North Carolina has once again favored policyholders seeking insurance coverage for COVID-19 business interruption losses. A recent decision from the Middle District of North Carolina in Durham Wood Fired Pizza Co. LLC v. Cincinnati Ins. Co., reinforces the North State Deli decision and suggests that a failure to provide coverage for COVID-19 business interruption claims may constitute bad faith.

Background

A group of four restaurants filed suit against Cincinnati Insurance Company after the insurer denied their claims for business interruption stemming from the COVID-19 government shutdowns in 2020. First, the restaurants made business interruption claims in April 2020, but those claims were denied. Then, the restaurants filed suit but agreed to dismiss the case while waiting for the North Carolina Supreme Court’s decision in North State Deli. In late 2024, the Supreme Court of North Carolina issued an opinion in North State Deli, LLC v. Cincinnati Insurance Co., in which it held that an all-risk insurance policy with no virus exclusion covered virus-related shutdowns due to government orders.

After the North State Deli decision, the restaurants sued Cincinnati again, bringing claims for (1) declaratory judgment, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, and (4) violations of the North Carolina Unfair and Deceptive Trade Practices Act. Cincinnati removed the case and moved to dismiss the claims for breach of implied covenant of good faith and fair dealing and under the Unfair and Deceptive Trade Practices Act (UDTPA).

Breach of Implied Covenant of Good Faith and Fair Dealing

In deciding the insurers’ motion to dismiss, the court analyzed the complaint’s allegations for breach of implied covenant of good faith and fair dealing. The restaurants alleged Cincinnati made a “company-wide decision to deny all coronavirus-related business interruption claims without conducting an individual investigation into such claims.” The court was unpersuaded by the restaurants’ argument. The court looked to the bases for the insurer’s denial as stated in its denial letter, which was attached to the complaint, and concluded that the insurer denied coverage based on its reasonable (albeit incorrect) interpretation of the policy under North Carolina law. However, the court agreed with the restaurants with regard to their argument that a denial of coverage by Cincinnati after the Supreme Court of North Carolina’s decision in North State Deli could constitute a breach of the policy’s implied covenant of good faith and fair dealing. The court noted, however, that while the complaint lacked factual allegations on that point, the “brief suggests that there may be facts . . . beyond those alleged in the complaint.” The court ruled, therefore, that the restaurants would be permitted to amend their complaint to assert factual allegations about how Cincinnati’s conduct in the wake of North State Deli amounts to a breach of the implied covenant of good faith and fair dealing.

UDTPA

The restaurants also brought a bad faith claim under North Carolina General Statute § 75-1.1. The court again found insufficient factual allegations in the complaint, but as before, again recognized the potential for facts not alleged in the complaint that might support a claim under § 75-1.1. Thus, as with the good faith and fair dealing claims, the court allowed the restaurants to amend their complaint.

Takeaways

In addition to furthering the Tar Heel state’s reasonable interpretation of “physical loss or damage” as used in all-risk insurance policies, the decision in Durham Wood Fired Pizza Co. LLC v. Cincinnati Ins. Co. highlights that insurer bad faith can arise based solely on an insurer’s disregard for controlling legal authority, and that liability can arise from such a disregard both at common law and under statute. It is important, therefore, for policyholders to consider relevant legal interpretive authority as well as the conduct of the insurer when evaluating whether an insurer may have breached its duties of good faith and fair dealing that are imposed by statute and inherent in every policy of insurance.