The Appellate Division Decides the First COVID-19 Business Interruption Cases in Favor of Insurers

Mac Property Group, LLC v. Selective Fire & Cas. Ins. Co. , ___ N.J. Super. ___ (App. Div. 2022). [Disclosure: I am counsel for insureds in another appeal regarding the issue of insurance coverage for business interruptions caused by COVID-19, though on different alleged facts and with different policy language]. As Judge Sumners noted at the start of his opinion for the Appellate Division in the six back-to-back appeals in this case, those cases present “an issue of first impression––whether in the context of Rule 4:6-2(e) motions to dismiss with prejudice, insurance policies issued by defendants did not cover business losses incurred by plaintiffs that were forced to close or limit their operations as a result of Executive Orders (EOs) issued by Governor Philip Murphy to curb the COVID-19 global health crisis.” The Law Division in two different vicinages ruled for the insurers, and the Appellate Division, applying de novo review, affirmed those decisions.

The Appellate Division so ruled primarily because it concluded that plaintiffs’ failed to “state a claim on the basis that plaintiffs’ business losses were not related to any ‘direct physical loss of or damage to’ covered properties as required by the terms of their insurance policies.” Among other things, plaintiffs had not alleged the actual presence of COVID-19 at their insured properties. Judge Sumners cited a number of cases from other jurisdictions that had held that COVID-19 business interruption insurance claims foundered on the “direct physical loss or damage” language in insurance policies.

Plaintiffs also asserted demands for payment under their policies’ “civil authority” coverage. Such coverage will “‘pay for the actual loss of Business Income’ each plaintiff sustained that was ’caused by action of civil authority that prohibit[ed] access to’ its premises. To trigger civil authority coverage, plaintiffs’ policies required that: (1) damage be done to other property within a certain distance of the insured premises; (2) this damage resulted from a ‘Covered Cause of Loss’; (3) the civil authority prohibited access to the insured premises because of the damage; and (4) the civil authority’s action was taken in response to dangerous physical conditions resulting from the damage or the continuation of the covered cause of loss or to ensure civil authority’s unimpeded access to the damaged area.”

Since there were “no published New Jersey cases interpreting civil authority coverage provisions in an insurance policy,” Judge Sumners again turned to out-of-state authority. The panel found persuasive decisions of the Supreme Judicial Court of Massachusetts and several federal courts. “First, the EOs neither prohibited access to plaintiffs’ premises nor prevented plaintiff owners from being on their premises, but merely restricted their business activities.” Second, “plaintiffs’ premises were not selectively closed by the EOs due to damage to nearby property. Instead, the EOs closed or restricted activities at premises of certain types within the state all at once to curb the spread of the COVID-19 cases. There is no merit to plaintiffs’ contention that because other businesses near them were closed by the EOs, the simultaneous closure or placement of restrictions on their own businesses by the same EOs triggered civil authority coverage.”

Additionally, plaintiffs asserted regulatory estoppel, relying on Morton Int’l v. Gen’l Accident Ins. Co., 134 N.J. 1 (1993). Regulatory estoppel holds that “if an insurer makes misrepresentations to a regulatory body regarding the meaning and effect of language it has requested to include in its policies, the insurer may be prevented from enforcing the otherwise clear and plain meaning of that language against an insured.” Judge Sumners found regulatory estoppel inapplicable here, finding no misrepresentations, and again citing decisions elsewhere.

Finally, some of the policies at issue contained virus exclusions or endorsements that the insurers asserted precluded coverage in this case. The Appellate Division agreed.

As an issue of first impression, on which courts elsewhere have differed to some extent, this decision looks ripe for Supreme Court review. We shall see.