Lawyers for struggling restaurants trying to stay afloat during the COVID-19 restrictions will be happy to learn about two recent insurance claim cases. Before these rulings, judges have typically sided with the insurance carriers, denying business interruption coverage to claimants. However, these two cases grow the emerging COVID-19 insurance case law and cast a hopeful light for restaurants fighting to survive.
1) The North Deli Summary Judgement in North Carolina
In the more significant case, North Deli LLC, et al. v. The Cincinnati Insurance Company, et al. (Cincinnati) (Case No. 20-CVS-02569), 16 restaurants sued the insurance carrier in a North Carolina superior court. The plaintiffs sought to force Cincinnati to pay them lost business income and extra expenses under their respective insurance contracts. On October 27, 2020, the judge issued a summary judgment order in favor of the plaintiffs.
The ruling centers on the lack of clarity for the policy term “direct physical loss” in the contract’s cause of loss language. Let’s look at the exact language and the court’s reasoning to guide lawyers’ analysis of clients’ business disruption policies and lawsuit potential.
The Cincinnati policies’ building and personal property coverage form and a business income (and extra expense) coverage form provides that Cincinnati will pay for business interruption coverage as follows (emphasis added):
Business Income Coverage
We will pay for the actual loss of “Business Income” and “Rental Value” you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct “loss” to property at a “premises” caused by or resulting from any Covered Cause of Loss.
Extra Expense Coverage
We will pay Extra Expense you sustain during the “period of restoration”. Extra Expense means necessary expenses you sustain … during the “period of restoration” that you would not have sustained if there had been no direct “loss” to property caused by or resulting from a Covered Cause of Loss.”
The insurance contract also states that “Covered Cause of Loss” means direct loss unless the loss is excluded or limited. The only additional policy definition is that “loss” means “accidental physical loss or accidental physical damage.” But the meaning of the terms in this loss definition is unclear.
Plaintiffs argued that COVID-19 governmental orders in North Carolina forced them to lose the physical use of and access to their restaurant property and that this is a non-excluded, “direct physical loss” requiring coverage. Defendants assert that there must be some form of physical alteration to the property for coverage to apply.
Ordinary Dictionary Meaning Favors Plaintiffs
The judge relied on another North Carolina case, Accardi v. Hartford Underwriters Ins. Co, to establish that undefined policy terms in insurance policies are to be given their ordinary meaning. In applying the ordinary dictionary meanings of “direct,” “physical,” and “loss,” the superior court judge found that the policy term “direct physical loss” “includes the inability to utilize or possess something in the real, material, or bodily world, resulting from a given cause without the intervention of other conditions.” The court determined that under this definition of the policy terms, the plaintiffs lost their right to access their restaurant property to use it to generate income under the government COVID-19 restrictions and that there was no other intervening condition. Thus, plaintiffs’ “direct physical loss” affords coverage under the policy.
The court goes on to dismiss the defendants’ claim that a reasonable, ordinary meaning required some physical alteration to the restaurant property. Because both meanings are reasonable, the term is ambiguous. Under Accardi, ambiguous terms must be construed in favor of the policyholder. Thus, the definition of “direct physical loss that includes loss of use or access to the covered property even without structural alterations prevails.
2) Taps & Bourbon Gets Green Light in Philadelphia
A Philadelphia County Court of Common Pleas judge overruled an insurance company’s preliminary objections to a COVID-19 business interruption coverage case in Taps & Bourbon on Terrace, LLC. V. Underwriters at Lloyds London. In the October 20, 2020 ruling, the court found that the plaintiff had successfully put forth factual allegations that merited further proceedings. The court also resisted dismissing the case due to the rapid evolution of facts and law related to COVID-19 business loss cases.
A Virus Exclusion
In Taps & Bourbon on Terrace, LLC v. Underwriters at Lloyds London and Main Line Insurance Offices, Inc. there are central arguments around the definition of “direct physical loss” like those found in North Deli. However, the inclusion of a virus exclusion provision complicates things for the plaintiffs.
At issue here is whether a physical loss resulting immediately and proximately from an event would include the government ordered shutdowns. Plaintiffs argue that the virus exclusion is ambiguous and that they never accepted it.
It will be interesting to follow both cases. Be on the watch for defendants to appeal the North Deli summary judgment. Litigants will also want to keep a close eye on Taps & Bourbon as the case moves forward in the First Judicial District of Pennsylvania.
It’s unclear if other courts will follow suit and side with plaintiffs’ definitions on what constitutes direct physical loss and any other similar terms found in business interruption contract language in insurance policies. Plaintiff lawyers and their clients, however, may take encouragement from these two recent decisions and bring more COVID-19 business interruption coverage lawsuits. On the flip side, insurance companies are likely to start defining business interruption terms in policies more precisely in an attempt to overcome the ambiguity bias towards policyholders.