The opinions expressed here are those of the author, a columnist for Reuters.
By Alison Frankel
Dec 16 (Reuters) - The North Carolina Supreme Court did something truly surprising on Friday: It sided with policyholders who sued their insurer after being denied coverage for losses sustained while their businesses were shut down during the early days of the pandemic.
The state justices ruled that 16 bars and restaurants are entitled to partial summary judgment against their insurer, Cincinnati Financial CINF.O subsidiary The Cincinnati Insurance Co. The justices concluded that the restaurants’ lost business during government-mandated COVID-19 shutdowns was covered under Cincinnati’s property insurance policies as a direct physical loss.
Cincinnati, of course, argued otherwise, offering what the North Carolina high court acknowledged to be a reasonable interpretation of policy language that was open to debate. But the policyholders’ lawyers at The Paynter Law Firm provided compelling arguments to the contrary, the Supreme Court said. And under North Carolina law, the justices concluded, ambiguities in policy language must be resolved in favor of policyholders.
“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,” wrote Justice Anita Earls. “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 might not seem like a remarkable holding until you consider the context of the North Carolina decision: 11 federal circuit courts and at least 20 state supreme courts have analyzed property insurance policies containing substantially similar language to the policies at issue in the North Carolina case — and none of them has concluded that businesses were entitled to coverage for the losses they sustained during government-mandated pandemic closures.
Only the Vermont Supreme Court has previously sided with a policyholder in a COVID business interruption insurance case, in a 2022 decision overturning the dismissal of a military shipbuilder’s lawsuit against its insurer. But the Vermont justices' ruling came only at the pleading stage of the shipbuilder's case.
The North Carolina decision was on summary judgment – marking the first time, according to the restaurants’ counsel, Gagan Gupta of the Paynter firm, that any state supreme court has definitively ruled that an insurer owes coverage to policyholders.
A Cincinnati Insurance spokesperson said by email that it will now “work with the trial court and our policyholders to determine appropriate next steps” when the case is remanded.
“While we respect this ruling from the North Carolina Supreme Court, we have agreed with the nearly 20 state supreme courts and all 11 federal appellate courts that did not find coverage for pandemic-related business interruption claims under our property insurance policy,” Cincinnati said in the statement.
Cincinnati was represented in the North Carolina case by Brooks, Pierce, McLendon, Humphrey & Leonard and Litchfield Cavo. Lawyers at the two firms did not respond to my email query.
The big question, of course, is whether the North Carolina ruling will end up being a unique outlier or a turning point in the once-vast litigation over insurance coverage for businesses shut down during the early days of the pandemic.
Plaintiffs' lawyer Gupta and Marshall Gilinsky of Anderson Kill, who filed a friend-of-the-court brief backing policyholders in the North Carolina case, told me they are hoping that high courts in states that have not yet ruled definitively on COVID business interruption claims will find the North Carolina justices’ reasoning to be persuasive.
“We finally have a state supreme court that had the steadfastness to apply the rules as they have existed for 60 years,” said Gilinsky.
Both Gilinsky and Gupta noted that the North Carolina justices cited the surprising (to me, anyway) statistic that the overwhelming majority of property insurance policies — nearly 83%, according to Gilinsky's amicus brief — contain a specific provision excluding claims for interruptions caused by a virus. The insurance industry, Gilinsky and Gupta said, nevertheless portrayed COVID shutdown cases as an existential threat, which may have helped defendants persuade courts to reject policyholders' theories.
Gupta said there is no doubt that Friday’s decision will help policyholders beyond the 16 plaintiffs in the case. Insurers, he said, will now bear the burden of showing why North Carolina businesses are not entitled to coverage, as long as their policies did not contain an exception for viruses.
“We flipped the starting point,” said Gupta, who described Friday’s ruling as the highlight of his career.
But law professor Tom Baker of the University of Pennsylvania, who has been closely tracking COVID business interruption litigation since these lawsuits began cropping up in 2020, said he is “not holding my breath” that the North Carolina decision will spark a broad swing in judicial sentiment.
To be clear, Baker said the North Carolina justices’ clear-headed analysis shows that different state courts can reach different but equally reasonable conclusions about how to define insurance policy terms. Insurance law varies from state to state, Baker said, so he always predicted that states might disagree on COVID coverage, as they have on coverage for environmental and asbestos liability.
The problem for policyholders, Baker said, is that insurers managed to remove most COVID coverage suits to federal court – and federal appellate courts quickly reached a consensus favoring the defendants. It’s not clear, Baker said, whether and when additional state supreme courts will even get a chance to weigh in.
“It’s so hard to fight against the bandwagon,” Baker said.
Read more:
Appeals court delivers another crushing win for insurers over COVID biz interruption
Business insurance battle for COVID losses shifts to state high courts
(Reporting By Alison Frankel)
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