In a resounding victory for policyholders, a North Carolina court ruled that “all-risk” property insurance policies cover the business-interruption losses suffered by 16 restaurants during the COVID-19 pandemic.  North State Deli, LLC v. Cincinnati Ins. Co., No. 20-CVS-02569 (N.C. Sup. Ct., Cty. of Durham, Oct. 7, 2020).  This is the first ruling in the country to find that policyholders are, in fact, entitled to coverage for losses of business income resulting from the COVID-19 pandemic.  Equally important, the decision illustrates that a proper analysis of the operative policy provisions requires this result.

The North State Deli court held that government orders mandating the suspension of business operations and prohibiting “all non-essential movement by all residents” caused “physical loss” of the policyholders’ property under the policies.  The policies at issue promised to pay for loss of “business income” and for “extra expenses” caused by “direct ‘loss’ to property . . . caused by . . . any Covered Cause of Loss.”  They defined “loss” as “accidental physical loss or accidental physical damage” to property.  The policyholders moved for partial summary judgment that their losses were covered because the government orders caused them to lose the physical use of and access to their restaurants.

Consistent with well-settled principles of insurance-policy interpretation, which require that undefined terms must be given their ordinary meanings, the court turned to the dictionary for definitions of “direct,” “physical,” and “loss.”  The court then determined that the government decrees caused an “immediate loss of use and access without any intervening conditions.”  As the court concluded, this “is precisely the loss caused by the Government Orders”:

“[D]irect physical loss” 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.  This is precisely the loss caused by the Government Orders.  Plaintiffs were expressly forbidden by government decree from accessing and putting their property to use for the income-generating purposes for which the property was insured.  These decrees resulted in the immediate loss of use and access without any intervening conditions.  In ordinary terms, this loss is unambiguously a ‘direct physical loss,’ and the Policies afford coverage.

Central to the court’s conclusion was its adherence to the axiom that various terms in an insurance policy must be “harmoniously construed,” according every word its commonly understood meaning.  Here, as the court explained, the policies covered “accidental physical loss or accidental physical damage.”  (Emphasis in original.)  The court found the use of the disjunctive “or” especially significant, because it supports “at the very least – that a reasonable insured could understand the terms ‘physical loss’ and ‘physical damage’ to have distinct and separate meanings.”

As the court recognized, the parties “sharply dispute[d]” the meaning of “direct physical loss,” with the insurer insisting that the policies required “some form of physical alteration to property.”  In rejecting that argument, made by insurers universally in these lawsuits, the court specifically relied on the black-letter principle that ambiguity exists when there is more than one reasonable meaning of the policy terms at issue:  “Even if Cincinnati’s proffered ordinary meaning is reasonable, the ordinary [dictionary] meaning . . . is also reasonable, rendering the Policies at least ambiguous.”  The court therefore gave “the ambiguous terms the reasonable definition which favors coverage,” holding that “the phrase ‘direct physical loss’ includes the loss of use or access to covered property even where the property has not been structurally altered.”

The North State Deli ruling provides welcome news to policyholders who have been waiting patiently for a court to apply the rules of insurance-policy interpretation properly in analyzing COVID-19 business-interruption claims.  Judge Hudson did so here.  The decision shows that, when courts “properly set the prism” through which the policy language must be viewed and apply settled principles of policy interpretation, coverage indeed will be found to apply to COVID-19 business-interruption losses under “all-risk” policies promising coverage for losses due to “physical loss.”