State Supreme Court backs bars, restaurants in COVID-related insurance dispute

A unanimous North Carolina Supreme Court has ruled in favor of bars and restaurants that sued their insurance company over a refusal to cover losses linked to COVID-19 shutdowns.

In a separate case, the court unanimously rejected a COVID-related insurance claim from clothing retailer Cato.

Fourteen bars and restaurants led by North State Deli sued the Cincinnati Insurance Company and Cincinnati Casualty Company over the insurers’ decision not to cover claims linked to government-mandated COVID shutdowns. The plaintiffs all had similar commercial property insurance policies when COVID prompted them to shut down in 2020.

“Those policies protect the businesses’ building and personal property as well as business income from any ‘direct physical loss’ to property not excluded by the policy,” wrote Justice Anita Earls for the unanimous court. “The dispute here is whether a ‘direct physical loss’ occurred when government orders forced temporary restrictions on the use of and access to the restaurants’ physical property.”

“Cincinnati argues that these temporary physical closures are not the type of direct ‘loss’ contemplated by the policy and refuses liability for coverage. The restaurants argue that these closures are a covered property ‘loss’ under the policy’s ordinary meaning and seek a declaratory judgment to that effect,” Earls added.

A trial court sided with the restaurants, but the state Court of Appeals reversed that ruling.

“We disagree with the Court of Appeals based on our Court’s long-standing rules of insurance contract interpretation,” Earls wrote. “Because a reasonable policyholder in the restaurants’ shoes could expect ‘direct physical loss’ to property, as used in this policy, to include the results of COVID-19-era government orders which affected the restaurants’ use of and access to their physical property, and because the policy otherwise contains no exclusion for viruses, we construe the ambiguity here in favor of coverage. Accordingly, we hold that this policy does cover the restaurants’ alleged losses and that the restaurants are entitled to their motion for partial summary judgment.”

The state Supreme Court case heard the North State Deli case along with a series of COVID-related disputes during two days in October. One of the other cases heard at that time involved clothing retailer Cato’s lawsuit against its insurer.

Earls described the Cato suit as a “companion case” to the North State Deli dispute. Yet Cato’s insurance policy included one significant difference from the policies covering the bars and restaurants in the first case.

“Here, we address a related issue: whether a clothing store retailer stated a claim for insurance coverage when it alleged that COVID-19 transformed and destroyed its property but where the policy excludes viral contamination as a covered cause of loss,” she wrote.

“[W]e conclude that Cato failed to allege facts sufficient to state a claim for insurance coverage due to direct physical loss of or damage to property because the contamination exclusion precludes coverage for direct physical losses caused by viruses,” Earls wrote.

The North State Deli and Cato decisions arrived on the same day that the state Supreme Court issued an opinion in one of two cases seeking refunds of fees paid to the University of North Carolina during times of campus shutdowns.

The state’s highest court has yet to issue rulings in high-profile COVID-related cases pitting private bars against Gov. Roy Cooper. Bar owners seek economic damages for losses they faced when the governor forced them to remain closed as other businesses reopened during the pandemic.