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North Carolina Court Rules That COVID Shutdown Orders Constituted “Physical Loss” of Property

October 27, 2020

The National Law Journal reported on October 23 that we have the country's first decision, by a North Carolina state court, granting summary judgment to a group of restaurants' claims seeking insurance coverage for business interruption losses arising out of pandemic-related government orders.

In two decisions dated 7 October 2020 in the case North State Deli, LLC, et al. v. The Cincinnati Insurance Co., et al., Case No. 20-CVS-02569 (North State Deli), Superior Court Judge Orlando F. Hudson, Jr. denied the defendant-insurers' motion to dismiss the policyholders' complaint and granted the policyholders' motion for partial summary judgment, ruling "the Policies provide coverage for Business Income and Extra Expenses for Plaintiffs' loss of use and access to covered property mandated by the Government Orders as a matter of law."

See Order Granting Plaintiffs' Rule 56 Motion for Partial Summary Judgment, at 7, North State Deli, LLC, et al., v. Cincinnati Ins. Co., et al., Case No. 20-CVS-05269 (N.C. Super. Ct. Oct. 7, 2020).

Sixteen restaurants brought a declaratory judgment action against The Cincinnati Insurance Company and The Cincinnati Casualty Company (Cincinnati) seeking coverage under specific "all risk" property insurance policies for business interruption losses resulting from government shutdown orders. The plaintiffs argued that the orders, which included stay-at-home mandates and travel restrictions on non-essential movements and were issued by various government entities to combat the COVID-19 pandemic, were covered perils under the policies because the orders compelled the plaintiffs to lose the physical use of and access to their restaurant property and premises.

The policies covered business income losses and extra expenses sustained as the result of business interruption, which required a "direct 'loss' to property." The policies defined "loss" to mean "accidental physical loss or accidental physical damage."

The court found that the policies' "accidental physical loss or accidental physical damage" language meant that the insureds' loss of the ability to use or access their property for the income-generating purpose for which the property was insured, constituted a "direct physical loss."

The Cincinnati policies did not contain any form of virus exclusions or any other exclusion that the court found applicable. That is obviously significant, because some policies do contain such exclusion – and I predict that more will in the future.

Cincinnati will likely appeal the superior court's ruling. This is nonetheless a significant decision for policyholders that experienced business interruptions due to COVID-19 orders or other similar government restrictions.

Though this is the first decision of its kind, it is unlikely to be the last.

Sharon D. Nelson, Esq., President, Sensei Enterprises, Inc.
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