A brief filed by the State of North Carolina1 acting through its Attorney General recited a number of basic insurance contract interpretation rules. Public policy supporting these rules is not often reflected in briefs, but North Carolina made a point of discussing those.
The State of North Carolina noted:
Under well-settled law, a North Carolina court faced with an ambiguous insurance policy must choose the interpretation that favors the insured. Wachovia Bank & Tr. Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 354, 172 S.E.2d 518, 522 (1970); 1 New Appleman North Carolina Insurance Litigation § 1.05 (2020). In accordance with this rule, courts must construe insurance provisions granting coverage expansively and exceptions or limitations to coverage narrowly. David B. Goodwin, Book Review, Disputing Insurance Coverage Disputes, 43 Stan. L. Rev. 779, 783-84 (1991).
Where a provision of an insurance contract ‘is uncertain or capable of several reasonable interpretations, the doubts will be resolved against the insurance company and in favor of the policyholder.’ Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500, 506, 246 S.E.2d 773, 777 (1978). In other words, ‘uncertain or ambiguous’ provisions ‘should receive that construction which is most favorable to the insured.’ Penn v. Standard Life and Accident Ins. Co., 158 N.C. 29, 31, 73 S.E. 99, 100 (1911) (cleaned up); see also 2 Steven Plitt et al., Couch on Insurance § 22:14 (3rd ed. 2021) (‘If an insurer uses language that is uncertain, any reasonable doubt will be resolved against it; if the doubt relates to extent or fact of coverage . . . the language will be understood in its most inclusive sense, for the insured’s benefit.’).
This rule does not empower courts to introduce ambiguity where none exists. But it does mean that when a policy term ‘is fairly and reasonably susceptible to either of the constructions asserted by the parties,’ the term ‘must be construed liberally so as to provide coverage . . . whenever possible by reasonable construction.’ Maddox v. Colonial Life & Accident Ins. Co., 303 N.C. 648, 650, 280 S.E. 2d 907, 908 (1981); State Cap. Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534, 538, 350 S.E.2d 66, 68 (1986) (emphasis added).
North Carolina courts construing exceptions to coverage must similarly read any ambiguous terms in favor of the insured. Here, the law’s protection for the insured gives rise to the opposite interpretive principle: While provisions granting coverage must be read expansively, provisions excluding coverage must be read narrowly. Wachovia Bank & Tr. Co., 276 N.C. at 355, 172 S.E.2d at 522-23; see also State Cap. Ins. Co., 318 N.C. at 538, 350 S.E.2d at 68 (‘[P]rovisions which exclude liability of insurance companies are not favored and therefore all ambiguous provisions will be construed against the insurer and in favor of the insured.’). Together, these interpretive rules ‘provide the greatest possible protection to the insured.’ State Cap. Ins. Co., 318 N.C. at 542-43, 350 S.E.2d at 71.
The North Carolina insurance contract interpretation rules are pretty standard with the vast majority of other states. However, the fascinating portion of the brief dealt with public policy:
Interpretive rules that favor the insured are in the public interest. Specifically, this well-settled doctrine furthers at least three important public policy goals: First, it protects policyholders, who lack both the market power and sophistication of insurers. Second, it incentivizes clearer contracts, thereby enhancing fairness and market efficiency. And third, it promotes the soundness of the insurance industry as a whole by fostering consumer confidence—and thus participation—in insurance.
The need to protect non-drafting parties applies with special force in the insurance context, where insurers enjoy several obvious and substantial advantages. First, insurance companies are typically larger and more powerful than their customers, enabling them to dictate terms and unilaterally define coverage parameters….Second, insurers are true subject-matter experts, drawing on deep experience in both risk management and claims adjustment when drafting policies. See id. at 782-91. This expertise equips them to identify salient policy ambiguities that ordinary purchasers like the small businesses in this case would struggle to appreciate. These advantages together counsel in favor of robust application of the rule favoring the non-drafter in the insurance context.
North Carolina’s strong presumption in favor of the insured incentivizes the clear drafting of insurance contracts. This clarity enables purchasers to select the policies that are best suited to their needs. And this improved fit between purchasers’ insurance needs and the insurance that they ultimately buy enhances the efficiency of the market overall.
For the formation of a contract to be fair, both parties necessarily must have a solid grasp of the consideration that they will receive. The need for clarity in contracting is particularly acute in the insurance context because ‘performance’ on the part of the insurance company will not necessarily clarify whatever ambiguities exist in a particular contract: If a triggering event never occurs, and an insured never has to file a claim, they will never have an opportunity to discover discrepancies between the consideration (liability coverage) that they believe they are due and the coverage that the insurer actually intends to provide….
North Carolina’s rules of construction that favor the insured encourage clearer contracts. Because ambiguities in an insurance contract will be held against the insurer, insurance companies have strong incentives to identify potential areas of confusion within the policies they offer and then to eliminate them.
North Carolina argued that clear contract terms improve the insurance market:
These clearer contracts also improve market efficiency. An efficient and effective market requires that buyers understand the products on offer. See Herbert Hovenkamp, Principles of Antitrust 2 (2017); Irston R. Barnes, False Advertising, 23 Ohio St. L.J. 597 (1962) (discussing the importance to market efficiency of buyers understanding ‘the significant differences . . . among [available] products’). When buyers understand what products are available, at what price, and from which sellers, they make more informed—and, thus, better—purchasing decisions.
The insurance market is no exception. When a buyer can read an insurance policy and easily understand the scope of the coverage, that buyer is better able to select the best insurance product for its needs, and the efficiency of the insurance market increases.
Promoting clearer contracts does not help buyers alone, though—it helps insurers too. When a buyer makes a suboptimal insurance purchase based on confusion, uncertainty, or outright deception, honest insurers suffer. See Edward S. Rogers, Book Review, 39 Yale L.J. 297, 297 (1929). Those sellers have been, ‘in effect . . . deprived of equal access to the market and to the attention of the buyers.’… By construing contracts against insurers who draft ambiguous policies, courts benefit market participants who choose to operate aboveboard and who strive for transparency.
North Carolina argued that public policy construing policy language in light of the rules set forth provides confidence in the insurance industry:
[C]onstruing ambiguous policy terms in favor of the insured strengthens the long-term viability of the insurance industry. A secure insurance industry, in turn, redounds to the benefit of a wide range of parties—including those businesses that choose to engage in economic activity because of the protection that insurance provides and the many consumers who partake in those businesses’ services.
… Consumer confidence, after all, is critical to the sustainability of insurance. If customers cannot trust insurance companies to provide coverage in the event of a loss, they have no reason to buy insurance. And, if enough consumers stop purchasing insurance, the entire industry model could collapse. Insurance companies are able to cover their customers’ ‘undesirable risk of suffering . . . . without transferring insecurity to’ themselves because they have a sufficiently large pool of customers from which to draw premiums and predict loss events. 1 New Appleman on Insurance Law Library Edition § 1.01 (2021). Anything that diminishes this pool threatens the industry itself.
The North Carolina Supreme Court has recognized this public interest as a justification for construing insurance policies in favor of the insured. In Grabbs, the Court explained that permitting insurance companies to evade covering insured losses by resort to ‘unreasonable stipulations’ would undermine the viability of insurance risk pooling. 125 N.C. at 399, 34 S.E.2d at 506. When customers ‘begin to feel that they may, by some unforeseen technicality, be deprived of all benefit from the contract into which they have honestly entered, they will seek some safer place for the investment of their savings.’… Thus, the rule exists ‘for the protection equally of the insurer and the insured.
In short, maintaining a robust insurance industry is an important public policy priority for a host of reasons. Obviously, insurance protects customers from incurring calamitous debts simply because they have had the misfortune to suffer a catastrophic loss or injury of some kind. Defraying the risk of devastating loss, moreover, catalyzes economic activity. When customers are confident that they are protected by insurance, they are more likely to take the kinds of economic risks from which we all benefit.
The unfortunate reason I was reading this amicus brief was that a North Carolina appellate court overturned a summary judgment ruling in favor of policyholders suffering business income losses caused by Covid-19.2 The court found that the definition of “physical loss” could not be a general “loss of use”:
We considered a similar issue in Harry’s Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Co., 126 N.C. App. 698, 486 S.E.2d 249 (1997). That case involved potential customers who were unable to access the insured location due to a snowstorm blocking the entrance. Id. at 699, 486 S.E.2d at 250. Our Court concluded there to be no coverage under a business interruption clause when the insured property was not ‘caused by direct physical loss of or damage to property at the premises’ as required by the policy….
Further, recent cases from the Fourth Circuit have agreed that similar or identical policy provisions do not provide coverage for business interruption losses due to COVID-19 governmental orders because there is no direct physical loss or damage to the insured property. See, e.g., Fs Food Group LLC v. Cincinnati Ins. Co., 2022 US Dist. LEXIS 22598 (Feb. 8, 2022); Summit Hosp. Grp., Ltd. v. Cincinnati Ins. Co., 2021 U.S. Dist. LEXIS 40613 (E.D.N.C. Mar. 4, 2021). These cases involve the application of North Carolina law, and we find them persuasive.
We agree with these courts that the relevant provisions of the Policies are unambiguous. Plaintiffs did not allege that their loss resulted from physical harm to their property, but that the Governmental Orders resulted in loss of business. Plaintiffs’ desired definition of ‘physical loss’ as a general ‘loss of use’ is not supported by our caselaw or the unambiguous language in the Policies. According to the plain language of the Policies, only direct, accidental, physical loss or damage to the property is covered. Therefore, the trial court erred in granting partial summary judgment to Plaintiffs…3
The continued trend in business income cases involving covid, where “physical loss” is the issue, remains with the insurance industry winning most decisions.
Thought For The Day
Though every legal task demands this skill, it is especially important in the effort to frame public policy in a way that is properly responsive to human needs and predicaments. The question is always: How will the general rule work in practice?
1 North State Deli v. Cincinnati Ins. Co., No. COA21-293 [Amicus Brief of The State of North Carolina] (N.C. App. 2022).
2 North State Deli v. Cincinnati Ins. Co., No. COA21-293 (N.C. App. July 5, 2022).