IN THE SUPREME COURT OF NORTH CAROLINA
No. 225PA21-2
Filed 13 December 2024
NORTH STATE DELI, LLC d/b/a LUCKY’S DELICATESSEN; MOTHERS & SONS, LLC d/b/a MOTHERS & SONS TRATTORIA; MATEO TAPAS, L.L.C. d/b/a MATEO BAR DE TAPAS; SAINT JAMES SHELLFISH LLC d/b/a SAINT JAMES SEAFOOD; CALAMARI ENTERPRISES, INC. d/b/a PARIZADE; BIN 54, LLC d/b/a BIN 54; ARYA, INC. d/b/a CITY KITCHEN and VILLAGE BURGER; GRASSHOPPER LLC d/b/a NASHER CAFE; VERDE CAFE INCORPORATED d/b/a LOCAL 22; FLOGA, INC. d/b/a KIPOS GREEK TAVERNA; KUZINA, LLC d/b/a GOLDEN FLEECE; VIN ROUGE, INC. d/b/a VIN ROUGE; KIPOS ROSE GARDEN CLUB LLC d/b/a ROSEWATER; and GIRA SOLE, INC. d/b/a FARM TABLE and GATEHOUSE TAVERN
v. THE CINCINNATI INSURANCE COMPANY; THE CINCINNATI CASUALTY COMPANY; MORRIS INSURANCE AGENCY INC.; and DOES 1 THROUGH 20, inclusive
On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision
of the Court of Appeals, 284 N.C. App. 330 (2023), reversing an order entered on
9 October 2020 by Judge Orlando F. Hudson Jr. in Superior Court, Durham County,
and remanding the case. Heard in the Supreme Court on 22 October 2024.
The Paynter Law Firm, PLLC, by Gagan Gupta and Stuart M. Paynter, for plaintiff-appellants.
Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by Kimberly M. Marston, Jim W. Phillips Jr., and Gary S. Parsons; and Litchfield Cavo, LLP, by Daniel G. Litchfield, pro hac vice, and Alan I. Becker, pro hac vice, for defendant-appellees.
Joshua H. Stein, Attorney General, by Ryan Y. Park, Solicitor General, and Kaeli Czosek, Solicitor General Fellow, for the State of North Carolina, amicus curiae. N. STATE DELI, LLC V. CINCINNATI INS. CO.
Opinion of the Court
Robinson, Bradshaw & Hinson, P.A., by Richard C. Worf Jr.; and Covington & Burling LLP, by Rukesh A. Korde, pro hac vice, and Tyler Weinblatt, pro hac vice, for United Policyholders and National Independent Venue Association, amici curiae.
Guy W. Crabtree for North Carolina Restaurant & Lodging Association, Restaurant Law Center, and Angus Barn, Inc., amici curiae.
Office of the City Attorney for the City of Durham, by Kimberly M. Rehberg; and Patrick W. Baker, Adam M. Jones, Rhonda D. Orin, pro hac vice, Marshall Gilinksy, pro hac vice, and Madilynne Lee, pro hac vice, for Cities of Charlotte and Durham, amici curiae.
Roger A. Peters II for American Property Casualty Insurance Association, amicus curiae.
EARLS, Justice.
Plaintiffs are bars and restaurants in North Carolina (collectively,
restaurants) that were forced to suspend business operations because of COVID-19-
related orders by government authorities.1 When the global pandemic struck in the
spring of 2020, each restaurant carried a materially similar commercial property
insurance policy with defendants Cincinnati Insurance Company and Cincinnati
Casualty Company (together, Cincinnati). Those policies protect the businesses’
building and personal property as well as business income from any “direct physical
loss” to property not excluded by the policy. The dispute here is whether a “direct
1 They are Lucky’s Delicatessen, Mothers & Sons Trattoria, Mateo Bar de Tapas, Saint
James Seafood, Parizade, Bin 54, City Kitchen, Village Burger, Nasher Cafe, Local 22, Kipos Greek Taverna, Golden Fleece, Vin Rouge, Rosewater, Farm Table, and Gatehouse Tavern. These restaurants and bars are based in Buncombe, Chatham, Durham, Orange, and Wake counties. The parent companies of those businesses are the plaintiff parties.
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physical loss” occurred when government orders forced temporary restrictions on the
use of and access to the restaurants’ physical property.
Cincinnati argues that these temporary physical closures are not the type of
direct “loss” contemplated by the policy and refuses liability for coverage. The
restaurants argue that these closures are a covered property “loss” under the policy’s
ordinary meaning and seek a declaratory judgment to that effect.
Below, the trial court sided with the restaurants, finding on a motion for
partial summary judgment that such losses are covered. The Court of Appeals then
reversed that order, interpreting the insurance contract to exclude such losses, and
remanded the case, directing the trial court to enter summary judgment in favor of
defendants. N. State Deli, LLC v. Cincinnati Ins. Co., 284 N.C. App. 330, 334 (2022).
We disagree with the Court of Appeals based on our Court’s long-standing rules of
insurance contract interpretation. Because a reasonable policyholder in the
restaurants’ shoes could expect “direct physical loss” to property, as used in this
policy, to include the results of COVID-19-era government orders which affected the
restaurants’ use of and access to their physical property, and because the policy
otherwise contains no exclusion for viruses, we construe the ambiguity here in favor
of coverage. Accordingly, we hold that this policy does cover the restaurants’ alleged
losses and that the restaurants are entitled to their motion for partial summary
judgment. We therefore reverse the judgment of the Court of Appeals and remand to
the Court of Appeals for further remand to the trial court for further proceedings
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consistent with this opinion.
I. Background
A. Government orders issued in response to COVID-19 forced covered establishments to suspend business operations.
“A ruling on a motion for summary judgment must consider the evidence in the
light most favorable to the non-movant, drawing all inferences in the non-movant’s
favor.” Morrell v. Hardin Creek, Inc., 371 N.C. 672, 680 (2018). Undisputed evidence
submitted during discovery showed the following: starting in March of 2020, state
and local governments responded to the COVID-19 public health crisis with multiple
orders aimed at stopping the virus’s spread. See, e.g., Exec. Order No. 141, 34 N.C.
Reg. 2360 (May 20, 2020). The orders imposed broad limitations on the use and
operation of a variety of business properties across the state. Relevant here, they
forced owners and employees of bars and restaurants to close or curtail business
operations. For example, varying state orders limited the sale of food and beverages
“to carry-out, drive-through and delivery services only” and limited access to facilities
that sell food and beverages accordingly. See, e.g., Exec. Order No. 118, 34 N.C. Reg.
1834 (Mar. 17, 2020). Bars with no food service were closed outright. See id. Later
orders kept restaurants closed except for preparing food for off-premises
consumption, see Exec. Order No. 120, 34 N.C. Reg. 1844 (Mar. 23, 2020), and
established social distancing and occupancy limits as time progressed, e.g., Exec.
Order No. 131, 34 N.C. Reg. 1960 (Apr. 9, 2020). These state orders were enforced by
threat of criminal prosecution. E.g., id. at 1968.
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Local or municipal orders supplemented these statewide measures. For
example, the City of Durham, where at least some of the restaurants are or were
located, prohibited travel to or engagement in business activities with enumerated
exceptions, including that restaurants were permitted to prepare and serve food for
off-premises consumption only.
The restaurants offered evidence that these mandated closures, use
restrictions, and corresponding declines in business income caused the businesses to
furlough and lay off their employees and even risk having to close permanently.
Sixteen of the restaurants closed completely after the orders, and two remained open
for take-out only before closing for business in May 2020 for a period of time. After
the pandemic, at least one of the restaurants (Lucky’s Delicatessen) never reopened.
B. The restaurants maintained an “all-risk” commercial property insurance policy and supplemental business income coverage.
At the time of these forced closures, the restaurants carried an “all-risk”
commercial property insurance policy and supplemental business income policy with
Cincinnati. “All-risk” or “open-perils” insurance is a type of property insurance that
protects property loss or damage from any peril, unless the peril is expressly
excluded. See Open-Perils Insurance, Black’s Law Dictionary (12th ed. 2024). It is
more protective for insureds because it covers imagined and unimagined perils, so a
business need not guess in advance what misfortune might befall it. See Avis v.
Hartford Fire Ins. Co., 283 N.C. 142, 146 (1973). The policy is also structured to allow
insurance companies to carve out certain events from coverage, including those not
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conducive to risk-spreading across the pool of insureds. Erik S. Knutsen & Jeffrey W.
Stempel, Infected Judgment: Problematic Rush to Conventional Wisdom and
Insurance Coverage Denial in a Pandemic, 27 Conn. Ins. L.J. 185, 194–95 (2021). In
addition to excluded perils, an “all-risk” or “open-perils” policy is further limited by
what types of losses are actually covered—as in, the type of property “damage” or
“loss” triggering coverage under a commercial property insurance policy. See Avis,
283 N.C. at 146 (noting that “all risks” does not include “all losses”).
A hypothetical to clarify this risk/loss distinction: If an alien spaceship crashes
into a small restaurant, that is a covered risk (aliens are not an excluded cause of
loss) and a covered loss (the commercial building is damaged). If an alien spaceship
dumps glitter all over the restaurant, that is a covered risk (aliens are not excluded),
but the insurance company likely could successfully contend that is not a covered loss
(the owner can vacuum up the glitter, and the building is fine). A policyholder is
entitled to coverage if they experience both a covered “risk” and a qualifying “loss.”
The restaurants here have such “all-risk” policies for which they have paid tens
of thousands of dollars in premiums. Specifically, they each have a commercial
property insurance policy that insures building and personal property from direct
physical loss or damage caused by a covered cause of loss—that is, all causes of loss
that are not specifically excluded. They also have a “Business Income (and Extra
Expense) Coverage” supplement insuring against lost business income sustained
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when the business must suspend its operations because of a covered loss.2
Starting with the property insurance policy, it says the following: “We will pay
for direct ‘loss’ to Covered Property at the ‘premises’ caused by or resulting from any
Covered Cause of Loss.” The quotations denote a term defined in the policy.
According to the definitions section, “ ‘Loss’ means accidental physical loss or
accidental physical damage.” But the policy does not define “physical loss,” “physical
damage,” or “accidental,” even as it defines dozens of other terms across three pages
of definitions.
The policy confirms that it is an “all-risk” policy by defining the scope of its risk
coverage only by its exclusions: Covered Causes of Loss means “direct ‘loss’ unless the
‘loss’ is excluded or limited in this Coverage Part.” The excluded Causes of Loss span
six pages. Examples include: earthquakes; an ordinance or law that regulates
construction, use, or repair of any building or structure; war or military action;
certain kinds of flooding or mudslides; fungi; wear and tear; dishonest or criminal
acts; exposure to weather; and pollutants of certain kinds.
Notably, viruses or contaminants are not excluded. On the contrary, one of the
restaurants’ owners and operators, Matthew Raymond Kelly, alleged that he
expressly requested that his insurance broker ensure that the policies provide
coverage for losses due to viruses, given his knowledge of a previous norovirus
2 Although there are multiple policies at issue across the multiple restaurants, the
operative language is the same in each, and therefore, we refer to North State Deli’s policy, attached as an exhibit to Matthew Raymond Kelly’s affidavit.
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outbreak among North Carolina restaurants. (The broker, Morris Insurance Agency,
Inc., is a defendant in this action.) The broker allegedly indicated that the policy
would cover virus-related events —the very policy under which the restaurants now
seek coverage.
The specific provision under which the restaurants seek coverage is the
supplemental “Business Income (And Extra Expense) Coverage Form.” It stipulates:
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 “loss” to property at “premises” . . . . The “loss” must be caused by or result from a Covered Cause of Loss.
Loss here is defined the same way as above (“accidental physical loss or accidental
physical damage”). A “suspension” means, in relevant part, a “slowdown or cessation
of . . . business activities.” The period of restoration is defined as:
a. Begins at the time of direct “loss”.
....
b. Ends on the earlier of:
(1) The date when the property at the “premises” should be repaired, rebuilt or replaced with reasonable speed and similar quality;
(2) The date when business is resumed at a new permanent location; or
(3) 12 consecutive months after the date of direct “loss”.
Putting together this web of provisions, the restaurants are entitled to recover
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insurance payments for the slowdown or cessation of business activities if their losses
stemming from the government-ordered shutdowns are a “direct” “physical loss or . . .
physical damage” to property caused by a covered risk.
C. The trial court sided with the restaurants, and the Court of Appeals reversed.
Because they were concerned Cincinnati would deny coverage for their claimed
losses, the restaurants filed suit in 2020. At issue here is the restaurants’ claim for a
declaratory judgment that gubernatorial, county, and municipal orders constitute
covered perils under the policies that caused “direct physical loss” to property at the
described premises and that Cincinnati must therefore pay the resulting lost business
income and extra expenses as defined by the polices. The restaurants moved for
partial summary judgment on that count on 3 August 2020.
The trial court agreed with the restaurants and granted their motion. Because
Cincinnati did not define “direct” “physical loss” or “physical damage” in the policy,
the court reasoned, those words must be given their ordinary meaning. The ordinary
meaning of “loss,” it noted, includes the “act of losing possession.” “Direct” and
“physical” connote a causal relationship between a source and a material object. It
further noted that “or” in “physical loss or . . . physical damage” suggests “loss” cannot
also require structural alteration to property or else “damage” would be rendered
meaningless. Moreover, it determined that since the policy does not exclude the cause
of the restaurants’ losses, government shutdowns due to a virus must be included.
At the Court of Appeals, a unanimous panel reversed the trial court’s order.
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While noting that the goal of insurance contract interpretation is to arrive at the
coverage intended by the parties and that any ambiguities are to be construed against
the insurer, it concluded that no “direct physical loss of or damage to” property occurs
from loss of use of or access to property. N. State Deli, 284 N.C. App. at 333. Since
there was no physical harm to property, only “loss of business,” partial summary
judgment in favor of the restaurants was error. Id. at 333–34. The restaurants filed
a petition for discretionary review, and the Court allowed the petition.
II. Analysis
A. Standard of Review
“Our standard of review of an appeal from summary judgment is de novo.”
Kimberley Rice Kaestner 1992 Fam. Tr. v. N.C. Dep’t of Revenue, 371 N.C. 133, 137
(2018) (quoting In re Will of Jones, 362 N.C. 569, 573 (2008)), aff’d sub nom. N.C.
Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Fam. Tr., 588 U.S. 262 (2019).
Summary judgment is appropriate when “the record shows that ‘there is no genuine
issue as to any material fact and that any party is entitled to a judgment as a matter
of law.’ ” In re Will of Jones, 362 N.C. at 573 (quoting Forbis v. Neal, 361 N.C. 519,
523–24 (2007)). The meaning of language in an insurance policy presents a question
of law for the Court. Accardi v. Hartford Underwriters Ins. Co., 373 N.C. 292, 295
(2020).
A dispute regarding coverage under an insurance policy is properly resolved
on summary judgment “where the material facts and the relevant language of the
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policy are not in dispute and the sole point of contention is ‘whether events as alleged
in the pleadings and papers before the court are covered by the policies.’ ” N.C. Farm
Bureau Mut. Ins. Co. v. Martin ex rel. Martin, 376 N.C. 280, 285 (2020) (quoting Waste
Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 690–91 (1986)).
Cincinnati does not contest the restaurants’ factual allegations, nor does it
argue that any exclusions apply that preclude coverage. Its sole contention is that the
restaurants have failed to carry their burden to establish that their businesses had
to suspend operations because of a direct physical loss or damage to property. Since
the dispute over the restaurants’ claim for a declaratory judgment turns only on the
interpretation of “direct” “physical loss or . . . physical damage” to property as used
in the policy, we agree that this claim is properly resolved at summary judgment.
B. Rules of Insurance Contract Interpretation
As with all contracts, the goal of interpreting a contract for insurance “is to
arrive at the intent of the parties when the policy was issued.” Woods v. Nationwide
Mut. Ins. Co., 295 N.C. 500, 505 (1978). In doing so, “the plain language of the policy
controls.” N.C. Farm Bureau Mut. Ins. Co., 376 N.C. at 286. Terms that are defined
in a policy should be given that definition. Woods, 295 N.C. at 505–06. Undefined
words are given their ordinary meaning consistent with the context in which the term
is used. Accardi, 373 N.C. at 295. One way of understanding ordinary meaning is to
consult standard, nonlegal dictionaries. N.C. Farm Bureau Mut. Ins. Co., 376 N.C. at
287. Terms should also be interpreted in harmony with other portions of the policy,
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if possible, and to give effect and purpose to each word or term. Wachovia Bank & Tr.
Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 355 (1970).
In addition to these general rules for contract interpretation, special
interpretive principles apply when interpreting contracts for insurance, as our Court
has long recognized. E.g. Jones v. Cas. Co., 140 N.C. 262, 263–65 (1905). Namely, the
insurance contract “should be given that construction which a reasonable person in
the position of the insured would have understood it to mean.” Grant v. Emmco Ins.
Co., 295 N.C. 39, 43 (1978); accord Wachovia Bank & Tr. Co., 276 N.C. at 356 (noting
that undefined terms should be given the “meaning most favorable to the insured
which is consistent with the use of the term in ordinary speech”); Register v. White,
358 N.C. 691, 699 (2004). Where a policy term is ambiguous, because “the language
is ‘fairly and reasonably susceptible to either of the constructions for which the
parties contend,’ ” it should be construed against the insurance company and in favor
of the policyholder. Accardi, 373 N.C. at 295 (quoting Wachovia Bank & Tr. Co., 276
N.C. at 354); accord Brown v. Lumbermens Mut. Cas. Co., 326 N.C. 387, 392 (1990).
Subject to those principles of construction, provisions granting coverage must be read
expansively, and provisions excluding coverage must be read narrowly. Wachovia
Bank & Tr. Co., 276 N.C. at 355.
These basic principles reflect the reality of the parties’ respective bargaining
power: insurance companies prepare the policies and choose what language to use.
See Grant, 295 N.C. at 43. They are also experienced in managing risk and drafting
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policies accordingly. Cf. Infected Judgment, at 194–95 (describing insurance as a
“risk-based product, designed to buffer chance happenings of loss-related events by
pooling collective risk” and noting some considerations in structuring and pricing
insurance polices in light of possible pandemic-related losses). This Court will not
impose on an insurance company liability it did not assume and for which the
policyholder did not pay. Accardi, 373 N.C. at 295. But insurance companies have
ample notice of these longstanding interpretive principles, which set clear “ ‘rules of
engagement’ for novel arguments” on which all parties can rely. See New Appleman
North Carolina Insurance Law §§ 1.03, 1.05 (2024 ed. 2023) (noting that insurance
disputes are governed by “basic principles [that] have been invoked by the courts time
and again,” including that provisions that provide coverage are construed liberally
and ambiguities are resolved against the insurer); 18 Strong’s North Carolina Index
4th, Insurance § 124 (2014) (compiling cases). Such rules of engagement are a useful
interpretive tool to ensure efficient dispute resolution and are consistent with our
approach to other kinds of contract interpretation. See O’Grady v. First Union Nat’l
Bank, 296 N.C. 212, 227 (1978) (describing the general rule of contract interpretation
that ambiguities are construed against the drafting party).
Put simply, because of these rules, insurance companies know they must
clearly “mark out and designate” the contours of their policy and that “it is not the
function of the court to sprinkle sand upon the ice by strict construction of the
[otherwise slippery] term.” Jamestown Mut. Ins. Co. v. Nationwide Mut. Ins. Co., 266
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N.C. 430, 437 (1966). If, in applying these background principles, coverage expands
beyond what the company says it contemplated, then “the fault lies in its own
selection of the words by which it chose to be bound.” Id. at 438.
C. Application to the Restaurants’ Policies
The issue here is whether the phrase “direct” “physical loss” to property as it
is used in the restaurant’s policies covers their loss of physical use of and access to
their property due to virus-related government orders.
Again, the policy does not define this operative term. “Loss” is defined as
“accidental physical loss or accidental physical damage,” but none of those constituent
phrases are defined among the dozens of definitions in the policy. “Accidental” is part
of this definition, but it is not contested here. Our task then is to interpret the
ordinary meaning of “direct physical loss” in the context of this policy.
We start by consulting relevant definitions in standard, nonlegal dictionaries.
See N.C. Farm Bureau Mut. Ins. Co., 376 N.C. at 287. “Direct” is characterized by “a
close esp[ecially] logical, causal, or consequential relationship” or marked by the
“absence of an intervening agency, instrumentality, or influence.” Direct, Webster’s
Third New International Dictionary 640 (2002). “Physical” means material, as
opposed to mental, moral, spiritual, or imaginary. Physical, Webster’s Third New
International Dictionary 1706. “Loss” means a deprivation, failure to keep possession,
or the state or fact of being destroyed. Loss, Webster’s Third New International
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Dictionary 1338.3 Put together, a covered cause of loss must, absent an intervening
factor, result in the material deprivation, dispossession, or destruction of property.
Both parties make reasonable arguments about whether that ordinary
meaning includes closures due to government orders. The restaurants argue that the
orders did immediately result in material deprivation of property. The orders
targeted individual conduct on the property, the functions of the property, and how
policyholders could physically access and occupy the insured space, including
whether and under what conditions the business premises could be open. See, e.g.,
Exec. Order No. 120, 34 N.C. Reg. 1844 (Mar. 23, 2020). That in turn affected the
feasibility of business operations. It is true that these restrictions were temporary,
but there is no “total” or “partial” modifier that excludes temporary property
restrictions from coverage.
Cincinnati counters that “direct physical loss” cannot simply mean “loss of
physical use.” By analogy, it points out that “loss of a car” does not mean the same
thing as “loss of use of a car,” as any grounded teenager could confirm, quoting Image
Dental, LLC v. Citizens Ins. Co. of Am., 543 F. Supp. 3d 582, 590–91 (N.D. Ill. 2021).
Extending that logic, it notes that the COVID-19 virus and corresponding
3 Ironically, Webster’s Third also defines “loss” as “the amount of an insured’s financial
detriment due to the occurrence of a stipulated contingent event (as death, injury, destruction, or damage) in such a manner as to charge the insurer with a liability under the terms of the policy,” which if applied here renders the policy totally circular. Loss, Webster’s Third New International Dictionary 1338.
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government orders regulated the activities of people, not property, and that the
restaurants experienced no physical change to the business property itself.
Contrary to Cincinnati’s arguments, though, we fail to see why the ordinary
meaning of “direct physical loss” is entirely insensitive to the “use” for which a
property is insured. Again, by analogy, the homeowner who cannot live in their house
due to irremediable cat urine odor is not placated that their property is not “lost”
because it could be used as a home for cats. See Mellin v. N. Sec. Ins. Co., 115 A.3d
799, 805 (N.H. 2015) (concluding that “physical loss to property” could include loss
resulting from persistent cat urine odor which rendered a property “temporarily or
permanently unusable or uninhabitable”). This overlap between property “use” and
“loss” follows from a contextual and common-sense expectation that insurance should
protect from threats to property that make it unusable for the purpose for which it is
insured. Property “loss” surely occurs when it is no longer usable for its insured
purpose, as a policyholder would reasonably expect. Thus when the restaurants lost
physical use of their properties as restaurants due to the pandemic orders, they
experienced a direct physical loss.
Can harmonizing the phrase “direct physical loss” with other policy provisions
clarify its contours? We note, as the trial court below did, that “direct physical loss”
is used in conjunction with “direct physical damage,” so “loss” must have some
meaning distinct from “damage” to effectuate both provisions. See also C.D. Spangler
Constr. Co. v. Indus. Crankshaft & Eng’g Co., 326 N.C. 133, 142 (1990). “Damage” is
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defined as “injury or harm to . . . property.” Damage, Webster’s Third New
International Dictionary 571. The distinct meaning of “loss” could be one of degree,
as Cincinnati argues: “loss” is complete destruction or total dispossession, as in an
instance of theft, while “damage” is a less-than-complete impairment or alteration.
That reading would exclude temporary restrictions under the pandemic-era
government orders that barred access to or use of restaurant dining rooms but not
the restaurants’ entire premises. Alternatively, a reasonable policyholder could see
these two words in the disjunctive and read “loss” as purposely broader than
“damage.” A broader definition could encompass dispossession, deprivation, or
impairment of use or function, complete or partial. That would include temporary
dispossession or deprivation of the businesses’ physical property under government
orders, as the restaurants argue.
It is not obvious from the conjunction “or” which of these two distinct yet
overlapping meanings the parties intended. But a “reasonable person in the position
of the insured” could certainly read the provision to include the latter, and the
ambiguity counsels us to find in favor of the restaurants’ reading. See Grant, 295 N.C.
at 43.
Looking yet further to neighboring language in the policies, Cincinnati urges
that the provision indicating the duration for which it will provide insurance benefits
after the property loss or damage, called the “period of restoration,” should color the
meaning of “direct physical loss” in the policy. Assuming without deciding that a
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reasonable insured would look to a provision on the duration of coverage to
understand the scope of the coverage, the ordinary meaning of the “period of
restoration” here again supports both parties’ constructions.
The provision in the restaurants’ policies about the “period of restoration”
states that it runs through one of three disjunctive alternatives: the date by which
the property should be repaired, rebuilt, or replaced; the date when business is
resumed at a new permanent location; or twelve consecutive months after the direct
physical loss or damage. Cincinnati points out that the indemnity ends “on the earlier
of” the three alternatives. Necessarily then, a policyholder must know exactly how
long each alternative takes, so all losses must be capable of complying with all three
alternatives, it argues. That implies direct physical losses are only those that can be
“repaired, rebuilt or replaced,” it says.
But that conclusion does not follow as a matter of ordinary meaning, rooted in
the reasonable understanding of the insured. If a policy gives two alternatives and
says the “earlier” is operative, and one is clearly inapplicable, the “earlier” is the only
applicable one. The insured does not lose coverage because the “loss” cannot be
restored under both alternatives.4 Same, here. If two of the three options (resuming
4 Consider the instant policy, putting aside the temporal alternative of twelve consecutive months. One restoration end-date is when the property at the premises “should be repaired, rebuilt or replaced.” The other is “[t]he date when business is resumed at a new permanent location.” It is clear a policyholder would not comply with both. For example, if escaped radioactive waste from a nuclear powerplant renders the next-door restaurant completely inoperable, then the restaurant policyholder may not have the option to rebuild, repair, or replace its lost property. She would need to move to a new permanent location. And
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at a new permanent location or repairing, rebuilding, or replacing the lost property)
do not apply, a reasonable policyholder would expect the twelve-consecutive-month
limit to be the “earliest” and thus controlling option. And that temporal limit says
nothing as to the contours of a “direct physical loss.”
Looking even further, the varying “exclusions” from covered causes of loss
underscore that the restaurants reasonably expected their losses in these
circumstances to be covered. Because the policy excludes certain kinds of government
zoning regulations, government ordinances, government seizures, and war and
military actions, a person in the insured’s shoes could reasonably expect virus-related
government orders that are not an excluded cause of loss to be covered under the
policy.
Notably, too, the restaurants’ policies contain no exclusions for viruses in
general, even as 82.83% of business insurance policies had such exclusions.5
Cincinnati may dismiss the existence of virus exclusions in other policies as
extratextual, but where a contract defines coverage only by excluded risks, as this
one does, a policyholder must know something about the universe of perils beyond
the four corners of the document to know what coverage they have paid for.
the time it takes to resume at that new permanent location would be the “earliest” and thus operative period of restoration. 5 This figure is according to one insurance industry data measure. See Nat’l Ass’n of
Ins. Comm’rs, COVID-19 Property & Casualty Insurance Business Interruption Data Call, Part 1, Premiums and Policy Information, at 3 (June 2020), https://content.naic.org/sites/default/files/inline-files/COVID- 19%20BI%20Nat%27l%20Aggregates_2.pdf (last visited Dec. 10, 2024).
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Further, concerns about viruses and their consequences for business
operations were common enough in the restaurant industry that at least one
restaurant specifically sought coverage for such losses under the instant policy.
Knowledge of the risks of viruses, together with knowledge that other policies exclude
virus risks while this one does not, underscores that a policyholder would reasonably
understand the absence of such an exclusion as an affirmative grant of coverage. See
Grant, 295 N.C. at 43. This conclusion is further supported by the allegation that the
restaurants’ insurance broker apparently shared this interpretation of the policy.
Finally, at the highest level of context, Cincinnati emphasizes that this is a
commercial property insurance policy. It is not insurance against lost profits, which
it says follows from the restaurants’ reading of “direct” “physical loss” to property.
But the restaurants counter that they seek coverage not under the first-level property
insurance policy—rather their claim is under the supplemental business income
coverage form. A policyholder may reasonably believe that “they purchased business
interruption insurance as an add-on to their property coverage in order to insure a
capital asset—the income-earning power of their business.” Infected Judgment, at
199. If that capital asset “is interrupted due to an interference with their use of the
property[,] . . . their reasonable expectation would be that the business interruption
portion of their policy would cover such losses,” especially since the interruption
coverage relates to the “all-risk” property insurance for which viruses and
corresponding orders are not excluded. See id. That is a particularly reasonable
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expectation for a restaurant policyholder, since restaurants are accustomed to
operating on razor-thin margins and can only do business with use of their physical
space.
Cincinnati, again, could have provided a narrower definition of “direct physical
loss” for this business income coverage. It did not. Instead, it opted only to restate its
non-definition: “ ‘Loss’ means accidental physical loss or accidental physical damage.”
Of course, the more definitions there are, the longer contracts become, and the more
difficult they can be for an ordinary policyholder to understand. But an insurance
company need not define every term in its policy to define the core provision around
which the entire policy operates.
At bottom, a reasonable person in the position of the insured would understand
the restaurants’ policies to include coverage for business income lost when virus-
related government orders deprived the policyholder restaurants of their ability to
physically use and physically operate property at their insured business premises.
Since Cincinnati’s interpretation of “direct physical loss” to property is also
reasonable, North Carolina’s background principles compel us to resolve this
ambiguity in favor of the insured policyholder. See Accardi, 373 N.C. at 295. We
therefore conclude that the restaurants have stated a claim for coverage due to a
“direct physical loss” to property under their policies, and they are entitled to partial
summary judgment as the trial court concluded.
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In so holding, we decline to do what other courts have done and affirmatively
define the “slippery” term Cincinnati chose to use in this manifestly ambiguous
situation. See Jamestown, 266 N.C. at 437; see also Schleicher & Stebbins Hotels, LLC
v. Starr Surplus Lines Ins. Co., 302 A.3d 67, 77 (N.H. 2023) (cautioning against an
overly broad judicial interpretation of “direct physical loss”). We are aware of the
opinions by other courts holding the opposite of what we hold today. But the array of
definitions offered in those opinions underscores that “direct physical loss” has a
range of reasonable interpretations—many of which include considerations of use,
possession, and function that are implicated by virus-related government orders. See,
e.g., Ungarean v. CNA & Valley Forge Ins. Co., 323 A.3d 593, 607–08 (Pa. 2024)
(concluding that “direct physical loss . . . of property” requires “a physical
disappearance, partial or complete deterioration, or absence of a physical capability
or function of the property”); Huntington Ingalls Indus., Inc. v. Ace Am. Ins. Co., 287
A.3d 515, 529 (Vt. 2022) (concluding that “direct physical loss” means “persistent
destruction or deprivation, in whole or in part, with a causal nexus to a physical event
or condition”); Starr Surplus Lines Ins. Co. v. Eighth Jud. Dist. Ct., 535 P.3d 254, 262
(Nev. 2023) (“[D]irect physical loss to covered property requires material or tangible
destruction or dispossession as a result of material or tangible impact directed toward
the property itself.” (cleaned up)); Cajun Conti LLC v. Certain Underwriters at
Lloyd’s, 2022-01349 (La. 3/17/23), 359 So. 3d 922, 926 (“[D]irect physical loss . . .
requires [that a] property sustain a physical, meaning tangible or corporeal, loss or
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damage [or otherwise become uninhabitable].”); Conn. Dermatology Grp., PC v. Twin
City Fire Ins. Co., 288 A.3d 187, 198 (Conn. 2023) (“[D]irect physical loss of property
. . . [requires] some physical, tangible alteration to or deprivation of the property that
renders it physically unusable or inaccessible.” (cleaned up)); Another Planet Ent.,
LLC v. Vigilant Ins. Co., 548 P.3d 303, 307 (Cal. 2024) (“[D]irect physical loss or
damage to property . . . must result in some injury to or impairment of the property
as property.”).
North Carolina’s background rules of insurance contract interpretation
counsel against this approach. It is the insurance company’s responsibility to define
essential policy terms and the North Carolina courts’ responsibility to enforce those
terms consistent with the parties’ reasonable expectations. See Grant, 295 N.C. at 43.
Otherwise, insurance companies are licensed to pitch consumers on an expansive,
“all-risk” policy, while hiding behind a narrower definition imposed by judicial fiat
when it comes time to pay out. Such a setup contradicts our Court’s holdings that the
lodestar for insurance contract interpretation is the reasonable expectation of the
policyholder and that ambiguities should be resolved in the insured’s favor.
III. Conclusion
In light of the above, we cannot say that the restaurants’ policies
unambiguously bar coverage when government orders and threatened viral
contamination deprived the policyholder restaurants of their ability to physically use
and physically operate property at their insured business premises. Accordingly, the
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policyholder restaurants have stated a claim for coverage and are entitled to their
claim for partial summary judgment. We reverse the judgment of the Court of
Appeals and remand this case to the Court of Appeals for further remand back to the
trial court for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
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