A Crack in the Armor of Physical Loss or Damage Requirements in Business Income Loss Policies

October 26, 2020

A North Carolina judge has issued what looks to be the first decision finding that property policies “provide coverage for Business Income and Extra Expenses for [businessowners’] loss of use and access to covered property mandated by the Government Orders as a matter of law.”

The case was filed by a group of sixteen restaurants operating out of North Carolina who were ordered to suspend business operations due to COVID-19. The plaintiffs’ “primary contention is that the Government Orders forced Plaintiffs to lose the physical use of and access to their restaurant property and premises, which constitutes a non-excluded ‘direct physical loss.’” The court agreed based on the following factors:

The Policies did not have virus exclusions;
Since the Policies provide coverage for direct “accidental physical loss or accidental physical damage” the terms must be different and have different meanings;
The terms “direct”, “accidental”, “physical loss” or “physical damage” were not defined in the Policies; and
Various dictionaries define the term “loss” to include “the inability to utilize and possess something in the real, material or bodily world.”

The above led the court to conclude that “[i]n 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.”

The insurer in this case, The Cincinnati Insurance Company, has already indicated they will appeal this decision and we can expect that other insurers will seek to file “friend of the court” briefs on Cincinnati’s behalf. Whether that appeal can be taken absent a full determination of all issues by the North Carolina court remains to be seen. What we do know now, however, is that a final determination of this issue is far from over.

We will continue to keep you updated if courts in other states follow the same reasoning. Your Graham Company Claims Consultant will utilize any potential arguments being considered by the courts to advocate on your behalf for insurance coverage in any COVID-related claims. For more information on this case, see this article.