Last week, the North Carolina Supreme Court issued its long-awaited ruling in North State Deli, LLC v. The Cincinnati Insurance Company, siding with a group of North Carolina restaurants that sought business interruption insurance for losses they sustained because of the COVID-19 pandemic. Specifically, the court held that those restaurants sustained “direct physical loss” to property, as that phrase is used in their commercial property policies, when COVID-19 government orders restricted the restaurants’ use of and access to their property, resulting in the suspension of their operations and the loss of income. In reaching this holding, the Supreme Court of North Carolina joined the Supreme Court of Vermont as the only other state supreme court to have ruled in favor of policyholders on the question of COVID-19 business interruption insurance coverage.
The insurance industry may criticize these opinions and attempt to paint them as outliers, but the North Carolina Supreme Court’s reasoning rests on well-established principles of insurance policy interpretation that reflect the law in virtually all jurisdictions in the United States. In the wake of the pandemic, many courts ignored these fundamental rules of construction, as well as prior pro-policyholder precedent interpreting the phrase “physical loss” broadly, when issuing decisions dismissing COVID-19 business interruption lawsuits. Fortunately, the North Carolina Supreme Court chose to apply the law and prior precedent, rather than judicial “group think.” While it is premature to predict whether other state supreme courts will follow suit, North State Deli underscores how the faithful adherence to bedrock insurance policy interpretation principles can prevent courts from imposing limitations on coverage that the parties to an insurance contract never expressed.
By way of background, the plaintiffs in North State Deli are bars and restaurants in North Carolina that were forced to suspend business operations because of COVID-19-related orders by government authorities.[1] They were all insured by the defendants under materially similar commercial property insurance policies that protect the businesses’ building, personal property, and business income from any “direct physical loss” to property.[2] Moreover, none of the policies in question contained virus exclusions,[3] which became relatively common in commercial property policies after the SARS-outbreak of the early part of this century. The key dispute in North State Deli was whether a “direct physical loss,” as defined in the policies, includes losses arising from pandemic era government orders that restricted use of the plaintiffs’ properties. The trial court sided with the restaurants, finding on a motion for partial summary...
