Claims and Bad Faith Law Blog

More on "Direct Physical Loss," and on "Loss" or "Damage" coverage determinations.

As two esteemed insurance academics put it in a law review article early in the COVID pandemic:

          Judges granting dismissal motions without any opportunity for discovery, and denying any possibility of coverage at the metaphorical starting gate, have undermined the traditional American commitment to jury trials as well as widely accepted legal principles of insurance policy construction such as interpreting ambiguous terms against the drafter and considering policyholder reasonable expectations.  Where the issue is solely whether sufficient “loss” or “damage” has taken place, standard property insurance policy language is simply not as conclusive as purported by these courts. Although other defenses such as a virus exclusion may carry the day for some insurers, insurers have to date gotten much more mileage out of very weak “no-loss/no-damage” arguments than should be the case if trial judges were consistently doing a thorough job.

Erik Knutsen and Jeffrey W. Stempel, Infected Judgment:  Problematic Rush to Conventional Wisdom and Insurance Coverage Denial in a Pandemic, 27 Conn. Ins. L.J. 185, 192 (Fall, 2020).  This law review article would influence the North Carolina Supreme Court in its interpretation in 2024 of the phrase, "direct physical loss" to property as that term is used in an insurance policy.  In 2024, the North Carolina Supreme Court declared that phrase ambiguous such that coverage was to be decided in favor of the policyholder in that case under a policy containing such a requirement.  North State Deli, LLC v. Cincinnati Ins. Co., 386 N.C. 733,  908 S.E.2d 802, 806 (N.C. 2024).  The North State decision was the subject of a blog article posted here on Wednesday, March 12, 2025.

Case law interpreting policy language of this kind is discussed in § 7:20 by Dennis J. Wall in CATASTROPHE CLAIMS / Insurance Coverage for Natural and Man-Made Disasters (Thomson Reuters West Nov. 2024 Edition, 2025 Supplements in process).

 Please read the disclaimer.  ©2025 Dennis J. Wall.  All rights reserved.  Interested in many things including Claims and Bad Faith Law?  Sign up for a free subscription to my Substack newsletter. 

"Direct Physical Loss" is a "slippery term" said the North Carolina Supreme Court.

It probably remains to be seen whether the current composition of the North Carolina Supreme Court will stick with stare decisis if they do not like the result.

The North Carolina Supreme Court, in contrast to the answer to certified questions by the California Supreme Court, declined "to do what other courts have done and affirmatively define the 'slippery' term [that the insurance carrier at bar] chose to use in this manifestly ambiguous situation."[1]  In an opinion amazing for its unanimity among other things, the North Carolina Supreme Court in North State Deli, LLC v. Cincinnati Insurance Co.[2] expressly rejected the approach of affirmatively defining the term "direct physical loss" where the carrier itself did not define the term in its insurance policy:

          At bottom, a reasonable person in the position of the insured would understand the restaurants’ policies to include coverage for business income lost when virus-related government orders deprived the policyholder restaurants of their ability to physically use and physically operate property at their insured business premises. Since Cincinnati’s interpretation of “direct physical loss” to property is also reasonable, North Carolina’s background principles compel us to resolve this ambiguity in favor of the insured policyholder.  [Citation omitted.]. We therefore conclude that the restaurants have stated a claim for coverage due to a “direct physical loss” to property under their policies, and they are entitled to partial summary judgment as the trial court concluded.

* * *

Otherwise, insurance companies are licensed to pitch consumers on an expansive, “all-risk” policy, while hiding behind a narrower definition imposed by judicial fiat when it comes time to pay out. Such a setup contradicts our Court’s holdings that the lodestar for insurance contract interpretation is the reasonable expectation of the policyholder and that ambiguities should be resolved in the insured’s favor.[3] 

Case law interpreting policy language of this kind is discussed in § 7:20 by Dennis J. Wall in CATASTROPHE CLAIMS / Insurance Coverage for Natural and Man-Made Disasters (Thomson Reuters West Nov. 2024 Edition, 2025 Supplements in process).

 Please read the disclaimer.  ©2025 Dennis J. Wall.  All rights reserved.  Interested in many things including Claims and Bad Faith Law?  Sign up for a free subscription to my Substack newsletter. 

 

[1] North State Deli, LLC v. Cincinnati Ins. Co., 386 N.C. 733, 908 S.E.2d 802, 812 (N.C. 2024).

[2] North State Deli, LLC v. Cincinnati Ins. Co., 386 N.C. 733, 908 S.E.2d 802 (N.C. 2024).

[3] North State Deli, 908 S.E.2d at 812, 813.

Read their own words that say that Section 504 is unconstitutional.

(Author Photo) 

Ken Paxton is currently the Texas attorney general. His name is on the complaint in Download Texas v. Becerra Complaint Doc. No. 1 filed Sept. 26 2024 (N.D. Tex. Case No. 5.24.cv.00225.H).  I wrote about that lawsuit previously. I may not have written enough, so today I will quote a lot of their own words.

In their complaint, Paxton writes that Texas and other states of the Old and New Confederacy say that Section 504 is unconstitutional.

Here is Count 3, in their own words:

Count 3 Section 504 is Unconstitutional U.S. Const., art. I, § 8, cl. 1.

221. All other allegations are repeated and realleged as if fully set forth herein.

222. Under the Rehabilitation Act, “no otherwise qualified individual with a disability in the United States . . . shall, solely by reason of her or his disability, be excluded from the participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.” 29 U.S.C. § 794(a).

(Complaint, Count III title and paragraphs 221-222, at p. 40.) (Emphasis added to title of Count III of their complaint.)

This is what Paxton has written in their complaint. No question, they knew what they were doing. They certainly know what Section 504 stands for; as you can see they quoted it.

They wrote that they think that Section 504, which prohibits discrimination against handicapped people, is unconstitutional:

239. Because Section 504 is coercive, untethered to the federal interest in disability, and unfairly retroactive, the Rehabilitation Act is not constitutional under the spending clause.

(Complaint, paragraph 239, at p. 40.) (Emphasis added.)

Then they demanded that a judge declare Section 504 to be unconstitutional everywhere in America in all things, no qualifications:

DEMAND FOR RELIEF

Plaintiffs respectfully request that the Court:

a. Issue permanent injunctive relief against Defendants enjoining them from enforcing the Final Rule;

b. Declare that the Final Rule violates the Administrative Procedure Act;

c. Hold unlawful and set aside (i.e., vacate) the Final Rule;

d. Declare Section 504, 29 U.S.C. § 794, unconstitutional;

e. Issue permanent injunctive relief against Defendants enjoining them from enforcing Section 504;

f. Award attorneys’ fees and costs incurred in this action to Plaintiffs; [and]

g. Issue any and all other relief to Plaintiffs the Court deems just and proper.

(Complaint, DEMAND FOR RELIEF, p. 42.) (The only demands for relief that do not address the transgender rule supposedly at issue in this case are the demands to which emphasis has been added so they are easily seen, and those are demands to declare Section 504 unconstitutional and enjoin enforcement of Section 504’s prohibition on discrimination against handicapped people.)

Paxton has since said that this lawsuit "will have no impact" on Section 504 coverage. He says that anything to the contrary is "a misinformation campaign." He says that they never demanded that the protections of Section 504 be taken away, but only, he says, that they demanded that the court "protect them."

What Mr. Paxton speaks now is not what he wrote in their complaint.

Now you can see for yourself what he wrote. Paxton never thought that would happen, but it has.

If they wanted to amend their complaint, they would; but they haven't amended their complaint. Every lawyer knows that it is relatively simple and straight-forward to amend a complaint and that if you don't amend your complaint, all the words in the wind don't matter in court.

Oh, one last Paxtonism contrary to the truth. He says that a recent executive order "paused" this lawsuit. There is no such thing as a "pause," not because of somebody's executive order or anything else. The only thing that can stop a lawsuit is an order from the court. That hasn't happened here. Until and unless that happens, Section 504 is on track for a declaration.

Unless of course they voluntarily dismiss their lawsuit since they won't amend it.

Please read the disclaimer.  ©2025 Dennis J. Wall.  All rights reserved.  Interested in many things including Claims and Bad Faith Law?  Sign up for a free subscription to my Substack newsletter. 

"Majority" or "minority" views: "Surface water" in the insurance coverage case law.

Some courts say that a majority of courts addressing the question have concluded that "surface water" includes water on a roof, but the Supreme Judicial Court of Massachusetts respectfully disagreed in the case of Zurich Am. Ins. Co. v. Med. Prop's Trust, Inc., 494 Mass. 382, 392 n.12, 237 N.E.3d 733, 741 n.12 (2024):

          Both the insurers and MPT argue that their particular interpretation of the term “surface waters” is the majority position among courts throughout the country. This mirrors courts in other jurisdictions that have similarly asserted both that the majority position is that “surface waters” includes water on a roof, see, e.g., Danville Commercial Indus. Storage, LLC, 442 F. Supp. 3d at 927 (“the majority of [courts] to have addressed this question have concluded that ‘surface water’ includes water on a roof”); ..., and that it does not[.]  As illustrated by our discussion of case law from other jurisdictions, there does not appear to be a definite majority position on the issue.  We also note that most jurisdictions that have defined the term "surface waters" in the insurance context have done so only in cases involving water at ground level.

Case law interpreting exclusions of this kind is discussed in § 7:16 by Dennis J. Wall in CATASTROPHE CLAIMS / Insurance Coverage for Natural and Man-Made Disasters (Thomson Reuters West Nov. 2024 Edition, 2025 Supplements in process).

Please read the disclaimer.  ©2025 Dennis J. Wall.  All rights reserved.  Interested in many things including Claims and Bad Faith Law?  Sign up for a free subscription to my Substack newsletter.