On December 13, 2024, the North Carolina Supreme Court refused to follow the herd of poorly and in many cases, erroneously-reasoned decisions and applied settled rules of insurance policy interpretation to find Cincinnati Insurance Company owes coverage to a group of restaurants suffering business interruption losses stemming from the COVID-19 pandemic.  While the North Carolina Court’s decision in North State Deli, LLC v. The Cincinnati Insurance Co., may come too late for many, the decision nevertheless offers reassurance that some courts remain willing to stand firm on fundamental guiding principles.

Background

Cincinnati insured a group of restaurants under all-risk commercial property policies, each of which afforded coverage for “direct physical loss to property not excluded by the policies” and resulting business interruption loss.  Unlike many similar all-risk policies in place when the COVID-19 pandemic hit, the Cincinnati policies at issue did not contain virus exclusions.  After the restaurants were ordered to close as a consequence of the pandemic, or chose to close on their own due to the dangers posed by COVID-19 and its causative virus, and losses of business income began to mount, the restaurants tendered claims to Cincinnati seeking coverage for those losses and the costs to alter their businesses to permissible and safe operation. 

The central issue before the Court was whether “physical loss” occurred when government orders related to COVID-19 placed temporary restrictions on the use of and access to the restaurant’s physical property.  The insurer argued, as it and other insurers have in similar cases across the country, that the temporary physical closures are not the type of direct “loss” contemplated by the policy. The restaurants argued that the closures are a covered property “loss” under the policy’s ordinary meaning.  The trial court entered summary judgment in favor of the restaurants.  On appeal, the court of appeals reversed, find that the losses were excluded under the policies.  The North Carolina Supreme Court reversed the court of appeals based on what the Court explained to be “long-standing rules of insurance contract interpretation.”

Applying those rules, the North Carolina Supreme Court found the term “direct physical loss,” which was undefined in the policy, susceptible to multiple reasonable interpretations.  The Court concluded that the term could reasonably be interpreted to include the inability of an insured to use its property as intended. As the Court explained, such a loss reasonably “occurs when property is no longer usable for its intended purpose, as a policyholder would reasonably expect.” 

Cincinnati also argued, as it has in other cases, that the policies’ “period of restoration” provisions also operate to preclude coverage.  Here, too, the North Carolina Supreme Court debunked the insurer’s argument after assuming that a reasonable insured would even look to such a duration of coverage provision to understand the scope of the coverage.  The insurer argued that because duration could be measured through the date that the property should be “repaired, rebuilt or replaced,” the provision necessarily requires loss or damage that requires repair, rebuilding or replacement.  Rejecting the insurer’s argument, the Court noted that the provision includes three disjunctive periods of measure for time element loss and that a reasonable reading of those provisions does not require that all three actually occur.

Finally, and to be sure, the Court explained how the policies – being all-risk in nature and, thus, covering all perils not expressly excluded – necessarily invite consideration of what is excluded (and what is not) to determine the scope of what is covered.  Here, the Court found it notable that some 83% of all-risk policies in place in 2020 contained some form of virus exclusion.  But not the Cincinnati policies at issue here. 

Consistent with the Court’s discussion in North State Deli, of the some 83% of all-risk policies containing some form of virus exclusion, the North Carolina Supreme Court issued a companion decision the same day, in which the Court held that a contamination exclusion in an insurance policy issued by Zurich American Insurance Company barred coverage for claims similar to those in North State Deli. Cato Corp. v. Zurich Am. Ins. Co., 2024 WL 5100679 (N.C. Dec. 13, 2024).  In Cato Corp., the contamination exclusion in the Zurich policy defined contamination to include, among other things, virus.  This, according to the Court, was sufficient to bar coverage.

Key Takeaways

The North State Deli decision illustrates the importance of understanding and faithfully applying fundamental rules of insurance policy interpretation.  The North State Deli decision, along with the decision in Cato Corp., also illustrates that one size does not fit all when it comes to insurance policy interpretation.  The words of each policy matter.  North State Deli and Cato Corp. make that clear, where the differences in policy wording caused the same Court to reach different outcomes under similar claims and the same controlling law.  Policyholders would be well-served, therefore, to engage coverage counsel to assess how their particular policy wording might affect the availability of coverage, even when it seems like the issue may have already been decided under seemingly similar facts or circumstances.