By Mark Binsky

Law360 (November 17, 2020, 5:06 PM EST )

Mark Binsky

The coronavirus pandemic has, in one way or another, affected every segment of American society. Government, at all levels, is straining to deal with both the human and commercial effects of COVID-19 worldwide.

One of the least popular, and potentially one of the most economically damaging, responses by state and local governments in this country has been to implement mandatory closures of nonessential businesses in an effort to quell the spread of the virus.

Many of these businesses reacted in the same way: by submitting claims under their commercial property policies' business interruption coverage features. The insurers' responses, across the board, have been to deny these claims primarily on the grounds that the closure orders do not constitute "physical loss or damage to insured property," which is an almost universal policy prerequisite for business interruption coverage.

In numerous instances, litigation has ensued, with courts in many states now beginning to rule on this question, with a good number of them deciding for the insurance companies.

However, recent decisions show that not all judges read the insurance policy language the same way. 

This article will compare and contrast the two very different policy analyses utilized by two different courts in two recent decisions, the first finding for the insured and the second for the insurer. The two approaches of these judges are, of course, diametrically opposed to one another.

For the Insured

In North State Deli LLC v. The Cincinnati Insurance Co.,[1] North Carolina's General Court of Justice for the County of Durham granted summary judgment to 16 restaurant plaintiffs on the issue of whether the government-mandated closures of their businesses related to COVID-19 constituted a direct physical loss thereby entitling them to business interruption coverage.

The policy language at issue in the case was a version of the standard provision found in most Insurance Services Office business interruption coverage forms and will be familiar to all property insurance claim professionals:

(1) Business Income
We will pay for the actual loss of "Business Income" and "Rental Value" you sustain due to the necessary "suspension" of your "operations" during the "period of restoration." The "suspension" must be caused by direct "loss" to property at a "premises" caused by or resulting from any Covered Cause of Loss.

The court also noted that the policies in question defined "loss" to mean "accidental physical loss or accidental physical damage," although, the court observed, the word "direct," and the phrases "physical loss" and "physical damage" were not further defined in the policy. What would concern the court the most, and what would become the key to its analysis, would be the meaning of the word "loss."

The plaintiffs in the case brought a motion for partial summary judgment.

In support of their application, the plaintiffs made the same argument that many other commercial plaintiffs around the country have made in their own suits to recover for lost revenue resulting from coronavirus inspired governmental shut-downs: that the government's orders forced the business owners to lose the physical use of and access to their business premises, thereby causing "direct physical loss" to covered property as required by the policy.

On the other hand, the defendant insurance companies countered plaintiffs' motion with another common argument in these types of cases: that "physical loss" to covered property requires some actual harm or some form of physical alteration to property before business interruption coverage will become available.

The defendant insurers argued the loss of income due to the interruption of access to the insured premises was not a "physical loss" as that term is used in the policy.

The court initially pointed out that the meaning of an insurance policy is a question of law to be decided by the judge and that the court must give an undefined policy term its "ordinary meaning."

Having found that the word "loss" was not sufficiently defined in the policy, the judge in North State Deli turned to the dictionary meaning of the term. Using three separate sources, the court ascertained that "loss" is defined as either "the act of losing possession," or the "failure to gain, win obtain, or utilize," or "the state of being deprived of or of being without something that one has had."

The judge concluded from this research that the ordinary meaning of the policy phrase "direct physical loss" included the policyholders' "inability to utilize or possess something in the real, material, or bodily world."

The judge found that "direct physical loss," as used in the policies at issue, encompassed the scenario where business owners lose the full range of rights and advantages attendant to the use of, and access to, their insured commercial property.

This, the court said, "is precisely the loss caused by the Government Orders. Plaintiffs 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." Consequently, the court held that the plaintiffs were entitled to coverage.

But the judge in North State Deli went further, addressing a subject that has been of some concern to insurance company lawyers who have been involved with these governmental order related business interruption cases. As noted above, the policy does provide a definition of "loss," which is "accidental physical loss or accidental physical damage."

The judge recognized the existence of the policy definition, but obviously felt that it was too imprecise when it came to the word "loss" itself, so he resorted to three dictionaries for clarification. Yet, as we shall see, this did not stop the judge from using the policy definition in his overall coverage analysis.

The court reasoned that the use of the conjunction "or" in this definition meant that an average policyholder could understand the terms "physical loss" and "physical damage" to have distinct and separate meanings. While the term "physical damage" could be said to require the type of physical alteration to the property as the insurers' attorney argued, the fact that the policy also used a second, separate term — "physical loss" — meant that the latter could not be interpreted the same way.

Doing so would render the phrase duplicative. Referring to the well settled principal that "[t]he various terms of the policy are to be harmoniously construed, and if possible, every word and every provision is to be given effect," the judge held that "physical loss" had to be afforded its own meaning.

The judge decided that this independent meaning was the very one he had discovered when doing his dictionary research. According to this approach, which the court adopted, coverage existed for the plaintiffs despite the absence of actual physical damage because "physical loss" meant loss of use, not physical damage.

For the Insurer

On the other hand, in Real Hospitality LLC v. Travelers Casualty Insurance Company of America,[2] U.S. District Judge Keith Starrett of the U.S. District Court for the Southern District of Mississippi was faced with policy language conceptually identical to the provision in North State Deli. However, Judge Starrett ruled in favor of the insurance company using a markedly different legal analysis.

The actual policy clause in the Real Hospitality case read as follows:

(2) We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at the described premises.

The loss or damage must be caused by or result from a Covered Cause of Loss....

At first glance, the specific wording of the clause appears somewhat different from the one in the North State Deli case. However, once the policy definition of the word "loss" in that case is taken into account, the two provisions become essentially the same.

For interpretive purposes, both policies afford coverage for suspension of the insured's operations where such suspension is caused by physical loss or physical damage to covered property.

Like the plaintiffs in North State Deli, the plaintiff in Real Hospitality operated a restaurant whose business was forced to shutter because of coronavirus related governmental orders. Again, like the North State Deli plaintiffs, the plaintiff in Real Hospitality filed a business interruption claim with its property insurer which was denied, resulting in a lawsuit against the insurance company.

That insurer, Travelers Casualty Insurance Company of America, moved to dismiss. The restaurant opposed the motion, making the same argument that the court in North State Deli employed to decide that case; namely, that the use of the separate phrases "physical loss" and "physical damage" in the policy provision in question meant that coverage was available not only for actual damage to property, but for loss of use as well.

Judge Starrett, with very subtle reasoning, rejected this approach. He conceded that the use of the two phrases meant that they addressed different kinds of casualty events, but not in the same way as the judge in North State Deli saw it.

Rather than view the dichotomy in the policy language as being between damage to insured property on the one hand, and loss of use of the insured property on the other as the judge in North State Deli had, Judge Starrett interpreted the first phrase as pertaining to property damage but construed the second phrase to mean the physical loss of the insured property — what he called "permanent dispossession" — not the loss of its use.

But this is not the real basis for the difference between the holdings in the two cases. What truly distinguishes them is how each judge approached the coverage analysis.

The judge in North State Deli homed in on the type of harm involved, emphasizing, as the insured in that case did, the loss of the insured property's use along with access to it.

In Real Hospitality, Judge Starrett was unconcerned with the type of harm involved. He concentrated his analysis on the subject of the harm and pointed out that, for coverage to adhere, the policy required damage to, or loss of, insured property.

In Judge Starrett's eyes, whatever the mechanism of the harm might be, it had to affect the insured property. As Judge Starrett saw it, the plaintiff in Real Hospitality was not alleging the loss of, or damage to, insured property. Its argument was that it simply could not access or use the insured property, not that anything had harmed the property.

According to Judge Starrett's analytical approach, there was no coverage because the insured property itself was not affected by the governmental orders.

Judge Starrett found that this analysis was bolstered by the policy's wording regarding "period of restoration." The provision in question, like almost all business interruption provisions, allows coverage for lost business income only during the "period of restoration."

The policy defines "period of restoration" as commencing "[w]ith the date of direct physical loss or damage" and ends "[t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or (ii) The date when business is resumed at a new permanent location."

Thus, the parameters of the period of restoration presuppose that insured property sustained some physical loss or physical damage that could be repaired, rebuilt or replaced. As the decision stated: "If there is no requirement that physical loss of or physical damage to the property be involved, the definition of the time period for paying the claim makes no sense."

Judge Starrett could find no support anywhere in the policy for the plaintiff's proposition that the date on which the governmental closure orders would be lifted could be construed as the date of repair for purposes of calculating the "period of restoration."

Conclusion

These two cases are obviously poles apart in their analyses of whether a policyholder is entitled to business interruption coverage when the government shuts down its business to prevent the spread of the coronavirus. They are, just as obviously, not the last word when it comes to this dispute.

We will have to wait to see how appellate judges analyze these issues. Until then, the questions will remain unsettled, will foster more and more litigation and encourage forum shopping. The questions posed by the controversy are not simply parochial or arcane matters of insurance law.

Businesses of all types nationwide are claiming losses in the billions of dollars because of government-mandated closures related to COVID-19. They argue that, if they cannot recoup these losses from their insurers, the economic affects will be devastating to the nation's economy.

On the other hand, if insurers are held to owe coverage for these business interruption claims, their dollar exposure will be astronomical and may force them into insolvency which will deprive both businesses and consumers of insurance protection.

Regardless of whose side one is on, interpretation of the policy clause "physical damage or physical loss to insured property" is of major importance to everyone.

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Mark Ian Binsky is counsel at Abrams Gorelick Friedman & Jacobson LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] North State Deli LLC v. The Cincinnati Insurance Co., Case No. 20-CVS-02569 (N.C. Gen. Ct. of Justice, Superior Ct. Div., Durham County, Oct. 7, 2020.).

[2] Real Hospitality LLC v. Travelers Casualty Insurance Company of America , ___F.Supp.3d___, 2020 WL 6503405 (S.D. Miss., 11/04/2020).

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