Two U.S. courts have recently released decisions regarding insurance policies and restaurant closures due to the COVID-19 pandemic. In both of those cases, the courts found for the restaurants and against the insurance companies. In this article, we will briefly review the decisions and discuss, in light of these decisions, some key considerations for Canadian underwriters.
In North Deli LLC, et al. v. The Cincinnati Insurance Company, et al.,[1] a North Carolina superior court granted summary judgement to 16 restaurants who sued an insurance company for lost business income and extra expenses as a result of the pandemic. The insurance policies themselves state that the company would pay for direct physical losses. “Direct”, “physical loss”, and “physical damage” are not defined in the policy. The plaintiffs held that the government orders that forced them to lose the physical use of and access to their restaurant properties and premises constituted a non-excluded direct physical loss. The defendants, on the other hand, contended that the policies do not provide coverage for pure economic harm in the absence of physical loss to property, which requires some form of physical alteration to property.
Hudson Jr. J. for the North Carolina court noted that undefined policy terms are to be given their ordinary meaning, and that if the term is open to more than one reasonable interpretation, it is ambiguous and open to judicial interpretation. Hudson Jr. J. found that the ordinary meaning of the phrase “direct physical loss” in the context of policies describes the scenario where business owners, their employees, customers, vendors, suppliers, and others lose the full range of rights and advantages of using or accessing their business property, which was precisely the loss caused by the government orders. Finally, Hudson Jr. J. found that even if the defendants’ interpretation of the phrase was also reasonable, looking to past jurisprudence, any ambiguity or uncertainty should be construed against the insurance company.
In Taps & Bourbon on Terrace, LLC. v. Underwriters at Lloyds London,[2] a Philadelphia court overruled an insurance company’s preliminary objections to the plaintiff’s claim regarding COVID-19 business interruptions. The plaintiff restaurant sought coverage for lost income and extra expenses that arose due to the pandemic. While the defendant insurance company brought forth a number of objections to the plaintiff’s claim, perhaps most notable is that, unlike the policy in the previous case, this policy had a virus exclusion. The exclusion expressly states that it applies to all coverage forms, including coverages for property damage, business income, extra expense, and/or an action of civil authority. The plaintiff contended that: the exclusion is open to more than one interpretation and thus that it is ambiguous; the government orders, not the virus itself, were the direct cause of property damage at issue; and the virus exclusion had been removed from the policy.
Glazer J. for the Philadelphia court overruled the defendant’s objections. While he did not provide much in the way of substantive reasons for the decision, he noted that at this early stage of the case it would be premature to dismiss the plaintiff’s claim, especially since the law and facts are rapidly evolving in the area of COVID-19 business losses.
It is perhaps trite to say that when U.S. law develops in a certain direction, Canadian law often follows suit. In light of these two decisions, Canadian underwriters should take care when advising about insurance policies. In particular, they should consider ensuring that all key terms are properly defined, and should pay particular attention to potential ambiguities where terms are not defined. Furthermore, underwriters should consider adding pandemic-specific exclusions to the policies they are reviewing, as well widening the scope of virus-related exclusions to account for situations such as lockdowns.
As Glazer J. noted, the law surrounding COVID-19 business losses continues to evolve, and thus it remains to be seen where courts will ultimately settle on this issue going forward.
[1] North Deli LLC, et al. v. The Cincinnati Insurance Company, et al., 2020 WL 6281508 (Superior Court of North Carolina).
[2] Taps & Bourbon on Terrace, LLC v. Underwriters at Lloyds London, 2020 WL 6380449 (Court of Common Pleas of Pennsylvania).
