RALEIGH, N.C. — The North Carolina Supreme Court delivered a mix of rulings on Friday concerning businesses seeking financial assistance due to the impacts of the COVID-19 pandemic. The court determined that one insurer would be responsible for covering losses experienced by certain restaurants and bars, but a different insurer’s policy related to a national clothing retailer would not provide coverage because of a specific exclusion.
The unanimous decisions were made by the seven-member court in two cases that focused on the provisions of “all-risk” commercial property insurance policies from Cincinnati and Zurich American insurance companies that were purchased by the affected businesses.
Businesses that paid their insurance premiums faced significant challenges, including reduced income, employee furloughs or layoffs, and even permanent closures as a result of the pandemic. Local and state government mandates enforced in 2020 restricted commerce and public movement, which severely impacted operations. In particular, restaurants in North Carolina were required to limit their selling options to takeout or drive-through services for a period of time.
In the first case, 16 restaurants and bars took legal action against The Cincinnati Insurance Co. and other related companies, all of whom had comparable policies that included safeguards for their buildings and personal property as well as coverage for business income lost due to “direct physical loss” of property, provided that such scenarios were not explicitly excluded by their policies.
Fearing that their claims for losses would be rejected, these establishments sought a definitive court decision stating that “direct physical loss” also pertains to the government-mandated restrictions. Initially, a trial judge ruled in favor of the businesses, but this decision was later overturned by a panel from the intermediate-level Court of Appeals, which concluded that, since there was no tangible physical damage to the properties—only a decline in business—such claims were invalid.
However, state Supreme Court Associate Justice Anita Earls, who authored the court’s opinion, pointed out that the insurance policies from Cincinnati did not specifically clarify what constituted “direct physical loss.” Furthermore, she mentioned that there were no exclusions in the policies that would reject coverage for losses related to viruses or contaminants. The court expressed that any ambiguities in the policies should be interpreted in favor of the policyholders, suggesting that a reasonable person in their position would understand their coverage to include business income losses stemming from virus-related governmental mandates.
On the other hand, in the second ruling, the Supreme Court upheld that Cato Corp., which operates over 1,300 clothing stores across the United States and is based in Charlotte, had been rightly denied coverage under its “all-risk” policy. Zurich American Insurance Co. had refused to cover Cato’s claimed losses, prompting Cato to file a lawsuit.
Although Cato adequately claimed a “direct physical loss of or damage” to its properties, Justice Earls stated in her additional opinion that the policy contained an exclusion for viral contamination, which Zurich American successfully proved was applicable in this instance.
These two cases are part of a broader set of eight related COVID-19 claims the Supreme Court heard during two days of oral arguments in October, and the justices have yet to arrive at decisions on the majority of the pending matters.
Additionally, the court announced on Friday that it was deadlocked on a separate lawsuit filed by former students at the University of North Carolina seeking refunds for tuition, housing, and fees due to the transition to non-in-person classes during the 2020 spring semester. The Court of Appeals had previously affirmed the dismissal of this suit, citing a new law passed by the General Assembly that granted immunity to colleges for pandemic-related legal claims during that semester. As only six justices participated in this case—with Associate Justice Tamara Barringer abstaining—the 3-3 split means that the Court of Appeals ruling will stand.
