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North Carolina Superior Court First to Hold Covid Closure Equals Physical Loss

November 13, 2020

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<p style="text-align: justify;">As the first wave of litigation over insurance company denials of business interruption coverage to restaurants and other businesses has begun to result in adjudicated decisions, those denials have been upheld, largely based upon a consistent interpretation that a mandated closure is not equivalent to an actual, direct physical loss or damage, as required to trigger coverage.</p>
<p style="text-align: justify;">However, in October the North Carolina Superior Court issued an Summary Judgment Order granting the motion of a group of restaurant plaintiffs seeking a declaratory judgment that Cincinnati Insurance Company must cover the plaintiffs’ lost business expenses and extra expenses under their respective individual policies. This decision may portend a lack of consistency among the courts on the issues of business interruption coverage for Covid-19 closures, and certainly sets an unwelcome precedent of rationale for insurance companies.</p>
<p style="text-align: justify;">In this case,<em> <a href="">North State Deli</a>, LLC, et al. v. Cincinnati Insurance Co., et al.</em>, sixteen North Carolina restaurants sought coverage under their Cincinnati Insurance policies for business interruption and extra expense coverage for losses sustained due to the mandatory non-essential business closures issued in March 2020 because of Covid-19. Cincinnati disclaimed coverage arguing the business interruption claims alleged no covered cause of loss because there was no “direct loss to property” or any “physical damage” to property, as the policies required.</p>
<p style="text-align: justify;">The Court’s order granting summary judgment held that the plaintiffs’ inability to utilize their physical property under the government shut down orders did indeed constitute a direct physical “loss” of property. In so holding, the Court noted that the Merriam-Webster dictionary defines a loss as “the act of losing possession,” thus the insurance policy reference to “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.”</p>
<p style="text-align: justify;">In other decisions, courts have hinted that if a restaurant plaintiff had established that anyone was exposed to Covid-19 on the premises, then that might support a finding of directly physical damage. But this new decision opens the gates open far wider for plaintiffs in finding that the closure itself constitutes a physical loss sufficient to trigger the business interruption coverage.</p>
<p style="text-align: justify;">Parties are sure to be watching the development of this litigation, and whether or not other courts take as an expansive view of coverage.</p>
Thanks to Vivian Turetsky for her contribution to this post.  Please contact <a href="">Heather Aquino</a> with any questions.

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