts to have rejected similar insurer arguments in analogous contexts. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 WL 6675934 (D.N.J. Nov. 25, 2014) (determining that ammonia gas discharge that rendered a packaging facility "unfit for occupancy" and "unusable" constituted "physical loss" under the commercial property insurance policy); Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826-27 (3d Cir. 2005) (determining that the presence of E. Coli bacteria could amount to "physical loss" to a home and that this determination would depend on "whether the functionality of the [] property was nearly eliminated or destroyed, or whether the[] property was made useless or uninhabitable.").

Likewise, North State Deli is not an isolated victory in policyholders’ fights to secure insurance coverage for COVID-19-related business interruption losses. In recent months, courts across the country have denied insurer attempts to dismiss COVID-19-related business interruption insurance claims on similar grounds:

• In Optical Services USA/JC1, et al. v. Franklin Mut. Ins. Co, a New Jersey state court rejected an insurer’s motion to dismiss because its argument that the "loss of physical functionality and use of [a] business" does not constitute "direct physical loss" was unsupported by New Jersey common law. Case No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cnty. Aug. 13, 2020).
• In Studio 417 Inc. et al. v. The Cincinnati Insurance Co., a Missouri federal court denied an insurer’s motion to dismiss because the policyholders’ allegation that the presence of COVID-19 made its property "unsafe and unusable" was sufficient to allege a direct physical loss. 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020).
• In Urogynecology Specialist of Florida LLC v. Sentinel Insurance Co. Ltd., a Florida federal district court rejected an insurer’s motion to dismiss because the policy’s virus exclusion did not unambiguously exclude COVID-19. 2020 WL 5939172 (M.D. Fla. Sept. 24, 2020).
• In Lombardi’s Inc. v. Indemnity Insurance Company of North America, a Texas state court rejected an insurer’s motion to dismiss for alleged lack of "physical loss," where the policyholders alleged "disruptions to their ability to physically access and utilize portions of the properties were necessary to prevent the spread of COVID-19." No. DC-20-05751-A (14 Dist. Ct., Dall. Cnty., Tex. Oct. 15, 2020).

As we noted many months ago in prior commentaries, disputes regarding the scope of coverage available for COVID-19 losses are widespread, likely to be protracted, and results could vary among jurisdictions. There are now well over 1,200 coverage lawsuits relating to COVID-19 pending across the United States and Europe. Insurers have had some early successes in certain jurisdictions defeating policyholder claims, particularly where there were pleading deficiencies or the policy contained an express virus exclusion. However, as the decisions described above reflect, policyholders have also had significant victories both in the United States and Europe, including a very significant victory before the English High Court in the UK Financial Conduct Authority’s COVID-19 Business Interruption Test Case. COVID-19 insurance coverage litigation is still in its early stages and these recent policyholder victories demonstrate that there continue to be available avenues for the recovery of COVID-19-related business interruption losses under the terms of many commercial property insurance policies.

Joseph D. Vandegriff, in the New York Office, assisted in the preparation of this Commentary.