HNRK Coverage Corner

In the early days of the pandemic, we published a Guide to Insurance Coverage for Business Losses Arising from the Covid-19 Pandemic <https://www.hnrklaw.com/HNRK-Coverage-Corner-Blog/coronavirus-and-business-interruption-claims-a-guide-to-insurance-coverage-for-business-losses-arising-from-the-covid-19-pandemic>, which was subsequently reprinted in the Summer 2020 edition of NYLitigator magazine. 

That article discussed business interruption coverage for businesses that were shuttered by government orders seeking to slow the spread of the Covid-19 virus.  Under standard policy language, such coverage is triggered by an underlying “physical loss of or damage to” the insured’s property.  We noted in our article that “[i]nsurers have already begun denying Covid-19 claims by taking a narrow view of the ‘physical loss’ or ‘damage’ requirement, arguing that some structural damage to the property is required.”  However, we advised that “insureds should not take an insurer’s reflexive ‘no’ for answer, as there are strong counter-arguments to make.”  Among other arguments, we pointed out that in light of the disjunctive phrase “physical loss of or damage to” in the standard policy language, “the insured’s loss of use of the property (e.g., because of a hazardous condition or government order) may be enough to trigger coverage, even without any physical damage to the property.”

We’ll confess that this argument hasn’t fared well—most courts across the country have rejected Covid-19 business interruption claims, often relying on the absence of physical damage to the insured’s property.  But at long last, the Coverage Corner has been vindicated!  In a decision issued on December 13, 2024, the Supreme Court of North Carolina in North State Deli, LLC v. Cincinnati Ins. Co., adopting our position on the meaning of “physical loss.”  Ruling in favor of a group of “bars and restaurants in North Carolina . . . that were forced to suspend business operations because of COVID-19-related orders by government authorities,” the Court explained:

We note, as the trial court below did, that “direct physical loss” is used in conjunction with “direct physical damage,” so “loss” must have some meaning distinct from “damage” to effectuate both provisions. . . .  The distinct meaning of “loss” could be one of degree, as Cincinnati argues:  “loss” is complete destruction or total dispossession, as in an instance of theft, while “damage” is a less-than-complete impairment or alteration.  That reading would exclude temporary restrictions under the pandemic-era government orders that barred access to or use of restaurant dining rooms but not the restaurants’ entire premises.  Alternatively, a reasonable policyholder could see these two words in the disjunctive and read “loss” as purposely broader than “damage.”  A broader definition could encompass dispossession, deprivation, or impairment of use or function, complete or partial. That would include temporary dispossession or deprivation of the businesses’ physical property under government orders, as the restaurants argue.

It is not obvious from the conjunction “or” which of these two distinct yet overlapping meanings the parties intended.  But a reasonable person in the position of the insured could certainly read the provision to include the latter, and the ambiguity counsels us to find in favor of the restaurants’ reading.

The Court also noted—as we did back in 2020 in our NYLitigator article—that the policies at issue had no virus exclusion, “even as 82.83% of business insurance policies had such exclusions.”  This was a relevant consideration because “[k]nowledge of the risk of viruses, together with knowledge that other policies exclude virus risks while this one does not, underscores that a policyholder would reasonably understand the absence of such an exclusion as an affirmative grant of coverage.”