North Carolina Supreme Court Ruling Favors Businesses with COVID-19 Claims
The North Carolina Supreme Court has made a landmark decision regarding business interruption insurance coverage related to the COVID-19 pandemic. In the case of North State Deli LLC et al. v. Cincinnati Insurance Co. et al., the court determined that businesses with property insurance policies lacking a virus exclusion clause are eligible for coverage for losses experienced due to the pandemic.
This ruling makes North Carolina only the second state, joining Vermont, where the highest court has affirmed that policies covering “physical loss or damage” can extend to COVID-19-related losses. The Vermont Supreme Court previously ruled in Huntington Ingalls Industries v. Ace American Insurance that such losses could be covered.
The North Carolina Supreme Court’s decision, reached unanimously, underscores key legal principles:
- Contract Interpretation: The court applied standard contract interpretation rules, focusing on the plain language of the insurance policies and what a reasonable policyholder would understand.
- Coverage Scope: The court recognized that the loss of use of commercial property is precisely what commercial property insurance is meant to protect. The court held that when businesses lost the physical use of their properties due to pandemic orders, they sustained a direct physical loss.
The court emphasized that in 2003, insurance companies paid out millions on SARS-CoV-1 business interruption claims, which were covered under policies including “direct physical loss or damage.”
Following the 2002-2003 SARS outbreak, the insurance industry developed broad virus exclusions to prevent such claims. Virus exclusions became standard, with nearly 83% of property policies including them before the COVID-19 pandemic. This meant that about 17% of the policies in the 2019-2020 period covered virus-related losses.
Some insurance companies stated their intention to cover virus-related losses, even petitioning regulators to permit policies without virus exclusions. Strathmore Insurance Co., for example, clarified that pandemics were a covered “type of loss.” They argued that it was important for policyholders to receive this coverage, as they reasonably expect such protection under their all-risks policies. Moreover, they recognized restaurants and other businesses would expect coverage in the event of a fortuitous outbreak of disease.
The North Carolina Supreme Court stressed the reasonable expectation of policyholders based on their coverage without virus exclusion and cited the NAIC report. The court has rightfully stopped insurers from denying these claims, and now NC policyholders should review their policies and check with their insurance advisors to analyze eligibility for claims reimbursement.
With over 30 state supreme courts yet to rule, the North Carolina decision may serve as an important precedent. It is hoped that these courts will follow North Carolina’s lead.
