The Construction Advantage, Rethinking COVID Business Interruption Claims – Maybe You Should Be Challenging that Denial 

Rethinking COVID Business Interruption Claims – Maybe You Should Be Challenging that Denial 

By Asha Echeverria 

In the wake of losses related to government shut down orders related to COVID-19, many companies submitted business interruption claims under their property insurance policies. I am pretty confident to say that insurers summarily denied these claims at least in part because according to the insurers, the companies had not suffered a “physical loss” or “physical damage” as required by the insuring agreement of the policy.

In North State Deli, LLC v. The Cincinnati Insurance Co.,[1] a group of sixteen North Carolina restaurants successfully challenged such a denial, establishing, as a matter of law, a right to business interruption coverage for economic losses resulting from civil authority orders mandating suspension of their business operations.

Under the restaurants’ “all risk” property insurance policies, all risks of loss are covered unless such risk is expressly excluded or limited. Under the policy, a “loss” is defined as “accidental physical loss or accidental physical damage.”[2] The policy did not define “direct,” “physical loss,” or “physical damage,” and therefore, in accordance with settled law, the trial court looked to the “ordinary meaning” of these words, as set forth in a standard dictionary.

Relying primarily on Merriam Webster, the trial court determined that the ordinary meaning of 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.” Therefore, the trial court held that under these property policies, “direct physical loss” unambiguously includes the circumstance where orders of a governmental authority cause a restaurant owner to lose the “full range of rights and advantages of using or accessing their business property.”

The insurer sharply disputed this interpretation claiming that “physical loss” requires some form of physical alteration to the property. The trial court held that even if such interpretation were reasonable, the court’s interpretation stated above was also reasonable. As this makes the term susceptible to at least two different reasonable interpretations, the term is, at best for the insurers, ambiguous. But, under settled law, ambiguities in any policy are interpreted to the benefit of the policyholder and therefore, the final result would be the application of the trial court’s interpretation stated above; the restaurants would still be entitled to coverage under the policies.

In further support of its finding, the trial court went on to note that the “various terms of the policy are to be harmoniously construed, and if possible, every word and provision is to be given effect.” As such, if the insurer’s interpretation were accepted that both “physical loss” and “physical damage” required physical alteration of property, then one of those terms would be rendered meaningless and superfluous. The trial court held that as there are two different terms, it was required to give each term a distinct meaning as it did in its decision.

Wrapping up its review of the policy, the Court noted that it was undisputed that the policy did not have an exclusion for virus-related causes of loss, and other exclusions raised by the insurer were found to not apply.

The trial court concluded by establishing its order as a final judgment, making it immediately appealable “as there is no just reason for delay of any such appeal.”

I think it can be safely assumed that this order will be appealed all the way to the North Carolina Supreme Court. Though this suit is pending in North Carolina, it establishes a successful roadmap to coverage for business interruption claims that could result in hundreds of millions, or even billions, in business interruption insurance claims around the country.

If your business interruption insurance claim was denied by your insurer, and you do not have a virus-specific exclusion in your policy, you may be able to follow the path to coverage established by North State Deli. Please contact your legal counsel or your insurance broker to discuss the possibility of challenging your denial of coverage. Do not delay, as there is a time limit to challenge a denial of coverage.

[1] No. 20-CVS-02569 (N.C. Sup. Ct. Oct. 7, 2020) (order granting partial summary judgment).

[2] The “accidental” nature of the loss was not contested by the insurer.

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