COVID-19 Coverage Fights Try Shifting To State High Courts

By Shawn Rice
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Law360 (July 1, 2021, 4:59 PM EDT) -- Policyholders and insurers have turned to several state supreme courts in bids to have COVID-19-related insurance questions answered in order to decide coverage issues in business interruption suits.

Sixteen North Carolina restaurants, which were the first to get a coverage win in a pandemic-related coverage suit, last week asked the state's high court to weigh in on whether The Cincinnati Insurance Co. must cover their losses from government shutdown orders to curb the spread of the coronavirus.

In October, a North Carolina judge ruled that the closure orders caused a "physical loss," triggering coverage for the restaurants. Cincinnati has appealed, but the restaurants, backed by the North Carolina Restaurant and Lodging Association, said the case should go directly to the North Carolina Supreme Court.

Businesses are struggling under the costs tied to closure orders in response to the COVID-19 pandemic, said Gagan Gupta of The Paynter Law Firm PLLC, counsel for the restaurants, telling Law360 on Thursday that businesses "lack crucial clarity into what portion of those costs will be borne by insurers."

"Absent definitive and timely guidance from our country's highest state courts, many more businesses may be forced to close," Gupta said. "The economic devastation — especially for small businesses — is too widespread and serious to wait for an intermediate appellate body to review these cases."

For many states, these COVID-19-related insurance questions are ones of first impression. In North Carolina, the state's Supreme Court hasn't addressed the scope of the "physical loss" issue under an insurance policy as it applies to the government shutdown orders, according to Gupta.

While North Carolina's high court was asked to take up a COVID-19 business interruption suit, the Fourth Circuit this week, in a one-page order, passed on a Maryland car auction company's request to certify questions to the state's highest court in a coverage dispute with Great Northern Insurance Co.

Bel Air Auto Auction Inc. had argued that resolving issues under Maryland law would benefit cases pending in the state and nationwide. The meaning of the policy provisions "is as universal and far-reaching as the virus that has infected both the nation and Maryland," the policyholder said in a June reply brief.

But the insurer successfully argued that Maryland's high court didn't need to be burdened as the Fourth Circuit can decide if the coronavirus physically damaged Bel Air Auto's property, triggering coverage. The case isn't rare as it can be resolved through straight application of Maryland law, the insurer said.

Counsel for Bel Air Auto and Great Northern declined to comment Thursday for this story.

Insurers have also involved state supreme courts in suits. The Ohio Supreme Court agreed in April to take a question from a federal court on whether the existence of the coronavirus caused a "direct physical loss or damage" to trigger coverage for an Ohio audiology practice's losses during the pandemic.

In June, Cincinnati filed its opening brief in the Ohio case, arguing that the coronavirus didn't physically alter Neuro-Communication Services Inc.'s property and thereby didn't cause any "direct physical loss or damage." The presence of the virus and related government shutdown orders didn't cause a covered loss, the insurer said.

Adam H. Fleischer of BatesCarey LLP, counsel for State Auto Mutual Insurance Co., which is backing Cincinnati's position, told Law360 on Thursday that the case presents facts of a "devastating pandemic" that are unique, but the same can't be said as to policy language interpretation and the requirement for a loss to be "direct" and "physical."

"While a few jurisdictions, such as Ohio, have seen interpretative inconsistencies in lower courts, the vast majority of states have seen rulings founded upon long-standing coverage principles, with no need to carve out new legal territory," Fleischer said.

Counsel for Cincinnati didn't respond to requests for comment Thursday.

The cases are North State Deli LLC et al. v. The Cincinnati Insurance Co. et al., case number 225P21, in the Supreme Court of North Carolina; Bel Air Auto Auction Inc. v. Great Northern Insurance Co., case number 21-1493, in the U.S. Court of Appeals for the Fourth Circuit; Neuro-Communication Services Inc. v. The Cincinnati Insurance Co. et al., case number 2021-0130, in the Supreme Court of Ohio.

--Additional reporting by Daphne Zhang and Mike Curley. Editing by Vincent Sherry. 

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