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In a unanimous opinion issued yesterday, the New Jersey Supreme Court joined the majority of other courts to hold that business interruption losses related to the COVID-19 pandemic are not covered under the standard language of a commercial property insurance policy. AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., __ N.J. __ (Jan. 24, 2024).
The appeal arose from motions to dismiss in which the insurers argued that the plaintiff’s complaint had failed to allege a viable claim. The plaintiff policyholder, Ocean Walk, operated a casino in Atlantic City. In its complaint, Ocean Walk alleged losses from “the actual and/or threatened presence of Coronavirus particles” on its premises, and the restrictions on its operations from the COVID-19 governmental directives. The trial court denied the insurers’ motions to dismiss on the grounds that (1) Ocean Walk’s alleged business losses could potentially qualify as “direct physical loss of or damage” to its property; and (2) those losses were not excluded from coverage under the policies’ Contamination Exclusion. The Appellate Division reversed as to both determinations in June 2022, and the New Jersey Supreme Court granted certification to consider these issues in January 2023.
Some observers speculated that the New Jersey Supreme Court’s agreement to consider the appeal was a signal that the Court may be willing to reverse and agree with the trial court’s decision. Yesterday’s decision proved that speculation wrong as the Court definitively ruled in favor of the insurers.
The Court found Ocean Walk had failed to allege that its business losses were caused by a “direct physical loss of or damage” to property. The Court explained that in order to establish “direct physical loss of or damage” under the policies, “Ocean Walk was required to demonstrate that its property was destroyed or altered in a manner that rendered it unusable or uninhabitable.” “The facts pled by Ocean Walk fall short of that mark,” according to the Court. The Court observed that at most, Ocean Walk had alleged “a loss of business during the COVID-19 government-mandated suspension of business operations,” and that such an allegation “is completely divorced from the physical condition of the premises.” The Court noted that the policies’ “time element” provisions underscored its interpretation of the policy language because those provisions would be meaningless if there has been no physical damage to property that would require repairs, rebuilding, or replacement.
The Court also found that the Contamination Exclusion barred coverage. The exclusion provided that the policies do not cover “Contamination,” and the policies defined “Contamination” to include “any condition of the property due to the actual presence” of any “pathogen or pathogenic organism,” or “virus.” The Court ruled that the alleged “presence of SARS-CoV-2 in Ocean Walk’s facilities falls squarely within the description of ‘contamination’ in the policies.” In so ruling, the Court found that its decision in Nav-Its, Inc. v. Selective Insurance Co. of America, 183 N.J. 110 (2005) did not justify “an interpretation contrary to the policies’ plain terms.”
If there was any remaining doubt, AC Ocean Walk establishes that property insurance policies do not provide coverage for COVID-19 related business interruption losses under New Jersey law. The decision also reaffirms the procedural rule that a complaint may be dismissed at the pleadings stage if the factual allegations “do not support a finding that the plaintiff is entitled to coverage under the terms of the insurance policy.”
Insurance and reinsurance
United States