North Carolina Justices Rule for Restaurants in COVID-19 Claims but Against a Clothing Chain
RALEIGH, N.C. – North Carolina’s Supreme Court issued mixed rulings for businesses seeking financial assistance due to the COVID-19 pandemic. In a ruling announced on Friday, the court declared that one insurer’s policy must cover losses incurred by certain restaurants and bars, while another insurer’s policy was found not to cover losses for a nationwide clothing chain.
The unanimous decisions from the seven-member court addressed the requirements of “all-risk” commercial property insurance policies issued by Cincinnati Insurance Company and Zurich American Insurance Company to the affected businesses. Many businesses that had paid premiums faced reduced income, furloughed or laid off employees, and some even had to close their doors due to the pandemic and the state and local government orders that were implemented in 2020, limiting commerce and public movement. For instance, restaurants in North Carolina were compelled to limit operations to takeout or drive-in services for an extended period.
In the first case, 16 eating and drinking establishments that sued Cincinnati Insurance Company and others contended that their insurance policies covered losses stemming from “direct physical loss” to their property, which was not excluded in their policies. Concerned about potential denial of coverage for their claimed losses, the restaurants and bars sought a judicial clarification that “direct physical loss” should also encompass government-mandated orders. A trial judge agreed, but the intermediate-level Court of Appeals ruled against them, asserting that the claims did not warrant acceptance because there was no actual physical damage to the property—only a loss of business.
However, state Supreme Court Associate Justice Anita Earls, writing for the court, pointed out that the Cincinnati policies did not explicitly define “direct physical loss.” She noted that there were no specific exclusions in the policy that would deny coverage for viruses or contaminants. Justice Earls highlighted that the court would favor any ambiguity toward the policyholders, stating that a reasonable person in their situation would likely understand that their policies included coverage for business income lost due to virus-related government orders.
“It is the insurance company’s responsibility to define essential policy terms and the North Carolina courts’ responsibility to enforce those terms consistent with the parties’ reasonable expectations,” wrote Earls.
In the second ruling, the Supreme Court determined that Cato Corporation, which operates over 1,300 U.S. clothing stores and is based in Charlotte, was properly denied coverage through its “all-risk” policy. Zurich American had refused to cover Cato’s alleged losses, resulting in a lawsuit by the company.
While Cato made a sufficient allegation regarding a “direct physical loss of or damage” to their property, Justice Earls clarified in her opinion that the policy included a viral contamination exclusion, which Zurich American successfully demonstrated applied in this particular case.
The two cases were among eight related COVID-19 claims that the Supreme Court reviewed after hearing oral arguments over two days in October. The justices have yet to issue rulings on most of the remaining matters.
Additionally, the court announced that justices were equally divided regarding a lawsuit filed by former University of North Carolina students who sought refunds for tuition, housing, and fees after in-person instruction was canceled during the 2020 spring semester. The Court of Appeals previously affirmed that it was appropriate to dismiss the suit, as the General Assembly had enacted a law granting colleges immunity from such pandemic-related claims during that semester. Only six of the justices participated in the case—Associate Justice Tamara Barringer did not take part—resulting in a 3-3 deadlock, which means the Court of Appeals’ decision remains intact.
