Key Takeaways
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On December 13, the Supreme Court of North Carolina found that government shutdown orders due to COVID-19 are sufficient to invoke coverage under an all-risk commercial property policy
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Coverage disagreements must be resolved pursuant to “special interpretive principles” applicable to insurance contracts, including viewing the contract in light of what a reasonable person in the position of the insured would have understood it to mean
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In a companion case regarding a similar policy, a contamination exclusion was held to be sufficient to defeat coverage for virus shutdown orders
The Supreme Court of North Carolina issued a pair of opinions on December 13 relating to coverage for government shutdown orders due to COVID-19. In North State Deli v. Cincinnati Ins., the court broke with the majority of jurisdictions around the country and held that claims for loss as a result of COVID-19 shutdown orders constituted a “direct physical loss” under an all-risk commercial property policy.
The North State Deli opinion reversed the holding of the N.C. Court of Appeals, which had found that the government shutdown orders were not “direct physical loss” according to the plain meaning of the policies. In reversing the intermediate Court of Appeals, the Supreme Court held that the phrase “direct physical loss” was ambiguous and must be construed against the insurer. The Supreme Court acknowledged but rejected the contrary majority position in jurisdictions around the country. In fact, the opinion noted that while other courts have found similar phrasing unambiguous, those courts have nevertheless reached slightly different conclusions as to what the phrase means. The court noted that “the array of definitions offered in those opinions underscores that ‘direct physical loss’ has a range of reasonable interpretations.”
The Supreme Court also relied on “special interpretive principles” that apply to insurance contracts. The opinion stressed that an insurance contract “should be given that construction which a reasonable person in the position of the insured would have understood it to mean.” Relying on this principle, the Supreme Court concluded that a reasonable purchaser of insurance could conclude that the policies covered claims for government shutdown orders due to viruses, and the court noted that at least one insured and its broker specifically contemplated this issue before purchasing the policy in question.
In a companion case issued the same day, the Supreme Court of North Carolina upheld the dismissal of a claim for coverage for losses under an all-risk policy held by a commercial clothing retailer due to COVID-19 government shutdown orders. In Cato Corp. v. Zurich Ins. the court held, in line with the North State Deli opinion, that the insured’s claim sufficiently alleged “direct physical loss” under the policy in question. However, the policy in Cato contained a “contamination” exclusion. More specifically, the Zurich policy expressly excluded “Contamination, and any cost due to Contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy.” The policy defined contamination to mean “any condition of property due to the actual presence of any … virus.” Based on this language, the Supreme Court held there was no coverage, as the complaint alleged viral contamination of the properties in question.
