State and local governments around the country, including in North Carolina, directed bars, restaurants, and other businesses to suspend or limit operations in response to the COVID-19 pandemic. These orders, in turn, spawned an unprecedented number of business interruption lawsuits against insurance companies. Commercial property insurance policies, insurers argue, do not afford coverage for economic losses caused by a public health crisis. But in the first ruling in North Carolina, a Durham County Superior Court judge found otherwise. The court granted summary judgment in favor of a group of policyholders and directed their insurer to compensate them for certain losses caused by their compliance with Governor Roy Cooper’s executive orders.
In general, commercial property insurance provides coverage in the event of direct physical loss of or damage to insured property. When an insured suffers this type of injury, the policy provides coverage for associated economic losses. This may include lost income and extra expense when the business is unable to operate. So, for example, if an insured property is damaged in a fire, the insured is afforded business interruption coverage while the uninsured is unable to operate and the building is restored. COVID-19, insurers point out, does not cause physical damage to property; it sickens people.
A Durham County Superior Court judge, however, found otherwise and ruled in favor of policyholders seeking coverage for business interruption claims. The policy provided coverage for “accidental physical loss or accidental physical damage.” The phrase “physical loss,” the court ruled, did not require physical damage to the insured property before coverage was afforded. Rather, it found that the insured’s inability to make full use of their property while the shut-down orders were in effect constituted a “physical loss.”
The Court certified the order under North Carolina Rule of Civil Procedure 54(b). This certification provides an avenue for immediate appeal of this ruling. Even still, it will likely be at least a year before the North Carolina Court of Appeals renders an opinion in this case. And, in the interim, numerous COVID-19 business interruption lawsuits are pending in North Carolina state and federal courts.
On the one hand, the Durham County order appears to be an anomaly. The vast majority of courts nationwide have ruled to the contrary on substantially the same question. Furthermore, case law in North Carolina, most notably Harry’s Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Corp., has recognized that loss of use of property, without associated physical damage, is not direct physical loss. Nonetheless, the Durham County order is the only ruling in North Carolina on COVID-19 business interruption coverage to date. Policyholders will likely cite to in support of their claim. Insurers must be prepared to deal with it.
