A lawsuit in Durham has drawn the attention of restaurant owners around the state after a judge ruled business interruption insurance should cover losses incurred by restaurants as a result of mandated closures during the coronavirus pandemic. A joint suit filed by Giorgios Hospitality Group (the original operator behind Kid Cashew and the now-closed Georges Brasserie) and restaurateur Matt Kelly, the case could mean survival for many businesses if the ruling is upheld. We asked Lori Keeton, lawyer and owner of Lori Keeton Law in SouthPark, what the ruling means, and what will likely happen next.

Unpretentious Palate: Can you give us the basics on this lawsuit?
Lori Keeton: Two Durham restaurant owners, Matt Kelly (who owns Mateo Bar de Tapas, Mothers & Sons Trattoria, Saint James Seafood and Lucky’s Delicatessen) and Giorgios Bakatsias (who owns Vin Rouge, Parizade, Rosewater, Bin 54, City Kitchen, Village Burger and Kipos, Farm Table and Gatehouse Tavern), sued their insurance provider, Cincinnati Insurance Company, alleging that North Carolina’s COVID-19 shutdown order should be covered by their business interruption coverage. There are a total of 16 restaurants in Buncombe, Chatham, Durham, Orange and Wake counties involved in this lawsuit.

As the name implies, business interruption insurance insures against interruptions to your business. Depending on the policy, the insured may be entitled to lost business income, extra expenses, rent, profits, and even temporary relocation expenses due to this coverage. What is typically required for this type of insurance to apply is direct physical damage or loss to your property. That is key. An economic loss alone is not enough. You often see this type of coverage come up when there has been a fire, earthquake, etc. A typical business interruption policy does not cover viruses, diseases, or pandemics.

What makes this lawsuit so important is that this is the first lawsuit of its kind nationwide where a judge was willing to interpret business interruption insurance to include coverage for COVID-19 related losses. There have been around 1,200 lawsuits filed by various restaurant owners attempting to recoup some of the money they were losing due to COVID-19 closures and limitations. However, all of the other cases have either already been lost or are still pending.

In reaching his decision that these owners could recover for losses suffered due to COVID-19, Durham Superior Court Judge Orlando Hudson found a somewhat creative way to “fit” the losses suffered into the business interruption coverage. Specifically, he put a great deal of emphasis on the word “or” in the policy. He found that the policy at issue provided coverage for accidental physical loss or physical damage and these shutdowns qualified as a “physical loss.” Plaintiffs argued that they suffered a direct physical loss when they “were expressly forbidden by government decree” from accessing their property. The judge accepted this argument. In other words, he did not require them to have physical damage as it typically required for business interruption claims. The loss itself was enough.

Note that other jurisdictions have found that the virus does not alter the appearance, shape, color or structure of the property and thus there was no direct physical loss to trigger business interruption coverage.

UP: What does this mean for restaurants in North Carolina? 
LK: This means that North Carolina restaurant owners need to check their policies and, assuming there is coverage for business interruption claims, they should be submitting claims for their losses ASAP. It goes without saying that they should be documenting everything to prove the losses they have suffered.  For those who may have previously been rejected, resubmit your claim and specifically reference this case in support of your claim. What is the worst that can happen? They deny your claim.

UP: Are there any quirks about the case that restaurant owners should be aware of? 
LK: One thing to look out for is if your policy has a virus related exclusion. The policy at issue in this case did not. If yours does, that could be a problem for you to successfully file a claim. But again, when in doubt, file the claim. There is very little downside to trying to get coverage other than the time it takes to put the claim together.

UP: What is the likelihood this ruling stands?
LK: Unfortunately, I think the appellate court will either overturn the entire ruling or at least find a way to limit its impact.  Mike Causey, North Carolina Insurance Commissioner, wrote a letter several months ago to insureds throughout the state explaining that “[s]tandard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses. 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. Consider the difference, for example, between losses suffered from a hurricane and the losses resulting from COVID-19. The hurricane losses affect certain areas on the coast where the event occurred but the losses from this pandemic cover the entire nation. Therefore, mandating coverage for this size and type of loss while canceling existing exclusions in the policies would end the very existence of the business interruption insurance market as we know it. Recent estimates show that business continuity losses from COVID-19 just for small businesses of 100 employees or fewer could amount to between $220 billion to $383 billion per month. Meanwhile, the total reserve funds for all of the U.S. home, auto, and business insurers combined to pay all future losses is 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. “

UP: Is there anything else in this lawsuit that owners should take notice of?
LK: Cincinnati Insurance has until Nov. 11, 2020 to appeal the trial court’s ruling and they have indicated that they plan to appeal.  Be on the lookout for updates that address that appeal. In the meantime, keep track of your losses and do what you can to mitigate your damages.  Also remember there is typically a duty to cooperate with your insurance company, so if they ask for additional information etc., be sure to provide it in a timely manner. Don’t give them a reason to deny you.

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