North Carolina COVID-19 Business Interruption Coverage Ruling
Earlier this month a state court in Durham County, North Carolina ruled that business interruption coverage responds to business losses resulting from a COVID-19 lockdown even without physical damage to insured property.
Policyholders had been pushing toward such a ruling for months with limited success. In fact, prior to the North Carolina decision the closest policyholders had come to a win on a non-property damage claim is in New Jersey where a state court allowed a similar case to proceed into the discovery phase on what it characterized as a “novel theory.”
The North Carolina court did not just allow the case to proceed into discovery. The court ruled the policyholders are entitled to coverage as a matter of law even if COVID-19 had not caused property damage.
A few important preliminary observations:
- The policy at issue did not contain a virus exclusion.
- The wording of the business interruption coverage is somewhat unusual.
- The insurer appears to have conceded that North Carolina lockdown orders had forced the insured businesses to suspend operations.
- The court dismissed the insurance company’s defenses based on exclusions for acts and decisions, law and ordinance, and loss or use with no substantive explanation.
Under the policy, business income coverage is available if the suspension of the policyholder’s business operations had been caused by “direct accidental physical loss.” The court zeroed in on the dictionary definitions of the words “direct physical loss” to conclude it is enough to trigger business interruption coverage if the policyholder has lost the right or ability to use the property for the business purpose for which it was insured.
Applying these definitions reveals that the ordinary meaning of the phrase “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. In the context of the Policies, therefore, “direct physical loss” describes the scenario where businessowners and their employees, customers, vendors, suppliers, and others lose the full range of rights and advantages of using or accessing their business property. This is precisely the loss caused by the Government Orders. Plaintiffs were expressly forbidden by government decree from accessing and putting their property to use for the income-generating purposes for which the property was insured. These decrees resulted in the immediate loss of use and access without any intervening conditions. In ordinary terms, this loss is unambiguously a “direct physical loss,” and the Policies afford coverage.
The COVID-19 Business Interruption Litigation Landscape
As explained in the attached video, 21 other cases throughout the country have reached a ruling on the question of business interruption coverage for COVID-19:
- 18 in federal courts; and
- 3 in state courts.
17 of these rulings have resulted in the dismissal of the claim:
- 14 dismissed claims sought to recover from a policy containing a virus exclusion; and
- 3 others did not allege COVID-19 had caused property damage.
Of the four cases that have survived to go on to discovery (i.e., the fact finding stage):
- 1 claim involved an atypical wording of the virus exclusion; and
- 2 claims alleged COVID-19 had caused property damage.
While just one decision, the North Carolina ruling could signal the start of a meaningful shift in the litigation landscape in favor of policyholders because:
- The ruling opens up the main business interruption coverage to non-property damage claims. Business interruption may be covered for up to 12 months under the main coverage while usually only 30–60 days under civil authority coverage.
- The reasoning of the ruling supports a line of attack many of previously dismissed claims had taken in an unsuccessful effort to maneuver around the virus exclusion.
Some 1000 lawsuit continue to make their way through the courts — so this picture is far from complete. Moreover, each of the orders of dismissal as well as this ruling in North Carolina may be subject to further proceedings at the trial level and, of course, appealed.