Cato Corp. v. Zurich Am. Ins. Co.

• Court: Supreme Court of North Carolina
• Decided: December 13, 2024
• Docket: 353PA23
• Status: Published

Opinion

IN THE SUPREME COURT OF NORTH CAROLINA

No. 353PA23

Filed 13 December 2024

CATO CORPORATION, a Delaware corporation, et al.

v. ZURICH AMERICAN INSURANCE COMPANY, a New York corporation

On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision

of the Court of Appeals, No. 23-305 (N.C. Ct. App. Nov. 21, 2023) (unpublished),

affirming an order entered on 10 January 2023 by Judge Forrest Donald Bridges in

Superior Court, Mecklenburg County. Heard in the Supreme Court on 22 October

2024.

Robinson, Bradshaw & Hinson, P.A., by Matthew W. Sawchak, R. Steven DeGeorge, and Benjamin C. DeCelle; and Kozyak Tropin & Throckmorton LLP, by Benjamin J. Widlanski, pro hac vice, Dwayne A. Robinson, pro hac vice, and Gail A. McQuilkin, pro hac vice, for plaintiff-appellants.

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by Gary S. Parsons and Kimberly M. Marston; Squire Patton Boggs (US) LLP, by Lauren S. Kuley, pro hac vice; and Teague Campbell Dennis & Gorham LLP, by William A. Bulfer, Megan N. Silver, and Daniel T. Strong, for defendant-appellee.

EARLS, Justice.

This is a companion case to North State Deli, LLC v. Cincinnati Insurance Co.,

No. 225PA21-2 (N.C. Dec. 13, 2024), also announced today. There, we held that

restaurant policyholders stated a claim for insurance coverage when COVID-19-

related government orders caused the restaurants to suspend business operations CATO CORP. V. ZURICH AM. INS. CO.

Opinion of the Court

due to the loss of use of and access to the restaurants’ physical property. Such losses

amounted to a “direct physical loss” under the terms of that policy, we concluded. We

specifically declined to define “direct physical loss” as requiring tangible alteration of

property. Here, we address a related issue: whether a clothing store retailer stated a

claim for insurance coverage when it alleged that COVID-19 transformed and

destroyed its property but where the policy excludes viral contamination as a covered

cause of loss.

The plaintiff here, Cato Corporation, is a clothing retailer with more than 1,300

stores across North Carolina and thirty-six other states. In July 2019, it purchased

an “all-risk” commercial property insurance policy from defendant Zurich American

Insurance Company. That insurance policy was operative in the spring of 2020 when,

as Cato alleged in its complaint, the COVID-19 virus and related government orders

forced the retailer to “close, severely curtail operations, and remediate and

reconfigure their spaces.” Zurich refused to cover those alleged losses, and Cato sued.

Among other claims, Cato sought a declaratory judgment that its policy with Zurich

covered its alleged losses. The trial court dismissed Cato’s claims on a Rule 12(b)(6)

motion, and the Court of Appeals affirmed—both relying on the now-reversed Court

of Appeals decision in North State Deli, LLC v. Cincinnati Ins. Co., 284 N.C. App. 330

(2022).

On review, we agree with the Court of Appeals’ ultimate decision to affirm the

dismissal of Cato’s claims. But we disagree with the Court of Appeals’ reasoning.

-2- CATO CORP. V. ZURICH AM. INS. CO.

Under North State Deli, No. 225PA21-2, we conclude that Cato failed to allege facts

sufficient to state a claim for insurance coverage due to direct physical loss of or

damage to property because the contamination exclusion precludes coverage for

direct physical losses caused by viruses. Therefore, we affirm the Court of Appeals’

judgment.

I. Background

In reviewing a trial court’s grant of a Rule 12(b)(6) motion, we examine

“whether the allegations of the complaint, if treated as true, are sufficient to state a

claim upon which relief can be granted under some legal theory.” State ex rel. Stein

v. Kinston Charter Acad., 379 N.C. 560, 572 (2021) (quoting Bridges v. Parrish, 366

N.C. 539, 541 (2013)). The summary below follows from the factual allegations in

Cato’s complaint and subsequent judicial proceedings.

A. Cato purchases an “all-risk” commercial property insurance policy from Zurich.

In July 2019, Cato purchased an “all-risk” commercial property insurance

policy from Zurich American Insurance Company. That policy provides $250 million

in coverage for the benefit of Cato and its named subsidiaries in exchange for

substantial premiums. A copy of the policy was attached as an exhibit to Cato’s initial

complaint and incorporated therein by reference.

Like the policy at issue in North State Deli, No. 225PA21-2, Cato’s policy is an

“all-risk” commercial property insurance policy. That means the policy defines the

scope of covered risks by its exclusions. See N. State Deli, No. 225PA21-2, slip op. at

-3- CATO CORP. V. ZURICH AM. INS. CO.

5–7. Section 1.01 of the policy reads, “This Policy Insures against direct physical loss

of or damage caused by a Covered Cause of Loss to Covered Property, at an Insured

Location . . . all subject to the terms, conditions and exclusions stated in this Policy.”

The bold lettering connotes a defined policy term. In turn, Covered Cause of Loss is

defined as “All risks of direct physical loss of or damage from any cause unless

excluded.” The policy does not define “direct physical loss of or damage,” or any

constituent term in that phrase.

One such excluded risk is “contamination.” Specifically, the policy excludes

“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.” In turn, “contamination” means “any condition of property due to the

actual presence of any . . . virus.”

The policy also provides coverage for lost business income due to direct physical

loss of or damage to property. Specifically, under the “time element” coverage

provision, Zurich must pay for

the actual Time Element loss the Insured sustains, as provided in the Time Element Coverages, during the Period of Liability. The Time Element loss must result from the necessary Suspension of the insured’s business activities at an Insured Location. The Suspension must be due to direct physical loss of or damage to Property (of the type insurable under this Policy other than Finished Stock) caused by a Covered Cause of Loss at the Location . . . .

This insurance contract was in effect when the pandemic struck in the spring of 2020.

-4- CATO CORP. V. ZURICH AM. INS. CO.

B. Cato alleges that the COVID-19 virus caused “direct physical loss of or damage” to property.

As Cato alleges, beginning in March 2020, the COVID-19 virus “physically

inundated” Cato’s stores.1 The virus’s “physical impacts . . . damaged [Cato’s]

properties” and rendered them “uninhabitable, unfit, unsafe and unusable.”

Government orders forced Cato’s stores to close and set limits and conditions on how

they could later reopen. Cato had to “remediate and reconfigure” its physical spaces

“because of the pervasiveness of the COVID Virus, including its direct physical

impacts on property.” Cato incurred significant revenue losses because of the virus’s

impairment of its property and related government mandates. It also incurred great

expense in attempting to remove the virus “and otherwise remediate, reconfigure and

restore the physical damage to its properties,” including by altering “the physical

structures to comply with governmental safety guidelines and best practices.”

Cato sought coverage for losses sustained due to the virus’s impairment of the

safety, use, and functionality of its stores in March of 2020. Zurich neither affirmed

nor denied coverage for Cato’s claim, instead issuing a reservation of rights letter

pointing to various policy provisions. Cato then sued before the expiration of the one-

year contractual limit, seeking a declaratory judgment that its losses were covered

under its policy with Zurich, and requesting damages for breach of contract as well

as treble damages and attorneys’ fees for violations of North Carolina’s Unfair and

1 Consistent with Cato’s complaint, we use “COVID-19 virus” in this opinion to refer

to the SARS-CoV-2 virus which causes the COVID-19 respiratory illness.

-5- CATO CORP. V. ZURICH AM. INS. CO.

Deceptive Trade Practices Act.

C. Court of Appeals affirms dismissal of Cato’s claims.

Zurich moved to dismiss all of Cato’s claims under North Carolina Rule of Civil

Procedure 12(b)(6) for failure to state a claim. See N.C.G.S. § 1A-1, Rule 12(b)(6)

(2023). After a hearing, the trial court concluded that the decision of the Court of

Appeals in North State Deli, 284 N.C. App. 330, was “authoritative and warrants

dismissal” of Cato’s claims. In particular, it observed that “in order for a loss to be

covered by the policy, the loss must have resulted from physical harm to the property

of the insured.” Cato’s allegations that the COVID-19 virus physically damaged the

covered property were “not sufficient to overcome” that caselaw.

Cato appealed, and on review, the Court of Appeals held that “tangible

alteration to the property is necessary to” recover for a “direct physical loss of or

damage” to property. Cato Corp. v. Zurich Am. Ins. Co., No. 23-305, slip op. at 9 (N.C.

Ct. App. Nov. 21, 2023) (unpublished). Cato failed to allege such losses in its

complaint, the court concluded, because “the record does not indicate any ‘physical

transformation’ of plaintiffs’ property.” Id. at 10 (citing Uncork & Create LLC v.

Cincinnati Ins. Co., 498 F. Supp. 3d 878, 883 (S.D.W. Va. 2020), aff’d, 27 F.4th 926

(4th Cir. 2022)). Although Cato alleged that the virus causes “tangible physical

transformation of the air and surfaces” of its property, “adhered to all objects and

surfaces” in the property, and “transformed Covered Properties into dangerous

vectors of illness and disease . . . requir[ing] ongoing remediation,” id. at 9–10, those

-6- CATO CORP. V. ZURICH AM. INS. CO.

allegations were, in the view of the Court of Appeals, “unwarranted deductions of

fact” not entitled to the presumption of truth at the motion to dismiss stage, id. at 10

(quoting Sutton v. Duke, 277 N.C. 94, 98 (1970)). The Court of Appeals did not reach

the issue of whether coverage was barred by a policy exclusion, reasoning that an

insurer has no burden to prove a policy exclusion until a prima facie case of coverage

is shown. Id. at 14 (citing Fortune Ins. Co. v. Owens, 351 N.C. 424, 430 (2000)). The

Court of Appeals affirmed the trial court’s order dismissing Cato’s complaint, and

Cato again appealed. We allowed Cato’s petition for discretionary review on 21 May

II. Analysis

We conclude that Cato sufficiently alleged a “direct physical loss of or damage”

to property under the approach we articulated in North State Deli, No. 225PA21-2.

However, Zurich met its burden to prove the contamination exclusion applies, and

therefore, Cato’s claims were properly dismissed. We address each issue in turn.

A. Standard of review.

North Carolina is a notice pleading state, meaning that a complaint need only

give “sufficient notice of the events or transactions which produced the claim to

enable the adverse party to understand its nature and basis and to file a responsive

pleading.” Pyco Supply Co. v. Am. Centennial Ins. Co., 321 N.C. 435, 442 (1988); see

also N.C.G.S. § 1A-1, Rule 8(a)(1) (2023). It is not appropriate to dismiss a complaint

unless “it appears to a certainty that [the] plaintiff is entitled to no relief under any

-7- CATO CORP. V. ZURICH AM. INS. CO.

state of facts which could be proved in support of the claim.” Est. of Graham v.

Lambert, 385 N.C. 644, 656 (2024) (quoting Sutton, 277 N.C. at 103).

A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of a claim. Id. The

motion is properly granted “(1) when the complaint on its face reveals that no law

supports plaintiff’s claim; (2) when the complaint on its face reveals the absence of

fact sufficient to make a good claim; [or] (3) when some fact disclosed in the complaint

necessarily defeats plaintiff’s claim.” Jackson v. Bumgardner, 318 N.C. 172, 175

(1986). On a Rule 12(b)(6) motion, well-pleaded allegations of fact in the complaint

are treated as true, but conclusions of law are not. Id. at 174–75. Factual inferences

should be viewed “in the light most favorable to the nonmoving party.” See

CommScope Credit Union v. Butler & Burke, LLP, 369 N.C. 48, 51 (2016) (quoting

Daniels v. Montgomery Mut. Ins. Co., 320 N.C. 669, 682 (1987)).

“Questions concerning the meaning of contractual provisions in an insurance

policy are reviewed de novo on appeal.” Register v. White, 358 N.C. 691, 693 (2004).

As we explained in North State Deli, when interpreting a contract for insurance, the

plain language and ordinary meaning of the policy control unless the contract

specifically defines certain terms or the context suggests otherwise. No. 225PA21-2,

slip op. at 11–12. The contract “should be given that construction which a reasonable

person in the position of the insured would have understood it to mean.” Id. at 12

(quoting Grant v. Emmco Ins. Co., 295 N.C. 39, 43 (1978)). Where the language of a

contract is reasonably susceptible to either construction offered by the parties, the

-8- CATO CORP. V. ZURICH AM. INS. CO.

ambiguity should be construed in the policyholder’s favor. Id. at 12–14 (citing Accardi

v. Hartford Underwriters Ins. Co., 373 N.C. 292, 295 (2020)).

B. Cato’s complaint sufficiently alleged a “direct physical loss of or damage” to property.

North State Deli, No. 225PA21-2, controls here on the question of whether,

absent an exclusion, the policy covers this loss. Applying that precedent, Cato did

sufficiently allege a “direct physical loss of or damage” to property.

The parts of Cato’s policy that grant coverage are functionally the same as the

parts of North State Deli’s policy that grant coverage. Both policies rely on the

operative phrase “direct physical loss” without defining that term, so it must be given

its ordinary meaning. Id. at 14–15; see also Accardi, 373 N.C. at 295. Both make use

of the conjunctive “or,” as in the phrase “direct physical loss of or damage” to property,

so direct physical loss must have a distinct and possibly broader meaning than

physical damage in order to give effect to both phrases. See N. State Deli, No.

225PA21-2, slip op. at 16–17; C.D. Spangler Constr. Co. v. Indus. Crankshaft & Eng’g

Co., 326 N.C. 133, 142 (1990). And both contain a set of exclusions that suggest a

broader meaning of “direct physical loss” of property. See N. State Deli, No. 225PA21-

2, slip op. at 19. Here, for example, Cato’s policy excludes unexplained

disappearances, seizure or other governmental destruction, the cumulative effects of

dust, and “delay, loss of market, or loss of use.” Those exclusions suggest the scope of

“direct physical loss” of property is broader than physical tangible alteration to

property, or else they need not be mentioned as exclusions to begin with.

-9- CATO CORP. V. ZURICH AM. INS. CO.

In its complaint, Cato alleged specific facts to show that “The COVID Virus

caused tangible physical transformation of the air and surfaces at the Cato’s Covered

Properties [sic], and rendered them dangerous transmission sources for the COVID

Virus, making the Covered Properties unsafe, unfit, non-functional and

uninhabitable for their intended uses.” That physical destruction, “along with the

government orders that recognized these physical effects, shuttered Cato’s Covered

Properties and caused physical loss of Cato’s use of the Covered Properties.”

Thus, accepting these factual allegations as true and taking factual inferences

in the light most favorable to the nonmoving party, as we must at the motion to

dismiss stage, Cato met its burden to show coverage due to a “direct physical loss of

or damage” to property. See Jackson, 318 N.C. at 174–75; CommScope Credit Union,

369 N.C. at 51.

C. The contamination exclusion applies to Cato’s alleged losses.

Once a prima facie case of coverage is shown, the insurer has the burden to

prove a policy exclusion precludes coverage. See Fortune Ins. Co., 351 N.C. at 430. We

conclude that Zurich has met its burden here and that the contamination exclusion

in Cato’s policy precludes coverage for Cato’s alleged losses.

To assess whether any exclusion applies, we review the full text of Cato’s

policy. Such a review is appropriate at the motion to dismiss stage without converting

the motion to one for summary judgment, because the policy was attached as an

exhibit to Cato’s initial complaint and explicitly incorporated therein. See N.C.G.S.

-10- CATO CORP. V. ZURICH AM. INS. CO.

§ 1A-1, Rule 12(b) (2023). One part of the policy explicitly excludes coverage for losses

resulting from “contamination.” Specifically, contamination and “any cost” associated

with it, “including the inability to use or occupy property or any cost of making

property safe or suitable for use or occupancy” is excluded by the policy. In turn,

“contamination” is defined as “[a]ny condition of property due to the actual presence

of any foreign substance, impurity, pollutant, hazardous material, poison, toxin,

pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing

agent, Fungus, mold or mildew.” (Emphasis in original omitted; italicized emphasis

added.)

Viral contamination is essentially what Cato alleges. It alleges that the

COVID-19 virus’s “physical transformation of the air and surfaces” rendered its

properties “dangerous transmission sources” and made them unsafe and non-

functional for their intended uses. “[B]ecause of the pervasiveness of the COVID

Virus,” Cato’s stores “were compelled by government orders to close, severely curtail

operations, and remediate and reconfigure their spaces.” A “reasonable person in the

position of the insured,” see Grant, 295 N.C. at 43, would understand such allegations

to qualify as “condition[s] of property due to the actual presence of any . . . virus.”2

2 Cato seems to concede as much in its brief to this Court, when it explained in a

footnote how the virus physically damages surfaces: “When contaminated with the Covid Virus or another infectious organism, . . . the surface or object to which the virus or organism adheres is transformed into a ‘fomite.’ ” (Emphasis added.)

-11- CATO CORP. V. ZURICH AM. INS. CO.

Cato responds that this is not the operative definition of “contamination” or

“contaminant” in its policy. Instead, it says that it alleged it paid a higher premium

for a different definition of “contamination.” That revised definition is located in a

series of “amendatory endorsements” at the end of the policy, which appear with

labels corresponding to specific states—thirty-one states, in fact. Cato argues that

the “Amendatory Endorsement – Louisiana” policy provision amended Cato’s

coverage by deleting the definition of “contamination” listed in the main body of the

policy and described above, replacing it with one that excludes viruses. Thus, it

contends, viral contamination is covered.

Cato’s argument that its North Carolina policy incorporates the Louisiana

amendatory endorsement is unpersuasive. To start, Cato’s complaint does not allege,

as a factual matter, that it bargained for the Louisiana endorsement to apply to its

policy covering properties not in Louisiana. The complaint makes a general allegation

that not having a virus exclusion in an “all-risk” policy means Cato paid a higher

premium for virus coverage. It specifically defines that virus exclusion as a

standalone “Exclusion Of Loss Due To Virus or Bacteria” that it alleges is “contained

in most of [Zurich’s] other all risks property insurance policies.”3 Then, in a footnote,

the complaint alleges that the separate contamination exclusion does not preclude

coverage for Cato’s losses. But it does not explain why. Nor does it argue that it has

3 That separate virus exclusion allegedly states that Zurich “will not pay for loss or

damage caused by or resulting from any virus.”

-12- CATO CORP. V. ZURICH AM. INS. CO.

any stores or properties in Louisiana. Absent such factual allegations, the effect of

the endorsement as it appears in the policy is a question of law not entitled to a

presumption of truth. See Register, 358 N.C. at 693.

Relying then on the insurance contract itself, Cato alternatively argues that

the thirty-one state-specific amendatory endorsements contain contradictions and

should therefore be strictly construed in Cato’s favor. It points out that two of the

thirty-one state-labeled amendatory endorsements (Connecticut and New York)

specify that the endorsement “APPLIES TO THOSE RISKS IN [state name].” The

twenty-nine other amendatory endorsements omit such limiting language, including

the one labeled “Louisiana.” The Louisiana amendatory endorsement also proclaims:

“THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT

CAREFULLY.”

Certainly the amendatory endorsements would be clearer if each specified that

it applied to risks only in the state corresponding to its label. But that something

could be written more clearly does not necessarily make it ambiguous; rather, an

ambiguity exists in an insurance contract when its language is “fairly and reasonably

susceptible to either of the constructions for which the parties contend.” See Accardi,

373 N.C. at 295. We think these labels are reasonably susceptible to only one

construction: a “reasonable person in the position of the insured” would construe an

“Amendatory Endorsement – Louisiana” in the context of thirty other state-specific

amendatory endorsements as having some connection to risks or losses only in

-13- CATO CORP. V. ZURICH AM. INS. CO.

Louisiana. See Grant, 295 N.C. at 43. Thus, it is not applicable here, where Cato does

not allege any connection to Louisiana.

This reading also comports with the other interpretive principle that insurance

policy provisions should be read in harmony and not to create conflicts. See C.D.

Spangler Constr. Co., 326 N.C. at 142. If we look only at the state-specific amendatory

endorsements that do not have language limiting them to risks in those states (i.e.,

the twenty-nine other endorsements outside of Connecticut and New York), and read

those to affect policies in all states, conflicts abound. For example, the Georgia

amendatory endorsement requires legal action to be initiated within twenty-four

months of the date of the loss, while Maryland states three years, and Missouri states

ten years. The Alaska amendatory endorsement states that if the insured cancels, the

refund may be subject to a cancellation fee of 7.5% of any unearned premium, while

the Florida amendatory endorsement does not mention a cancellation fee and instead

provides that “the refund may be less than pro rata but no less than 90% of the pro

rata unearned premium.” Those two amendatory endorsements also specify different

timelines by which a refund is to be mailed. Alaska states any premium refund will

be mailed within forty-five days after the request for cancellation; Florida states any

premium refund will be mailed within fifteen days of the cancellation taking effect.

Reading the state-specific amendatory endorsements to apply only to those risks in

the respective states avoids these conflicts and harmonizes the provisions consistent

with the parties’ intent. See C.D. Spangler Constr. Co., 326 N.C. at 142.

-14- CATO CORP. V. ZURICH AM. INS. CO.

Cato makes the final point that a different provision of the policy instructs that

“The titles of the various paragraphs and endorsements are solely for reference and

shall not in any way affect the provisions to which they relate.” (Emphasis added.)

This limitation must mean that the “Amendatory Endorsement – Louisiana”

provision cannot be read in a manner that affects the scope of Cato’s coverage, it

asserts. But if that were right, the titles of each endorsement would become

superfluous. That again contradicts our obligation to give effect to each policy

provision. See C.D. Spangler Constr. Co., 326 N.C. at 142. The more harmonious

reading is that the titles do serve as a reference to understand where coverage applies,

but do not change the underlying substance of the applicable policy.

In sum, a “reasonable person in the position of the insured” would understand

the viral contamination exclusion in Cato’s policy to exclude Cato’s alleged losses. See

Grant, 295 N.C. at 43. That exclusion bars coverage for Cato’s alleged losses here.

III. Conclusion

For the foregoing reasons, we conclude that Cato’s alleged losses are barred by

the viral contamination exclusion in its commercial property insurance policy with

Zurich. We modify the Court of Appeals decision below but affirm its judgment

dismissing Cato’s claims.

MODIFIED AND AFFIRMED.

-15-