Covid-19 Business Interruption Coverage Claims Update

A state court judge in North Carolina ruled in favor of policyholders and against Cincinnati insurance in a summary judgment motion addressing Covid-19 business interruption coverage claims.  The plaintiffs were a group of restaurants and they filed a motion for summary judgment, seeking declaratory judgment as to one count of their complaint that Cincinnati Ins. must replace their lost business income and expenses pursuant to their policies.

The insurance policies at issue were “all risk” property insurance policies, which would cover all risks of loss unless expressly included or limited in the policy.  The policies also included forms providing coverage for business interruption.  According to the policies, the suspension of the business must be caused by direct “loss” to the property.  The policies defined “loss” to mean “accidental physical loss or accident physical damage.”  The policies did not define “direct,” “physical loss” or “physical damage.”  The plaintiff argued the Government Orders suspending their business operations forced the plaintiffs to lose the physical use of and access to their restaurant property, which constituted a non-excluded directly physical loss.

Since several of the relevant terms were not defined in the policies, the court looked to the ordinary meaning of each term with the help of the dictionary definition.  Using that meaning, the court determined “direct physical loss” to describe a situation where a business and its employees/customers/etc. lose the full range of rights and advantages of using the property – which the court held was precisely the result of the Government Orders.   Therefore, the court determined the loss was unambiguously a “direct physical loss” and coverage would be afforded.

Cincinnati Ins. argued there was no coverage where there was no direct physical loss to the property, which required some form of physical alteration to the property.  The court noted that if that meaning was reasonable, and the ordinary meaning was reasonable, the policy would then be ambiguous so the definition favoring coverage would apply.  The court also pointed out that the policy applied to physical loss or physical damage, which indicates that a physical loss does not require actual physical damage to the property.  Lastly, the court noted the policies did not explicitly exclude virus-related causes of loss.  For these reasons, the court granted summary judgment and ruled the policies provided coverage for the plaintiffs’ loss of use and access to property mandated by the Government Orders.

According to the University of Pennsylvania Law School, as of mid-October, 2020, 1,183 lawsuits had been filed seeking coverage from insurance companies for business interruption claims caused by Covid-19.  It was also noted that judges have granted insurers’ motions to dismiss in 26 cases but denied summary judgment in 12 cases.  In many of the rulings, the court found there must be some tangible alteration to the property to trigger coverage.  In others, the policies specifically excluded coverage for viruses.

To date, there does not appear to be any rulings on the merits by an appellate court so it will be quite some time before we start seeing binding opinions by state supreme courts.