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 recently for businesses seeking financial assistance due to the pandemic. The court declared that one insurer’s policy must cover losses incurred by some restaurants and bars, while another insurer’s policy for a nationwide clothing store chain was not applicable due to an exception.
The unanimous decisions from the seven-member court addressed the “all-risk” commercial property insurance policies issued by Cincinnati and Zurich American insurance companies to various businesses. Many companies that paid premiums were significantly affected by reduced revenue, employee furloughs or layoffs, and even closures mandated by state and local government orders to limit public movement and commerce due to COVID-19. For instance, many North Carolina restaurants faced restrictions that limited sales to takeout or drive-in orders for an extended period.
In one of the cases, 16 dining establishments filed a lawsuit against Cincinnati Insurance Co., Cincinnati Casualty Co., and others. They argued that their policies, which protected both their physical property and any business income from “direct physical loss,” should cover their losses due to government-mandated orders. Initially, a trial judge sided with the businesses, but an appellate court disagreed, asserting that claims of loss didn’t pertain to tangible harm to property, only to business disruptions.
However, Associate Justice Anita Earls, writing for the court, highlighted that the Cincinnati policies did not clearly define “direct physical loss.” Importantly, there were no explicit policy exclusions denying coverage for viruses or contaminants. Justice Earls emphasized that any ambiguity should favor policyholders; a reasonable person would expect the policies to include coverage for business income lost due to government orders tied to the pandemic.
“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,” Earls stated.
In the second ruling, the Supreme Court determined that Cato Corp., which runs over 1,300 clothing stores based in Charlotte, was rightly denied coverage through its “all-risk” policy. Zurich American had refused to cover Cato’s reported losses, leading to the company’s legal challenge. Although Cato had claimed a “direct physical loss of or damage” to property, the court found that the policy contained a viral contamination exclusion, which applied to this case.
Both cases were part of a larger set of eight related to COVID-19 claims that the Supreme Court examined over two days of oral arguments in October. The justices have not yet ruled on the majority of these matters.
The court also announced that justices were equally divided regarding a lawsuit from students at the University of North Carolina who sought refunds for tuition, housing, and fees after in-person classes were canceled in the spring of 2020. The Court of Appeals dismissed the lawsuit, asserting that a law passed by the General Assembly granted colleges immunity from such pandemic-related claims during that semester. With only six justices participating in the case, the 3-3 deadlock means that the Court of Appeals decision remains in place.
