North Carolina State Court Ruling
In Durham County Superior Court, Senior Judge Orlando Hudson Jr. signed two orders in October 2020 that went further than any others in a handful of recent rulings favoring plaintiffs suing their insurance companies over denials of coverage for Covid-related losses.
In North State Deli v. Cincinnati Insurance Company, Judge Hudson denied the Cincinnati Insurance Company’s motion for summary judgment in the lawsuit. That was the insurer’s attempt to have the case dismissed entirely. The suit was filed by the owners of 16 restaurants that include North State Deli, Lucky’s, Mothers & Sons, and others.
Judge Grants Partial Summary Judgment for Plaintiffs
In an even more substantial order, the judge granted the plaintiffs’ motion for partial summary judgment against the insurance company. That motion sought a declaratory judgment that “Cincinnati must replace the lost business income and extra expenses under insurance policy contracts.”
Law.com reported last week that, “The North State Deli ruling appears to be the first truly definitive win for the plaintiffs in one of these types of cases.”
Pandemic-related business interruption litigation has, so far, been a legal tug-of-war between policyholders and insurers, with most of the wins going to insurance companies’ defense. However, two recent rulings out of Missouri and another out of New Jersey have given plaintiffs glimmers of hope.
While earlier Missouri and New Jersey decisions were preliminary victories for policyholders, this North Carolina ruling is a decisive win for plaintiffs.
Missouri Trial Case Rulings for Plaintiffs
In Studio 417 v. Cincinnati Insurance Co., U.S. District Judge Stephen Bough of the Western District of Missouri denied Cincinnati Insurance’s motion to dismiss a complaint filed by Studio 417. That entity operates hair salons in Springfield, Missouri, along with several local salons and restaurants in Springfield and Kansas City, MO.
Judge Bough ruled that the presence of Covid-19 was not a “benign condition” as the insurer claimed. He ruled for the plaintiff’s position that Covid particles were a “physical substance” which attached to their property and damaged it, rendering their property unsafe and unstable. That ruling allowed the suit to proceed.
In Blue Springs Dental Care v. Owners Insurance, Judge Bough cited the Studio 417 decision, noting that the policy at issue failed to define the term “direct physical loss.” The judge ruled that the plaintiffs: “[P]lausibly alleged that Covid-19 physically attached itself to their dental clinics, thereby depriving them of the possession and use of those insured properties.”
New Jersey Trial Case Rulings for Plaintiffs
In Optical Services USA/JCI v. Franklin Mutual Insurance, Bergen County, New Jersey Superior Court Judge Michael Beukas rejected an insurance defense motion to dismiss a case which challenged the insurer’s denial of a business interruption claim.
Judge Beukas concluded that plaintiffs in that case “should be afforded the opportunity to develop their case and prove that the event of the Covid-19 closure may be a covered event under the Coverage C, Loss of Income, when occupancy of the described premises is prohibited by civil authorities.”
An Interesting Argument
Judge Beukas noted: “There is an interesting argument made before this Court that physical damage occurs where a policyholder loses functionality of their property and by operation of civil authority such as the entry of an executive order results in a change to the property.”
How the New Jersey and North Carolina Compare
In the North Carolina North State Deli case, Judge Hudson not only left the door open for the plaintiffs to develop their argument, he also used a dictionary to determine the meaning of “direct physical loss” in the insurer’s policy.
Judge Hudson said the restaurant owners “were expressly forbidden by government decree from accessing and putting their property to use for the income-generating purposes for which the property was insured.”
The judge said that North Carolina leaders, as in most states, “entered civil authority orders mandating the suspension of business operations at various establishments. The orders also prohibited, via stay-at-home mandates and travel restrictions, all non-essential movement by all residents.”
“This is precisely the loss caused by the Government Orders,” said Judge Hudson. “Nothing in the policy excludes coverage.”
As of early October, roughly 1,300 businesses had sued their insurers for failing to cover losses related to the pandemic, according to data from a Covid coverage litigation tracker run by the University of Pennsylvania Carey Law School. Filings peaked at 60 to 70 new cases per week in May and June and slowly declined through July and August, although September and early October saw 14 to 24 cases filed per week.
Though insurance companies have won most of those cases in the preliminary stages so far, Judge Hudson’s ruling in North Carolina has perhaps brightened the future for some business owners trying to recover losses over Covid lockdown losses.
Attorney David P. Matthews – who represents businesses nationwide trying to recover losses in Covid-19 business interruption claims – said this ruling could help other plaintiffs’ cases. “We hope that this ruling may lead other courts to see a broader meaning to ‘direct physical loss.’ That could help other businesses fighting their own insurance companies over denial of their business interruption claims.”
For the defense side, a New York-based litigator named Paul Ferland wrote in a blog post that there were several appealable issues in Judge Hudson’s ruling which defense would try to exploit.
Mr. Ferland wrote: “The Court’s failure to review North Carolina case law interpreting ‘physical loss or damage,’ its reliance solely on dictionary definitions of terms, and its ruling against applying any of the policies’ exclusions without explanation of its reasoning stand out as critical issues to monitor going forward. Further, the Court’s reliance on the specific policy language in question may limit the precedential value of Judge Hudson’s ruling. Finally, and perhaps most critical for insurers to note, the inclusion of a virus exclusion would likely have rendered much of Judge Hudson’s analysis moot.”
Virus Exclusions still problematic for Plaintiffs
Some legal experts believe that Judge Hudson’s ruling and the other plaintiff-friendly decisions that have occurred thus far are still unlikely to help those whose policies contain virus exclusions. Most of the cases brought with virus exclusions have been routinely shut down in the courts.