In what appears to be the first North Carolina ruling in favor of policyholders in a business interruption claim related to COVID-19, a state court judge has granted summary judgment in favor a group of restaurants as to their claim for lost business income and extra expense. The case involves a group of sixteen restaurants, in five North Carolina counties, who purchased “all risk” insurance policies. These policies included a business income coverage form allowing for payment of actual loss of business income due to the necessary suspension of operations during the period of restoration. The policies required that the suspension be caused by direct physical loss to property at a premise caused by or resulting from any covered cause of loss. The policies did not have a virus exclusion.
The restaurants relied upon civil authority orders mandating the suspension of business at their restaurants beginning in March 2020. The restaurants sought a declaratory judgment that government orders constituted perils under the policies that caused direct physical loss to property at the restaurants. Plaintiffs primarily argued that the government orders forced them to lose physical use and access to their restaurant properties and premises, which constituted a non-excluded “direct physical loss.” The Court interpreted the phrase “direct physical loss” to include the inability to access their properties. The Court further found the claimed losses were caused by the government orders since the restaurants were expressly forbidden, by government decree, from accessing and putting their property to use for income-generating purposes.
The insurer argued that the policies do not provide coverage for pure economic harm in the absence of direct physical loss to property. The Court rejected this argument by finding the phrase “direct physical loss” to be ambiguous, and by resolving the purported ambiguity against the insurer and in favor of the policyholder. The Court also found that since the policies provide for “accidental physical loss or accidental physical damage”, the use of the conjunction “or” means that a reasonable insured could understand these terms to have distinct and separate meanings.
We expect that the insurer will appeal given that courts in other jurisdictions have found that that “direct physical loss” is not ambiguous and requires structural alteration to property. These jurisdictions have found that an economic loss alone does not trigger business interruption coverage.
To view a copy of the opinion, please click HERE.