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Court ruling: North Carolina restaurants win business interruption case

Recently, the owners of a group of restaurants in North Carolina prevailed in a case, North State Deli et. al v. Cincinnati Insurance Company, against Cincinnati Insurance Co., for business interruption claims that resulted from the government-mandated closure during the COVID-19 pandemic.

The plaintiffs—who operate 16 restaurants in North Carolina—purchased “all risk” property insurance policies from Cincinnati Insurance Co., to cover their restaurants. The policies covered the restaurants in the event of an accidental physical loss or accidental physical damage. Beginning in March 2020, governmental authorities across North Carolina entered civil authority orders mandating the suspension of business operations at various establishments, including the plaintiffs’ restaurants. The plaintiffs sought coverage under the policies for losses arising out of the government-mandated closures. Cincinnati denied the claims, stating that there was no physical alteration to the property and thus, no direct physical loss.

The court found that the insurance policies in question did not define the terms “direct,” “physical loss,” or “physical damage,” and ruled in favor of the plaintiffs. As such, the court looked at the ordinary meaning of those terms to conclude 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 without the intervention of other conditions. In other words, “direct physical loss” can occur without a physical alteration (i.e., physical damage) to the property. The court held that the government-mandated closures resulted in the immediate loss of use and access without any intervening conditions. It concluded that the loss was unambiguously a “direct physical loss,” and the policies afforded coverage. Further, the court found that the use of the conjunction “or” between the terms “accidental physical loss” and “accidental physical damage” indicated that physical damage was not required for a loss to occur. The court stated that if “physical loss” also required structural alteration to property, then the term “physical damage” would be rendered meaningless.

What this means to agents: While this decision is a major win for the plaintiffs in this case, it is unlikely to have a substantive impact on other business interruption claims. The decision in this case largely was the result of poor policy construction by the carrier. Both the lack of definitions for key coverage terms and use of the conjunction “or” between the terms “accidental physical loss” and “accidental physical damage,” allowed the court to interpret the policy more favorably for the plaintiffs. Additionally, the policy did not contain any exclusions for virus-related causes of loss. A policy written a slightly different way would have likely led to a much different result.