The New Jersey Supreme Court recently ruled unanimously that standard commercial property insurance policies do not cover business interruption losses caused by the COVID-19 pandemic, aligning with many other courts around the country. The case, AC Ocean Walk, LLC v. Am. Guarantee Liab. Ins. Co. _ N.J._ (Jan. 24, 2024), centered around a casino operator in Atlantic City who claimed losses due to the presence of COVID-19 particles on its premises and the resulting governmental shutdown of its operations.
Factual Background
In 2018, AC Oceanwalk, LLC (hereinafter "Oceanwalk") opened the Ocean Casino Resort located on the Atlantic City Boardwalk. Oceanwalk secured insurance coverage from American Guarantee and Liability Insurance Company, AIG Specialty Insurance, and Interstate Fire and Casualty. The policies had the same standard policy forms, which stated that Oceanwalk was insured against "direct physical loss or damage" resulting from "a covered cause of loss." The policies also stated that recovery for direct loss was subject to the "terms, conditions and exclusions in the policy." One such exclusion was a Contamination Exclusion that stated in part, "Contamination, or any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy is excluded."
Oceanwalk was forced to cease operations of its casino and other facilities in March 2020 through July 2020 due to orders by the New Jersey Governor that they be aimed at preventing the spread of COVID-19. Oceanwalk filed a claim with its insurers for losses due to business interruption. The insurers denied coverage stating that no "direct, physical loss" had occurred, and that even if COVID-19 particles could be found on the property, such loss would be excluded by the Contamination Exclusion.
Initially, the trial court rejected the insurers' motions to dismiss Oceanwalk's Complaint, suggesting that the losses could qualify as a "direct physical loss of or damage" to property and were not excluded under the policies' Contamination Exclusion. However, the Appellate Division overturned the decision in June 2022. The New Jersey Supreme Court agreed to review the case, prompting speculation that it might reverse the decision in favor of Oceanwalk. However, the Court's ruling definitively favored the insurers.
Defining Direct Physical Loss in the Context of COVID-19
The Court turned to dictionary definitions as well as applicable case law from other jurisdictions to determine the definition of "direct physical loss or damage" to property. In short, it found that the claimant must show that the property was altered or destroyed in a way that rendered it unusable or uninhabitable. The Third Circuit defined direct physical loss as "a failure to maintain tangible possession of the structure." Wilson v. USI Insurance Service LLC, 57 F.4th 131, 142 (3d Cir. 2023). Further, in Mac Prop. Grp. v. Selective Fire & Cas. Ins. Co., 473 N.J. Super.1 (App. Div.2022), the Appellate Division held that an insurance policy required the claimants to show that their property was rendered "physically incapable of operating or too dangerous to enter."
"An insurance policy will be enforced as written when its terms are clear in order that the expectations of the parties will be fulfilled, with undefined terms construed in accordance with their plain and ordinary meaning.” Flomerfelt v. Cardiello, 202 N.J. 432, 441 (2010). “If the language is clear, that is the end of the inquiry…courts will not engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased.” Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195 N.J. 231, 238 (2008) (quoting Progressive Cas. Ins. Co. v. Hurley, 166 N.J. 260, 273 (2001)).
The Court also recognized that the "time element" provisions present in the insurance policy bolstered supports that direct physical loss must render the property uninhabitable or unusable. These terms defined business interruption losses as losses that occurred while a business space is being repaired or replaced after a physical loss. "These provisions would be meaningless if there had been no physical damage to the property that would require repairs, rebuilding, or replacement." Mac Prop. Grp. at 21-22.
Based on this analysis, the Court concluded that "direct physical loss" requires physical damage in the form of destroyed or physically altered property, which was not present in this case. Though Oceanwalk was shuttered from the premises for several months, it was able to pursue limited operations during the majority of the pandemic. Oceanwalk also maintained its online gambling operation throughout the crisis. Therefore, the Court found that these facts were not sufficient to support a finding of direct physical loss or damage to the property.
The Court agreed with the finding in Wilson which states, "The loss of the ability to use property for their intended business purposes by virtue of government orders is completely divorced from the physical condition of the premises, given that the properties were intact and functional and were not destroyed in whole or in part." Wilson, 57 F.4th at 142-43. Here, absent governmental orders shutting down the business, Oceanwalk operations would have carried on uninterrupted. Thus, it was clear to the Court that no direct, physical loss occurred to trigger coverage by the insurance policies.
The Contamination Exclusion
The insurance policies at issue in this case define contaminant as "any solid, liquid, gaseous, thermal, or other irritant, pollutant or contaminant, including but not limited to smoke, vapor, soot, fumes, acids, alkalis, chemicals, waste, asbestos, ammonia, other hazardous substances, fungus or spores." The Court noted that the word "contaminant" does not include a virus, pathogen, or pathogenic organism. Despite this, Oceanwalk argued that the Contamination Exclusion should not apply to their claim. Specifically, the policy states that "the inability to use or occupy property, or any cost to making property safe or suitable for use or occupancy…" is not covered unless "the contamination results from direct physical loss or damage."
Oceanwalk also argued that the Contamination Exclusion should only exclude environmental pollution risks. Oceanwalk relied on the decision in Nav-Its, Inc. v. Selective Ins. Co., 183 N.J. 110,118-24 (N.J. 2005), which held that "a contamination exclusion should be read as nothing more than a pollution exclusion." Here, the Court found this argument unpersuasive as the policy term in Nav-Its was specifically called a "pollution exclusion" and it was "intended to create a broad exclusion for traditional environmentally related damages." Id. at 115.
The instant matter is different as it does not deal with a pollutant, but rather a virus. The Court concluded that nothing in Nav-Its supported Oceanwalk's interpretation of the Contamination Exclusion, as that reading would run against the plain reading of the contract. Therefore, the Court concluded that in addition to there being no "direct, physical loss" shown, the claim was also barred by the provisions of the Contamination Exclusion. Mandatory government shutdowns due to a virus do not equate to direct, physical loss.
Conclusion
The Court emphasized that Oceanwalk failed to demonstrate that its business losses resulted from a direct physical alteration of its property. In order to meet the policy's criteria, Oceanwalk needed to show that its property was rendered unusable or uninhabitable. Additionally, the Court upheld the Contamination Exclusion, stating that Oceanwalk's claim fell within the definition of contamination outlined in the policies.
The Court noted that although Oceanwalk brought proof of financial loss due to the government shutdown, this by itself failed to show that the physical condition of the premises was affected by the particles produced by COVID-19. This decision solidifies that property insurance policies do not cover COVID-19-related business interruption losses in New Jersey and falls in line with the majority of court decisions on both the federal and state level on this issue.