The Covid-19 pandemic resulted in a great deal of litigation regarding coverage for business income losses under commercial insurance policies.  In nearly all cases, the insured lost, with courts holding that business income losses due to the Covid-19 pandemic were not covered.  One notable exception was the case of Northstate Deli, LLC, et al. v. The Cincinnati Insurance Company, et al., from North Carolina.

Trial Court Opinion

Northstate Deli was filed by 16 North Carolina restaurants that were insured by Cincinnati.  The case was filed in Durham County Superior Court in May of 2020.  The Plaintiffs sought coverage from Cincinnati under their policies for loss of income and expenses from their reduced or stopped business operations and moved for partial summary judgment.  Cincinnati denied coverage and filed a motion to dismiss. 

After a hearing, the Trial Court entered judgment for the plaintiffs on their first claim, which sought a declaratory judgment that the policies covered business income and extra expense resulting from governmental action that forced the Plaintiffs to suspend operations.  The Trial Court concluded that the policies provided coverage for business income and extra expenses for the Plaintiff’s loss of use and access to covered property mandated by governmental shutdown orders as a matter of law.

This was one of the few victories for policyholders, and accordingly received a good deal of attention.  However, in an order filed July 5, 2022, the North Carolina Court of Appeals reversed the Trial Court’s Order and directed the Trial Court to enter summary judgment in favor of Cincinnati. 

Court of Appeals Reversal

The restaurants each had a policy with Cincinnati, and each policy had an identical provision, the “business income provision” that provided as follows:

We will pay for the actual loss of “Business Income” . . . you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.  The “suspension” must be caused by a direct “loss” to property at a “premises” caused by or resulting from any Covered Cause of Loss.

The policies provided that “Loss” means accidental physical loss or accidental physical damage (emphasis supplied). 

          When the Covid-19 pandemic struck in March of 2020, state and local government orders were issued restricting restaurant operations to carry-out / take-out and delivery operations only.  By  May of 2020, all 16 of the Plaintiff restaurants had closed due to the financial repercussions of the government orders.  The Plaintiffs argued that their loss resulted from physical harm for their property, but the Court of Appeals disagreed.  The Court of Appeals cited an earlier decision, Harry’s Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Co., 126 N.C. App. 698, 486 S.E. 2d 249 (1997).  That case involved potential customers who were unable to access the insured location due to a snowstorm blocking the entrance.  In that case the Court of Appeals concluded that there was no coverage under a business interruption clause because the loss was not “caused by direct physical loss of or damage to property at the premises,” as required by the policy.  486 S.E. 2d at 251.

          The Court of Appeals also cited recent cases from the U.S. Court of Appeals for the 4th Circuit that held that similar or identical policy provisions did not provide coverage for business interruption losses due to Covid-19 governmental orders because there was no direct physical loss or damage to the insured property, citing Fs Food Group LLC v. Cincinnati Ins. Co., 2022 U.S. Dist. LEXIS 22598 (Feb. 8, 2022) and Summit Hospital Group, Ltd. v. Cincinnati Ins. Co., 2021 U.S. Dist. LEXIS 40613 (EDNC March 4, 2021).  As those cases involved the application of North Carolina law, the Court of Appeals found them persuasive. 

          The Court of Appeals concluded that the relevant policy provisions were not ambiguous.  “According to the plain language of the policies, only direct accidental, physical loss or damage to the property is covered.  Therefore, the Trial Court erred in granting partial summary judgment to the Plaintiffs on their first claim for relief.” 

Takeaways

          The takeaway is that coverage for loss of business income is almost impossible to get when the cause of loss is an invisible virus.  It is virtually impossible to show physical loss or physical damage to property, since nothing is destroyed as it would be, for example, if there were a hurricane or a tornado.  In addition, many business policies have a virus exclusion, making it even more impossible to obtain coverage for losses resulting from viral pandemics.