North Carolina justices rule for restaurants in COVID-19 claims but against a clothing chain

RALEIGH, N.C. — The North Carolina Supreme Court on Friday issued mixed rulings for businesses seeking financial relief due to the COVID-19 pandemic, saying that one insurer’s policy should cover losses incurred by some restaurants and bars, but that the policy from another insurer for a national clothing store chain is not due to an exception.

The seven-member court’s unanimous decisions in the two cases concerned the requirements of “all-risk” commercial property insurance policies issued to the companies by U.S. insurance companies based in Cincinnati and Zurich.

The companies that paid premiums saw their sales and revenues decline, employees laid off or even closed due to the coronavirus and the resulting 2020 state and local government orders that restricted commerce and public movement. Restaurants in North Carolina, for example, were forced to limit sales to takeout or drive-thru orders for some time.

In one case, the 16 food and beverage establishments that owned The Cincinnati Insurance Co., The Cincinnati Casualty Co. and others had sued largely similar policies that protected their buildings and personal property, as well as all business income from “direct physical loss” of property. not excluded by their policy.

Concerned that coverage would be denied for claimed losses, the restaurants and bars filed a lawsuit, asking a court to rule that “direct physical loss” also applied to government-imposed orders, according to a court opinion. A judge sided with them, but a mid-level Court of Appeal panel disagreed, saying such claims did not need to be accepted because there was no actual physical damage to the property – just loss of business.

But Associate Supreme Court Justice Anita Earls, writing for the court, noted that Cincinnati’s policy did not define “direct physical loss.” Earls also noted that there were no specific policy exclusions that would deny coverage for viruses or contaminants. Earls said the court was in favor of any ambiguity against the policyholders because a reasonable person in their position would understand that the policy includes coverage for business income lost due to virus-related government orders.

“It is the responsibility of the insurance company to define essential policy terms and the responsibility of the North Carolina courts to enforce those terms consistent with the reasonable expectations of the parties,” Earls wrote.

In the other ruling, the Supreme Court said Cato Corp., which operates more than 1,300 U.S. clothing stores and is headquartered in Charlotte, was properly denied coverage because of its “all-risk” policy. Zurich American Insurance Co. had refused to cover Cato’s alleged losses, and Cato sued.

But while Cato sufficiently alleged that there was “direct physical loss or damage” to property, Earls wrote in another opinion, the policy contained a viral contamination exclusion that Zurich American found applicable in this case.

The two cases were among eight related to COVID-19 claims on which the Supreme Court heard oral arguments over two days in October. The judges have yet to rule on most of these cases.

The court announced Friday that the justices were evenly split on a lawsuit filed by then-University of North Carolina students seeking reimbursement for tuition, housing and fees when in-person instruction was canceled during the spring 2020 semester. The Court of Appeals agreed that it was proper to dismiss the lawsuit — the General Assembly had passed a law granting colleges immunity from such pandemic legal claims for that semester. Only six justices decided the case — Associate Justice Tamara Barringer did not participate — so the 3-3 deadlock means the Court of Appeal’s decision stands.