The hospitality industry has suffered significant economic distress as a result of COVID and the related state-mandated shutdowns on business operations. The COVID pandemic has created a unique set of facts that have not been addressed by the insurance industry in the United States, and restaurant owners with business interruption policies have taken insurance company denials to court. As these COVID insurance loss claims are starting to work their way through the judicial system, initial results appear promising for the hospitality industry.

COVID Insurance Loss Claims

On October 7, 2020, a North Carolina judge granted partial summary judgment in favor of plaintiffs, a group of restaurants, against Cincinnati Insurance Company, for financial losses associated with the state-mandated COVID-19 restaurant shut-downs. Typically, courts have ruled that a restaurant’s business interruption coverage: (1) applies only to “physical alterations to the property” and (2) cannot be triggered solely by economic loss. This means that so long as the physical structure of the restaurant is unaltered and only economic loss occurs, no business interruption coverage may be utilized.

In the North Carolina case, the judge provided a new interpretation of the phrase “direct physical loss.” In the judge’s definition, “direct physical loss” is triggered by an “inability to utilize,” not by a physical alteration. As stated above, courts have typically regarded “direct physical loss” as requiring a physical change; however, in this case, the judge strayed from this interpretation by relying on the policy’s “accidental physical loss or accidental physical damage” language. In the judge’s opinion, to say that “loss” is synonymous only with a physical alteration would cause the “or” in “accidental physical loss OR accidental physical damage” to become meaningless. North State Deli, LLC, et al., v. Cincinnati Ins. Co., et al., Case No. 20-CVS-05269 (N.C. Super. Ct. Oct. 7, 2020). This decision may help other policyholders and be used as an example of how to interpret similar business interruption coverage policy language.

Promising Court Opinions

More recently, on October 26, 2020, a Philadelphia County Court of Common Pleas judge overruled an insurance company’s preliminary objection involving losses related to COVID-19 business interruption coverage in Taps & Bourbon on Terrace, LLC. V. Underwriters at Lloyds London. While not as substantial as the North Carolina decision in terms of business interruption coverage interpretation, this Pennsylvania order is also a positive step for policyholders.

The facts of the case are arguably more in favor of the insurance company, as the policy in question involves (1) a “direct physical loss” or “damage” provision and (2) a virus exclusion provision. In response, Taps & Bourbon relies upon an interpretation of “physical loss” as resulting “immediately and proximately from an event,” which would arguably include the mandatory COVID-19 shutdowns. Additionally, Taps & Bourbon attacked the validity of the virus exclusion by alleging the provision is: (a) overly ambiguous and (b) inapplicable because Taps & Bourbon never specifically accepted the provision.

In denying the preliminary objection, the court opined:

At this very early stage, it would be premature for this court to resolve the factual determinations put forth by defendant to dismiss plaintiff’s claims. Taking the factual allegations made the plaintiff’s complaint as true, as this court must at this time, plaintiff has successfully pled to survive this stage of the proceedings. Moreover, the law and facts are rapidly evolving in the area of COVID-19 related business losses. Accordingly, the preliminary objections are overruled. Taps & Bourbon on Terrace, LLC v. Underwriters at Lloyds London, et al, Court of Common Pleas of Philadelphia County, No. 00375 (Oct. 26, 2020).

The judge’s order does not mean business interruption coverage will now include “damage” from COVID-19 shutdowns, but it could lead to this potential outcome. Clearly, the courts recognize the weight of these decisions, as they allow COVID-19 business interruption claims to progress. We will continue to monitor the outcomes of these cases and other reported cases.