North Carolina judge 1st to rule for policyholder in business interruption case

A North Carolina judge became the first in the nation to side with policyholders in a business interruption insurance lawsuit arising from the pandemic, ruling on summary judgment that the term "direct physical loss" should cover a loss caused by a coronavirus-prompted government shutdown.

Since the first business interruption suit was filed in March, judges have, for the most part, sided with insurance carriers, throwing out business interruption insurance suits in response to motions for summary judgment. Most have found the policy term "direct physical loss" to mean damage caused by physical alteration to a property such as a fire or flood and not by government-ordered shutdowns.

While a small number of judges have allowed suits to proceed past motions to dismiss, North Carolina Superior Court Judge Orlando Hudson, became the first to actively find in favor of the policyholder on summary adjudication.

"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," Hudson wrote. "In the context of the policies, therefore, 'direct 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."

The suit was filed in a North Carolina Superior Court by a group of 16 restaurants represented by attorney Gagan Gupta of the North Carolina firm Pawnter Law. The restaurants say Cincinnati Insurance Co. unfairly denied their claims after they were ordered to close. North State Deli LLC v. The Cincinnati Insurance Co., 20-CVS-02569 (N.C. Sup. Ct., filed Sept. 21, 2020)

"It's a groundbreaking and powerful win for policyholders during this era of economic devastation for small businesses everywhere," Gupta said in a statement.

Insurance law in North Carolina, California and most of the country clearly states that when a phrase such as "direct physical loss or damage" is ambiguous, courts must side with the policyholder's interpretation, if they prove their interpretation to be reasonable, Gupta said.

"The way I talk about it is, 'If there's a tie, the policyholder wins,'" Gupta said in an interview Thursday. "So long as the policyholder provides a reasonable definition or reasonable interpretation of what 'direct physical loss means,' then that ambiguity gets construed in favor of the policyholder."

Over 1,000 business interruption lawsuits have been filed against insurance companies in the U.S. since the pandemic hit and governments ordered restaurants and other brick and mortar business establishments to close and workers and customers to remain at home.

With businesses continuing to close and no federally backed insurance product available to specifically cover COVID-19, business owners and insurers have been forced to litigate over whether existing business interruption insurance should cover losses due to a pandemic or a pandemic-related government shutdown.

Although not all disputed policies are the same, judges are being asked to address a few common questions in motions to dismiss: Do government closures trigger coverage? What constitutes "physical loss or damage" to property? Do any virus exclusions apply?

While the policy at issue did not include a virus exclusion, which would preclude a policyholder from coverage in the event of a virus-induced business closure, most plaintiffs' attorneys, like William Shernoff of Shernoff Bidart Echeverria LLP, who is not part of the suit, argue virus exclusions are irrelevant because it was the government shutdown that caused the closure.

"There are exclusions for ordinary viruses in some of the policies, but what induced the government to come out with the shutdown orders was the pandemic," Shernoff said Thursday. "The pandemic was a known risk to the insurance industry, and they did not exclude it. There is no exclusion for pandemics in any of these policies."

Cincinnati Insurance did not respond to a request for comment Thursday.