Recent Ruling in COVID-19 Business Interruption Coverage Case

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Cranfill Sumner LLPOn March 16, 2021, an order was entered by US District Court Judge Richard E. Myers, II granting Valley Forge Insurance Company’s motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See National Coatings & Supply, Inc. v. Valley Forge Ins. Co., No. 5:20-CV-00275-M, 2021 WL 1009305, at (E.D.N.C. Mar. 16, 2021).  The court ruled that coverage for the insureds’ business interruption losses related to the COVID-19 pandemic was excluded under a policy provision which excluded “loss or damage caused directly or indirectly by or resulting from the presence, growth, proliferation, spread or any activity of . . . microbes”.  The policy expressly defined “microbes to include “any….virus.” 

The court rejected the insured’s argument that the policy incorrectly included “virus” in its definition of “microbes” because “a microbe is a ‘minute life form’ and a virus is not a living organism,” and found that there was no ambiguity in the policy definition. The court also rejected the insureds’ argument that the definition of “microbes” in the General Liability Coverage Part, which did not include a “virus”, created an ambiguity as to the definition of “microbes” in the Business Property Coverage Part, noting that the definitions in those two coverage parts were exclusive of each other and not comparable for purposes of determining whether an ambiguity existed.

Finally, the court rejected the insureds’ contention that the terms “presence, growth, proliferation, spread or any activity of . . . microbes” in the microbes exclusion were vague, finding that “[a] reasonable reading of the provision, particularly in tandem with the part providing limited coverage for viruses, reveals that the Policy excludes direct or indirect loss or damage caused by a virus unless the virus is the result of a covered peril other than fire or lightning.”  The court noted that in identifying the “covered peril”, the insureds asserted their “alleged damages were caused by the global-wide spread of COVID-19.”   The court held that the microbes exclusion barred coverage because the insureds’ alleged losses were not caused by a virus resulting from a covered peril, but rather “the purported peril in this instance is the very occurrence excluded by the plain language of the Policy:  the growth, proliferation, and spread of a virus.” 

Because the court found that coverage was barred by the microbes exclusion, it did not address whether the insureds had otherwise established coverage.

Other North Carolina federal court cases involving COVID-19 business interruption coverage disputes have resulted in favorable decisions for insurers. See Natty Greene’s Brewing Co., LLC v. Travelers Cas. Ins. Co. of Am., No. 1:20-cv-437, 2020 WL 7024882 (M.D.N.C. Nov. 30, 2020); Summit Hosp. Grp., Ltd. v. Cincinnati Ins. Co., No. 5:20-cv-254-BO, 2021 WL 831013 (E.D.N.C. Mar. 4, 2021); FS Food Grp. LLC v. Cincinnati Ins. Co., No. 3:20-cv-00588-RJC-DSC (W.D.N.C. Mar. 18, 2021) (Memorandum & Recommendation).  There has been a split among our state courts.  See North State Deli, LLC v. The Cincinnati Insurance Company, 20-cvs-2569 (N.C. Super. Ct. Oct. 9, 2020) (Durham County); Bluewater Sales, LLC v. Erie Insurance Group, 20 CVS 506 (N.C. Super. Ct. Feb. 9, 2021) (Moore County).  We will continue to keep you updated on decisions rendered in the other COVID-19 coverage cases that are pending in our state and federal courts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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