The Insurance Trend That Can [Maybe] Help Small Businesses Survive
4.16.2021
By: Safran Staff
It has now been a little over a year since the beginning of the COVID-19 stay-at-home orders and government shutdowns, yet businesses are still struggling to stay afloat.
Compared to November of 2020 where the nation had only 47 judicial decisions on the merits in business interruption cases, as of April 13th, 2021, there have been 340 judicial decisions, including the most recent North Carolina federal court decision in Blue Coral, LLC et al v. West Bend Mutual Insurance Company.
On April 13th, 2021 however a chief federal judge in the Eastern District of North Carolina held that the Hand and Stone Massage and Facial Spa franchise (“Hand and Stone franchisees”) failed to plausibly allege that their insurance policies’ Communicable Disease Provision was implicated by their claimed “business losses suffered during the COVID-19 shutdown.”[1] However, the Court found that the insureds failed to plausibly assert that this provision was implicated by their lost income because the insureds do not assert that COVID-19 was present at their insured premises.
Hand and Stone franchisees, like many North Carolina businesses, were shut down in compliance with North Carolina Gov. Roy Cooper's March 23, 2020, Executive Order 120 (EO 120) in response to the coronavirus pandemic. Hand and Stone franchisees remained closed until May 22 when they were permitted to reopen with restrictions. Thereafter, Hand and Stone franchisees filed claims for their lost income with their insurer, but those claims were denied.
After the insurer denied coverage, the insureds filed suit in the Wake County, N.C., Superior Court on August 7th, however on September 20th, the insurer removed the lawsuit to the U.S. District Court for the Eastern District of North Carolina, Western Division, and moved to dismiss in October. Hand and Stone franchisees allege that "[a]s a direct and proximate result of this government-ordered shutdown, Plaintiffs have each suffered more than $50,000.00 in lost business income and extra expense at each of their eight franchise locations." (Exh. A., Compl. at ¶ 31).
Hand and Stone franchisees' complaint included two claims: (1) seeking a judicial declaration that the losses caused by EO 120 were covered under their policies' Communicable Disease Provision and (2) alleging that their insurer was in breach of contract because it denied coverage for the alleged business losses incurred. However, the District Court dwindled these claims to a single breach of contract claim because the two claims overlap entirely.[2]
In analyzing the breach of contract claim, the District Court found that the plain reading of the Communicable Disease Provision[3] at issue “was intended to cover certain losses resulting from: (1) a temporary suspension of certain business operations that was (2) properly ordered by a governmental board (3) due to the presence of certain diseases or pathogens at the insured premises.”[4] While this plain reading may appear to be in favor of Hand and Stone franchisees, plaintiffs’ claim fell apart under this third requirement. Rather, the Court found that while COVID-19 is a plausibly alleged communicable disease within the meaning of the provision, Hand and Stone franchisees do not plausibly allege that COVID-19 was ever-present at the insured premises.
As depicted in our earlier article, one of the most determinative factors in assessing how courts may rule in these business interruption cases is premised on how the insured pleads their claim. As the Court described as a fatal deficiency to Hand and Stone franchisees claim, Hand and Stone franchisees failed to include the Declarations of their policies that define the insured premises, nor did they allege how the Declarations described those premises. Ultimately, the Court was left to speculate what the insured premises actually were.
Yet even under a definition of insured premises that would include the buildings at which Plaintiffs' businesses were operated and those buildings' grounds, the Court points out another issue: the complaint makes no allegation that COVID-19 was present at those premises. Rather, Plaintiffs attempted to argue that there had been an outbreak of COVID-19 everywhere when EO 120 was issued and that "the area subject to the COVID-19 emergency is statewide” in hopes of persuading the Court that this statewide language included every specific place within North Carolina where Plaintiffs’ businesses were located.
However, as could be presumed, the Court rejected this argument and stated, “Plaintiffs' suggested interpretation-that EO 120 was issued due to a COVID-19 outbreak at Plaintiffs' premises specifically because the disease was present within the state generally-is not reasonable, as such an interpretation would impermissibly render "at the insured premises" entirely meaningless." Ultimately, the district court dismissed the plaintiffs' claim with prejudice, meaning that it's been dismissed permanently as a final determination on the merits of the case.
This case further narrows the potential ways in which policyholders can plead their business interruption claims. Simply alleging that an outbreak affects the public at large, without further allegations that COVID was actually present on the premise or that anyone was actually infected with COVID on the premise, will not be sufficient to survive.
[1] Blue Coral, LLC, et al. v. West Bend Mutual Insurance Company, No. 20-0049, E.D. N.C., Western Div., 2021 U.S. Dist. LEXIS 71101. See here.
[2] The Court stated "the declaratory-judgment claim essentially asks the court to declare that Defendant has breached the insurance policies. Plaintiffs' two claims, therefore, overlap entirely, and the question is whether Plaintiffs have plausibly alleged a breach of the policies.” Id. at 6.
[4] Id.
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