Policyholder Loses in the Supreme Court on Claims for Business Interruption Insurance Coverage for COVID-19 Losses

AC Ocean Walk, LLC v. American Guarantee & Liability Ins. Co., ___ N.J. ___ (2024). [Disclosure: I was one of the counsel for United Policyholders, an amicus in support of the plaintiff policyholder. I also argued very similar issues for other policyholders in a different case.] As noted here, businesses around the country who paid for business interruption insurance have sued in a number of cases to contest the denial of such coverage by their insurers in the context of claims for damages arising from COVID-19. This case was the first to reach our Supreme Court. Most cases in New Jersey and elsewhere have gone against policyholders, often at the motion to dismiss stage, though some cases in certain states, such as the Supreme Court of Vermont, have denied or reversed the grants of motions to dismiss.

That was not the result in this case, in which Justice Patterson wrote the opinion for a 5-0 Court (Justices Solomon and Fasciale did not participate) that affirmed the Appellate Division’s grant of defense motions to dismiss, reversing a Law Division decision that had denied those motions and allowed the case to proceed.

Justice Patterson summarized the essential facts and procedural history this way. “Ocean Walk, which operates a casino and other entertainment facilities, alleged that it suspended its operations on the effective date of an executive order mandating the closure of facilities to the public because of the COVID-19 pandemic, and then resumed limited operations approximately three months later when another executive order lifted some of the restrictions. It claimed that by virtue of the presence of SARS-CoV-2 in its facilities and its government-mandated temporary suspension of operations, it had sustained a ‘direct physical loss’ of or ‘direct physical . . . damage’ to its property as those terms are used in the insurance policies issued by defendants. Ocean Walk also argued that an exclusion in the policies for certain claims based on ‘contamination’ did not bar its coverage claims. It contended that it was therefore entitled to up to $50,000,000 in coverage under the policies.

“The insurers denied coverage under the provisions of the policies, except for coverage under an endorsement subject to a $1,000,000 sublimit. Ocean Walk filed an action for a declaratory judgment, damages, and other relief.

“The trial court denied motions to dismiss for failure to state a claim filed by three of the insurers. The court concluded (1) that Ocean Walk’s alleged business losses constituted a ‘direct physical loss’ of or ‘direct physical . . . damage’ to its property, and (2) that those losses were not excluded from coverage under the policies’ contamination exclusion. The Appellate Division reversed as to both determinations.”

The Supreme Court, applying de novo review, agreed with the Appellate Division. Persuaded by the weight of authority elsewhere and by the Appellate Division’s decision in Mac Property Group, LLC v. Selective Fire & Cas. Ins. Co., 473 N.J. Super. 1 (App. Div. 2022), the Court held that Ocean Walk had not pleaded “direct physical loss” or “direct physical … damage.” Applying dictionary definitions of “direct,” “physical,” “loss,” and “damage,” the Court concluded that “the phrase ‘direct physical loss of . . . property’ clearly denotes the destruction of the property or a physical change to the property that renders it unusable or uninhabitable.” The presence of COVID-19 at Ocean Walk’s property, as alleged in its pleading, did not rise to that level, as Ocean Walk was able to use its property to some extent.

The Court went on to rule, though recognizing that it need not have done so, that the contamination exclusion would defeat Ocean Walk even if it had pled direct physical loss or damage. Ocean Walk had relied on Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110 (2005), in which the Court had held that a “pollution exclusion” was limited to “traditional environmentally related damages,” so that the contamination exclusion did not extend to a virus such as COVID-19. The Court disagreed, distinguishing Nav-Its on several grounds.

The Court’s decision gave short shrift to several aspects of New Jersey law that distinguish New Jersey from other jurisdictions. First, like the practice in Vermont under which that state’s Supreme Court denied dismissal at the threshold and allowed a comparable case to proceed, and unlike the standards for motions to dismiss applicable in federal court and many other state courts, New Jersey’s Rule 4:6-2(e) is to be liberally construed in favor allowing cases to proceed past the threshold. The Court mentioned the Vermont case only once, in a footnote, without addressing the fact that the standard applied there, applicable in New Jersey as well by virtue of prior decisions of our Supreme Court, called for the Court to restore the Law Division’s denial of the motions to dismiss.

Second, the Court tersely distinguished, again in a footnote, New Jersey authorities that should have led to a result different than that reached in most other jurisdictions. Those cases were Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co., 406 N.J. Super. 524 (App. Div. 2009), and Customized Distribution Services v. Zurich Ins. Co., 373 N.J. Super. 480 (App. Div. 2004), on which the Law Division had relied. The Supreme Court’s distinctions of those cases were not particularly persuasive.

Finally, Mac Property was utterly unlike the Ocean Walk case. The plaintiffs in Mac Property did not even allege that COVID-19 was present on their properties, unlike Ocean Walk, which had alleged that expressly. Decisions on motions to dismiss should carefully address the pleadings in the case at hand, rather than being affected by differing allegations in other cases on a similar subject matter.

But the result is what it is. Policyholders will not get business interruption coverage for COVID-19 losses in the general run of cases.