A judge in Durham County, North Carolina has handed down what may be the nation’s first dispositive ruling in favor of policyholders in a COVID-19 business-interruption lawsuit.

Superior Court Judge Orlando F. Hudson Jr. ruled on Oct. 7 that closure orders that restricted the use of a group of 16 restaurants in the Raleigh-Durham area constituted a “direct physical loss” that was covered by the policy.

“Cincinnati’s argument that the policies require physical alteration conflates ‘physical loss’ and ‘physical damage,'” the judge wrote in his order. “The use of the conjunction ‘or’ means — at the very least — that a reasonable insured could understand the terms ‘physical loss’ and ‘physical damage’ to have distinct and separate meanings.”

The case is North State Deli et. al v. Cincinnati Insurance Co.

According to a litigation tracker maintained by the University of Pennsylvania law school, as of Thursday 1,183 lawsuits have been filed seeking coverage from insurers for business income losses caused by coronavirus closure orders. Judges have granted insurers’ motions to dismiss in 26 cases, but have denied dismissal motions in 12 cases, including the Durham County lawsuit, according to the university’s data.

In the cases that were dismissed, many of the judges found that some tangible alternation of a property is necessary to trigger coverage. Others were dismissed because the policies excluded coverage for viruses.

Attorney Gagan Gupta with Paynter Law in Hillsborough, N.C. said Hudson’s decision is the first that he is aware of that found policyholders were owed coverage. He said other rulings that denied motions to dismiss did not reach a conclusion on the merits of the claims; they simply allowed proceedings to continue into the discovery phase.

Gupta scored the victory by filing a motion for declaratory judgment that two restaurant groups, with a total of 16 restaurants, were owed coverage under their policies. Cincinnati Insurance had filed a motion to dismiss the claims, arguing that no coverage is owed.

Gupta said none of the policies excluded coverage for viruses, as many all-risk commercial insurance policies do. In fact, the restaurant owners negotiated to include coverage for viruses because they were aware of norovirus outbreaks that had forced restaurant closures, he said.

Cincinnati Insurance intends to appeal Hudson’s ruling, said spokeswoman Betsy Ertel.

“We continue to believe that business interruption coverage under our property policy in this case does not apply because there was no structural alteration to property,” Ertel said. “The prevailing view by courts around the country has been that an economic loss alone doesn’t qualify as direct physical damage or loss to property, which is the trigger for business interruption coverage.”

Hudson’s ruling in favor of policyholders seems to directly contradict North Carolina Insurance Commissioner Mike Causey’s understanding of the law. Causey posted online an open letter to business owners on April 17 telling them that his office cannot force insurers to pay for damages that aren’t covered.

“Standard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses,” he said. “Insurability requires that loss events are due to chance and that potential losses are not too heavily concentrated or catastrophic. This is not possible if everyone in the risk pool is subject to the same loss at the same time.”

Causey’s letter repeated projections made by the Insurance Information Institute that business-continuity losses from COVID-19 may amount to $220 billion to $383 billion per month, and that the total amount reserved for all home, auto and business insurers amounts to only $800 billion.

“This type of loss could cripple the insurance industry causing many companies to fail, which would put the protection of homes, automobiles, and businesses at risk,” Causey said.

In a statement Thursday, the Insurance Information Institute said business interruption policies reimburse business owners from lost profits and continuing fixed expenses when a facility is closed due to direct physical damage from a covered loss, such as a fire, riot or windstorm.

“Insurers have been prevailing nationwide in nearly all of the litigated COVID-19 business interruption lawsuits because, as North Carolina’s insurance Commissioner has noted, ‘standard business interruption policies are not designed to provide coverage for viruses, diseases or pandemic-related losses because of the magnitude of the potential losses,'” stated Chief Executive Officer Sean Kevelighan.

About the photo: The Vin Rouge in Durham, shown here in a photo taken from the restaurant’s website, is one of 16 restaurants that filed suit against Cincinnati Insurance after the carrier denied their business interruption claims.

*This story ran previously in our sister publication Claims Journal.