When restaurant owners and other companies were forced to shut down their businesses due to COVID-19 restrictions, many of these companies filed claims with their own insurance companies in an effort to recover their business interruption losses. Many decisions have been rendered in favor of insurers, finding that there is no coverage for such losses. However, two recent lower-court decisions in favor of policyholder businesses illustrate that some courts may rule that insurance coverage for business interruption losses sustained during the pandemic may be available, depending on the exact language used in the policies, along with the willingness of certain courts to accept these arguments.
In North State Deli LLC v. The Cincinnati Insurance Company, the superior court in Durham, North Carolina, concluded that the insureds—operators of 16 restaurants in North Carolina—were entitled to business interruption coverage from the defendant insurer for losses caused by having to shut down their restaurants during the pandemic. The insurance policies at issue were “all risk” property insurance policies, which afforded coverage for, among other things, business income losses resulting from a “covered cause of loss.” A covered loss under the policies was defined to include “accidental physical loss or accidental physical damage.”
The court rejected the insurer’s proffered interpretation that the policies required actual physical damage to the property, even where, as here, the restaurants sustained purely economic losses as a result of having to close their businesses to comply with government stay-at-home orders. The court agreed that accidental physical damage reasonably required actual physical damage to the premises. However, the policies alternatively provided coverage for accidental physical loss, which, in order to give effect to all of the terms used in the policies, must have a separate and distinct meaning from physical damage. Thus, the court concluded that accidental physical loss may broadly include losses where restaurant owners are prevented from fully accessing and using their restaurants as a result of the shutdown orders.
In a similar ruling, a trial court in Philadelphia County overruled an insurer’s preliminary objections seeking to dismiss the insured’s suit that sought to recover COVID-19-related business losses. In Taps & Bourbon on Terrace, LLC, the plaintiff, a gastropub, sought to recover insurance for its business losses as a result of various state and local orders mandating that nonessential businesses temporarily close during the pandemic. The court overruled the insurer’s objections that claimed that there was no coverage for direct physical loss or damage to the property. The court noted that, at this procedural juncture, it was required to accept as true all of the factual allegations in the complaint. Moreover, the court noted that “the law and facts are rapidly evolving in the area of COVID-19-related business losses.”
These two recent decisions demonstrate that insurance coverage for business interruption loss claims caused by the COVID-19 pandemic often turns on the precise terms and conditions used in the insurance policies (it is unclear as to whether appeals will be taken from these decisions). Some policies clearly require direct physical damage to the premises, whereas some policies appear to cover a broader scope of losses. Other policies include virus exclusions or losses caused by the action of civil authority. Consequently, whether there is coverage for business interruption, losses must be evaluated on a case-by-case basis in accordance with the policy language at issue.
If you have any questions regarding this alert, please contact Mark Whitford, partner, at mwhitford@barclaydamon.com, or another member of the firm’s Insurance Coverage & Regulation Practice Area or Hotels, Hospitality & Food Service Team.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.