By: Emily Siguenza

The COVID-19 pandemic created challenges for businesses, particularly restaurants and bars.[1] State and local governments imposed shutdown orders that required many restaurants and bars to suspend or limit their operations.[2] These restrictions placed substantial financial pressure on business owners who lost revenue while continuing to face ongoing expenses.[3] Several North Carolina restaurants carried commercial property insurance policies issued by Cincinnati Insurance Company (“Cincinnati”).[4] These policies provided coverage for certain business income losses resulting from “direct physical loss” or damage, unless otherwise excluded.[5] After the restaurants were forced to suspend or restrict their operations, they sought coverage from Cincinnati for their pandemic-related losses.[6] Cincinnati denied coverage, taking the position that the restaurants did not suffer the type of direct physical loss or damage required under the policies.[7]

This disagreement became the central issue in North State Deli, LLC v. Cincinnati Insurance Co.[8] The restaurants argued that their inability to physically use and access their properties for their intended purposes constituted a covered “direct physical loss,” while Cincinnati argued that physical alteration or damage to the property was required.[9] Although the policies defined “loss” as “accidental physical loss or accidental physical damage,” they did not separately define “physical loss” or “physical damage.”[10] The North Carolina Supreme Court explained that undefined terms are given their ordinary meaning and that an insurance policy should be interpreted as a reasonable person in the position of the insured would understand it.[11]

The North Carolina Supreme Court disagreed with Cincinnati’s interpretation.[12] It explained that “physical loss” must have a meaning separate from “physical damage” because Cincinnati chose to include both terms in the policy.[13] The court also considered the ordinary meaning of “loss” and determined that a reasonable policyholder could understand the loss of physical use of property as a direct physical loss.[14] The court further noted that Cincinnati’s all-risk policies contained numerous exclusions, but did not specifically exclude viruses or contaminants.[15] Because the government orders deprived the restaurants of the physical use of their properties for their intended purpose, the court held that the policies covered their alleged losses.[16]

While North State Deli was proceeding, another group of North Carolina restaurants brought a similar lawsuit against Cincinnati that later became Durham Wood Fired Pizza Co. v. Cincinnati Insurance Co.[17] Like the restaurants in North State Deli, the plaintiffs sought coverage for losses resulting from COVID-19 shutdown orders.[18] The policies in Durham Wood Fired Pizza Co. contained materially identical language to those interpreted in North State Deli.[19] On September 3, 2026, the United States District Court for the Middle District of North Carolina granted summary judgment in favor of the restaurants on liability.[20]

The district court explained that North State Deli had already determined that the same policy language provided coverage for the type of losses suffered by the Durham Wood Fired Pizza plaintiffs.[21] Once the restaurants established that their losses fell within the policies’ coverage, Cincinnati had the burden of showing that an exclusion applied.[22] Cincinnati referenced several possible coverage defenses, but the court found that Cincinnati failed to sufficiently explain why those provisions applied.[23] The court also focused on Cincinnati’s actions after North State Deli.[24] Before that decision, the court recognized that reasonable minds could disagree over the policy language.[25] After North State Deli, however, Cincinnati continued to deny coverage without identifying a material policy difference, factual distinction, or exclusion that placed the claims outside of the decision.[26] The court ultimately found Cincinnati liable for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair trade practices, while leaving damages for later proceedings.[27]

These decisions could have significant consequences for businesses, insurers, and the attorneys who advise them.[28] For policyholders whose COVID-19 claims were previously denied, North State Deli may provide a reason to have those claims and polices reviewed again, particularly when the policy contains similar “direct physical loss” language and does not contain a specific virus or contamination exclusion.[29] Insurance companies may respond to these decisions by defining covered losses more specifically and adding or strengthening exclusions involving viruses, communicable diseases, pandemics, or similar business disruptions.[30] During policy procurement and renewal, businesses should also carefully review their business-interruption provisions rather than assuming that a government shutdown or similar event will automatically trigger coverage.[31] Businesses should pay particular attention to what event triggers coverage, applicable exclusions, coverage limits, waiting periods, and whether the policy contains civil-authority or communicable-disease coverage.[32] Business attorneys can help clients evaluate coverage provisions and exclusions during policy procurement and renewal, while insurance attorneys can draft policy language that more clearly defines the scope of available coverage and applicable exclusions.[33] Ultimately, North State Deli and Durham Wood Fired Pizza demonstrate why businesses should understand the specific language of their insurance policies before an unexpected event results in substantial financial losses.[34]

 

[1] William W. Beach, Comm’r Bureau of Lab. Stat., Commissioner’s Statement on the Employment Situation News Release (Sep. 23, 2020), https://www.bls.gov/news.release/archives/jec_05082020.htm (on file with the American University Business Law Review).

[2] See 100,000 Restaurants Closed Six Months into Pandemic, Nat’l Rest. Ass’n (Sep. 14, 2020), https://restaurant.org/research-and-media/media/press-releases/100,000-restaurants-closed-six-months-into-pandemic/ [https://perma.cc/LGU2-QZ42].

[3] Steven Hix & G. Benjamin Milam, North Carolina Supreme Court: Government-Ordered Business Closures During COVID-19 Lockdowns Constitute “Direct Physical Loss” Under Insurance Policy Lacking Virus Exclusion, Bradley: It Pays to Be Covered (Jan. 7, 2025), https://www.itpaystobecovered.com/2025/01/north-carolina-supreme-court-government-ordered-business-closures-during-covid-19-lockdowns-constitute-direct-physical-loss-under-insurance-policy-lacking-virus-exclusion/ [https://perma.cc/N7Y3-T8U7].

[4] N. State Deli, LLC v. Cincinnati Ins., 908 S.E.2d 802, 805 (N.C. 2024).

[5] Id. at 806.

[6] Id. at 807–08.

[7] Id.

[8] Id. at 805.

[9] Id. at 809–10.

[10] N. State Deli, LLC v. Cincinnati Ins., 908 S.E.2d 802, 807 (N.C. 2024).

[11] Id. at 808–09.

[12] Id. at 810–12

[13] Id.

[14] Id. at 809–10

[15] Id. at 812.

[16] N. State Deli, LLC v. Cincinnati Ins., 908 S.E.2d 802, 813 (N.C. 2024).

[17] See Durham Wood Fired Pizza Co. v. Cincinnati Ins., No. 1:25-CV-492, slip op. at 1, 4–5 (M.D.N.C. Sep. 3, 2026).

[18] See id. at 4.

[19] Id. at 5 .

[20] See id. at 18.

[21] Id. at 8.

[22] Id. at 9.

[23] Durham Wood Fired Pizza Co. v. Cincinnati Ins., No. 1:25-CV-492, slip op. at 9–10 (M.D.N.C. Sep. 3, 2026).

[24] Id. at 6–7.

[25] Id. at 11–12.

[26] Id. at 12–14, 17–18.

[27] Id. at 17–19.

[28] See Alison Frankel, North Carolina Justices Hold Insurer Liable for COVID Shutdown Losses, Defying ‘Bandwagon’, Reuters (Dec. 16, 2024, at 17:57 ET), https://www.reuters.com/legal/government/column-north-carolina-justices-hold-insurer-liable-covid-shutdown-losses-defying-2024-12-16/ [https://perma.cc/CC58-D897].

[29] Id.; see also Cato Corp. v. Zurich Am. Ins. Co., 909 S.E.2d 144, 146–48 (N.C. 2024) (holding that a virus exclusion barred coverage despite the insured’s claim for business interruption losses).

[30] William Rabb, NC Supreme Court Bucks Trend, Finds COVID Caused Physical Loss to Restaurants, Ins. J. (Dec. 16, 2024), https://www.insurancejournal.com/news/southeast/2024/12/16/804858.htm [https://perma.cc/N82D-29WM].

[31] Business Interruption and Business Owner Policy, Nat’l Ass’n of Ins. Comm’rs (June 25, 2026), https://content.naic.org/insurance-topics/business-interruption-and-business-owner-policy (on file with the American University Business Law Review).

[32] Id.

[33] See id.; Hix & Milam, supra note 3.

[34] See N. State Deli, LLC v. Cincinnati Ins., 908 S.E.2d 802, 808–09 (N.C. 2024); Durham Wood Fired Pizza Co. v. Cincinnati Ins., No. 1:25-CV-492, slip op. at 8–19 (M.D.N.C. Sep. 3, 2026).