For many restaurant owners, the phrase “business interruption insurance” once sounded as comforting as a fully booked Friday night. Then COVID-19 arrived, dining rooms went dark, payroll stayed stubbornly real, and insurers across the country began saying the legal equivalent of, “Sorry, wrong table.”
The recent development in Durham Wood Fired Pizza Company LLC v. The Cincinnati Insurance Company gives several North Carolina restaurant operators a second chance to sharpen parts of their business interruption claims. It does not hand them a guaranteed victory on every theory. It does not mean every restaurant claim suddenly turns into a giant check with a bow on it. But it does show something important: in insurance law, policy wording, state law, timing, and factual detail can matter as much as the menu, the lease, and the fryer that always waits until Saturday night to break.
The case involves four Durham, North Carolina businesses: Dashi, NanaSteak, The Cookery, and Ponysaurus Brewing. They filed business interruption claims after pandemic-era government restrictions limited restaurant operations. Cincinnati Insurance denied those claims, arguing that the policies did not cover losses without direct physical loss or damage. Years later, after the North Carolina Supreme Court issued a major policyholder-friendly ruling in North State Deli, the Durham restaurants returned to court with renewed claims, including breach of contract, declaratory judgment, breach of the implied covenant of good faith and fair dealing, and unfair trade practices.
The federal court dismissed the bad-faith-style claims as currently pleaded, but with permission to amend. Translation: the restaurant plaintiffs were told, “You may still have a point, but bring more facts next time.” In litigation terms, that is not a standing ovation. It is more like a judge handing the kitchen one more ticket and saying, “Refire this, and make it specific.”
Why This Restaurant Insurance Case Matters
The Durham case matters because it sits at the intersection of two big realities. First, restaurants were among the businesses most visibly hurt by COVID-19 closure orders. Dining rooms, banquet spaces, taprooms, and event venues were designed for people to gather. Suddenly, gathering was the problem. Second, most commercial property policies were written around physical loss, physical damage, civil authority orders, extra expense coverage, and exclusions that were never drafted with a once-in-a-century pandemic in mind.
Across the United States, most courts sided with insurers in COVID-19 business interruption disputes. The dominant view was that loss of income caused by shutdown orders did not equal “direct physical loss or damage” unless the property itself was physically altered, destroyed, or rendered unusable in a tangible way. Many courts also enforced virus or contamination exclusions. In short, a restaurant could be financially flattened while the walls, tables, and espresso machine remained physically intactand under many policies, that was enough for insurers to deny coverage.
North Carolina became a notable exception. In North State Deli, LLC v. Cincinnati Insurance Co., the North Carolina Supreme Court held that restaurants could reasonably understand “direct physical loss” to include pandemic-era government orders that restricted their use of and access to physical property, especially where the policy did not contain a virus exclusion. That decision did not rewrite every insurance policy in America, but it did change the weather in North Carolina. For restaurants with similar wording, the forecast suddenly included a chance of coverage.
The Core Legal Issue: What Does “Direct Physical Loss” Mean?
Business interruption coverage is usually part of a commercial property policy. It often covers lost income and continuing expenses when business operations are suspended because of a covered cause of loss. The classic example is simple: a fire damages the kitchen, the restaurant closes for repairs, and the policy helps cover lost income during the restoration period. That is the insurance-world equivalent of a straightforward cheeseburger.
COVID-19 claims were more like a twelve-course tasting menu with footnotes. Restaurants were not always claiming that walls collapsed or roofs burned. Instead, they argued that government orders deprived them of the ability to use their dining rooms, event spaces, and other insured property for their intended business purpose. Insurers countered that “physical loss” requires physical alteration, not merely loss of use.
The North Carolina Supreme Court focused on the wording. If a policy uses the phrase “physical loss or damage,” the word “loss” should not automatically be treated as identical to “damage.” Otherwise, the policy might as well say “damage or damage,” which is not exactly a triumph of drafting. The court reasoned that a reasonable policyholder could understand “loss” more broadly, including temporary deprivation or impairment of property use caused by government orders.
That interpretation became crucial for the Durham restaurants. Their case had been paused while the courts sorted out North State Deli. Once the state supreme court ruled that materially similar language could cover COVID-era losses, the restaurants argued that Cincinnati’s continued failure to pay deserved closer scrutiny.
What the Court Actually Gave the Restaurants
The December 2025 federal ruling did not simply say, “Restaurant wins, insurer loses, everybody go home.” Instead, the court allowed the core coverage dispute to move forward while dismissing two extra-contractual claims as insufficiently detailed.
The plaintiffs alleged that Cincinnati Insurance acted in bad faith by making a company-wide decision to deny coronavirus-related business interruption claims without individualized investigation. They also alleged violations of North Carolina’s unfair and deceptive trade practices law. The court found that, as pleaded, those allegations were too conclusory. The insurer’s 2020 denial was based on an interpretation of policy language that reasonable courts had disagreed about. A wrong coverage position is not automatically bad faith, especially when appellate judges themselves had wrestled with the same wording.
However, the court recognized a different possible issue: what happened after North State Deli? Once the North Carolina Supreme Court clarified that the policy language could cover these losses, the plaintiffs suggested that Cincinnati still failed to settle or pay appropriately. The court said the complaint needed more facts: what Cincinnati offered, what it refused, what explanations it gave, and why its post-decision conduct might be unreasonable.
That is the “second chance” in the headline. The restaurants were allowed time to amend their complaint with additional factual allegations related to the renewed denial or failure to settle after North State Deli. In plain English: the judge closed one door halfway, then pointed to the doorknob and said, “You may try again, but bring details.”
Bad Faith Is Not Just “The Insurer Said No”
Restaurant owners often experience claim denial as deeply unfair. That feeling is understandable. When a business pays premiums for years, suffers a catastrophe, and receives a denial letter, the phrase “valued customer” can start to sound like a prank.
But in court, bad faith requires more than disappointment. Depending on state law, plaintiffs usually need facts showing unreasonable refusal to pay, failure to investigate, failure to settle after liability became reasonably clear, deception, delay tactics, or conduct that goes beyond a good-faith disagreement over coverage. A denial can be incorrect without being malicious. It can be aggressive without being legally outrageous. It can also, in some cases, cross the linebut courts want facts, not adjectives.
That is why the Durham ruling is useful for businesses beyond the restaurant industry. It reminds policyholders to document the timeline. Who said what? When was the claim submitted? What did the denial letter say? Did the insurer request documents? Did the insurer consider the specific property, the specific orders, and the specific policy? After a controlling court decision, did the insurer reassess the claim or simply keep serving the same cold plate?
Why Virus Exclusions Can Change Everything
One reason the North Carolina restaurant decisions stand out is the absence of a virus exclusion in the relevant Cincinnati policies. That detail is not garnish; it is the steak.
Many commercial property policies contain exclusions for virus, contamination, pollution, microorganisms, communicable disease, or similar causes. If an exclusion clearly applies, courts are often willing to enforce it. North Carolina’s companion ruling involving Cato Corporation is a useful contrast. In that case, the state supreme court concluded that although the company had sufficiently alleged a form of direct physical loss, Zurich’s viral contamination exclusion barred coverage.
For restaurant operators, this means policy review cannot stop at the declarations page. The declarations page tells you the headline limits. The exclusions tell you where the trapdoors are. A policy may look like a warm blanket until the exclusions section turns it into a napkin.
How This Fits the National Business Interruption Landscape
Nationally, COVID-19 business interruption litigation has largely favored insurers. Courts in many states required tangible alteration or physical harm to property. Some decisions rejected coverage even where businesses argued that virus particles were present on surfaces or in the air. Other decisions turned on specific exclusions. The New Jersey Supreme Court, for example, rejected an Atlantic City casino’s attempt to recover pandemic-related business interruption losses, holding that the policy required physical loss or damage of the kind that destroyed, altered, or rendered property unusable or uninhabitable in a physical sense.
The North Carolina Supreme Court took a different route. It did not say every pandemic loss is covered. It did not ignore exclusions. It focused on ambiguous policy wording and the reasonable expectations of the insured. That made North Carolina one of the most policyholder-friendly jurisdictions for this specific category of claims.
For insurers, that creates uncertainty. For restaurants, it creates an opening. For lawyers, it creates billable hours, which is the legal profession’s version of a bottomless bread basket.
Practical Lessons for Restaurant Owners
1. Read the Policy Before the Disaster
A restaurant owner should know whether the policy includes business income coverage, extra expense coverage, civil authority coverage, dependent property coverage, communicable disease coverage, or event cancellation coverage. These sections may sound boring, but so does “fire suppression inspection” until the kitchen hood starts doing its dragon impression.
2. Study the Exclusions
Virus, contamination, pollution, bacteria, ordinance, utility failure, flood, and wear-and-tear exclusions can dramatically limit recovery. The best time to discover an exclusion is before a claim, not after the insurer has mailed a denial letter thick enough to level a wobbly patio table.
3. Keep Detailed Financial Records
Business interruption claims are numbers-heavy. Restaurants should preserve sales reports, payroll records, rent obligations, supplier invoices, reservation logs, canceled event contracts, delivery-platform fees, cleaning expenses, and communications with landlords or lenders. A claim without records is like a recipe that says, “Add some stuff and hope.”
4. Document Government Orders and Operational Impact
Restaurants should connect losses to specific orders, dates, capacity restrictions, dining-room closures, curfews, or access limitations. Courts care about causation. The more clearly a business can show how an order affected its physical premises and revenue, the stronger the claim narrative becomes.
5. Do Not Assume a Denial Is the Final Word
Denial letters are important, but they are not tablets from the mountaintop. A denial may be challengeable if the insurer misreads the policy, overlooks state law, ignores endorsements, or fails to evaluate the claim fairly. Policyholders should respond carefully, preserve deadlines, and consult qualified insurance counsel when the stakes are high.
What Insurers Should Take From the Case
Insurers should not read the Durham order as a disaster. The court dismissed the bad-faith and unfair-trade-practices claims as pleaded. That is meaningful. It shows courts will not punish insurers merely because coverage law later evolves against them.
But insurers should also take the warning seriously. Once a state supreme court resolves policy language in favor of coverage, continuing to deny similar claims without a careful reassessment can create litigation risk. The safest approach is not stubborn repetition. It is fresh analysis, clear communication, documented reasoning, and realistic settlement evaluation.
In other words, after the legal landscape changes, the claims file should not look like it was sealed in amber in June 2020.
Experience Notes: What Restaurant Claim Disputes Teach in the Real World
Business interruption disputes reveal a truth every restaurant operator already knows: survival depends on systems built before chaos arrives. A restaurant that has clean books, organized insurance files, written procedures, and a habit of documenting problems is better positioned than one that keeps receipts in a shoebox labeled “miscellaneous panic.” When a claim happens, memories blur. Managers move on. Vendors change systems. Bank portals stop showing old data. The restaurants that can tell a clear, dated, document-supported story usually have the advantage.
One practical experience from restaurant claims is that communication matters almost as much as coverage. Owners should avoid casual, emotional claim descriptions that undersell the loss or misstate the facts. A rushed email saying “we were basically fine except sales were down” can later become Exhibit A in a fight nobody expected. Better communication explains the timeline, the specific government restrictions, the parts of the premises affected, the revenue impact, and the extra expenses incurred to keep operating.
Another lesson is that “extra expense” can be overlooked. During the pandemic, many restaurants spent heavily on outdoor dining setups, delivery packaging, sanitation, protective barriers, technology, signage, menu redesigns, and staffing changes. Even where business income coverage is disputed, extra expense coverage may deserve separate analysis. Owners should categorize these costs carefully rather than dumping them into one accounting bucket called “COVID stuff,” which is emotionally accurate but financially unhelpful.
Restaurant groups with multiple entities also need consistency. If one location is owned by one LLC and another location by a separate LLC, the policies, named insureds, leases, payroll records, and claim submissions should match reality. Corporate structure may seem like background paperwork until an insurer asks who actually suffered the loss. Then it becomes the main character.
Finally, the Durham case teaches patience with precision. The restaurants did not receive a full win on their extra-contractual claims, but they received permission to amend. That is a procedural lifeline, and lifelines reward preparation. If a policyholder wants to allege that an insurer failed to settle after liability became clear, the complaint should include concrete facts: dates of communications, claim amounts, offers made or refused, reasons given, and why the conduct was unreasonable under the policy and state law. Courts are not mind readers. They are more like strict brunch customers: they want the order complete, specific, and preferably not served late.
Conclusion
The second chance given to the Durham restaurants is not a universal passport to pandemic insurance recovery. It is narrower and more interesting than that. The court recognized that North Carolina’s North State Deli decision may have changed what Cincinnati Insurance had to do after coverage became clearer, but it required the restaurants to plead specific facts before pursuing bad-faith and unfair-trade-practices theories.
For restaurant owners, the takeaway is simple: policy language matters, exclusions matter, state law matters, and documentation matters most when everyone is tired, broke, and arguing over what “loss” means. For insurers, the message is equally clear: a reasonable denial in uncertain law may be defensible, but once the law shifts, claims handling must shift with it.
Business interruption insurance will never be the most glamorous part of running a restaurant. It will not plate the dessert, charm the regulars, or fix the ice machine. But when disaster hits, it can determine whether a business gets a fighting chanceor just another denial letter with excellent formatting.
