In December, we covered Ocean Casino Resort’s ongoing insurance coverage litigation over pandemic-related loses.[i] On January 24, 2024, New Jersey’s Supreme Court unanimously held mere interruption of business activities during the pandemic without direct physical loss or damage to the insured property did not trigger coverage.

COVID-19 Compelled Business Closures

Due to COVID-19 concerns, Atlantic City casinos were among the thousands of New Jersey “non-essential” businesses forced to close under Governor Phil Murphy’s Executive Orders. Ocean Casino Resort, the largest gaming suite in the United States, suspended its casino and entertainment operations for nearly four months. Ocean submitted claims under multiple insurance policies, alleging it was covered under several policy sections, each of which conditioned coverage on direct physical loss or damage to the insured property. With the exception of certain “Interruption by Communicable Disease” (ICB) endorsements, the insurers denied coverage.[ii]

Ocean Sues Its Insurers For Claim Denials

Ocean’s complaint alleged it sustained “the physical loss of use of its property” and “loss of business revenue” “as a result of the risks associated with the [COVID-19] pandemic, including direct physical loss of or damage to covered property, and in compliance with government guidance and orders.”[iii] Ocean argued the “actual presence” of COVID-19 on the property created a “near-certain risk of danger and harm to its employees and customers” because of “airborne transmission.”[iv]

Ocean further asserted the property “became unsafe due to respiratory droplets discharged from infected individuals landing on surfaces and objects, thus ‘becoming a part of that surface’ and physically changing the property.”[v] Consequently, based on the denial of coverage, it sought damages for breach of contract and declaratory relief.

In response, the insurers moved to dismiss, asserting Ocean could not legitimately claim it “suffered direct physical loss or damage to the property, and all of the provisions under which [it] seek[s] coverage require[s] direct physical loss or damage.”[vi] The insurers further argued their “contamination exclusions” which included “virus” in their definitions, precluded coverage.[vii]

Court Rulings and Appeals

Ocean scored a partial victory at the trial court level. There, the court held physical alteration to an insured’s property was not a prerequisite to coverage for losses stemming from COVID-19. The court further held the policies’ contamination exclusions were ambiguous and did not preclude coverage.

The Appellate Division reversed the lower court’s decision, ruling COVID-19’s presence and/or the government-mandated shutdown did not constitute a direct physical loss of or damage to Ocean as required under the policies. Ocean petitioned the New Jersey Supreme Court, arguing the Appellate Division violated “bedrock principles of New Jersey law” by judging disputed facts on a motion to dismiss.[viii] New Jersey’s High Court agreed to hear the case to resolve the question of whether business interruptions during the pandemic constituted the type of direct physical loss or damage to property required for coverage.

In its unanimous opinion, New Jersey’s High Court held a “direct physical loss” of its property or “direct physical damage” to property was necessary. Ocean was “required to demonstrate that its property was destroyed or altered in a manner that rendered it unusable or uninhabitable.”[ix] Even if Ocean’s factual allegations were true, they did not support such a finding.

The court determined, at most, Ocean alleged it “sustained a loss of business during the COVID-19 government-mandated suspension of business operations because it was not permitted to use its property as it would otherwise have done.”[x] Absent Governor Murphy’s Executive Orders, Ocean “would have been able to use its property for casino and other entertainment functions with no suspension of its operations.”[xi] The court further concluded Ocean’s allegations fell squarely within the contamination exclusions in the policies that barred coverage.[xii]

Takeaway

Here we have a rare case of a casino losing. Courts across the nation initially struggled in determining whether coverage was afforded under many insurance policies for loss of or damage to property resulting from COVID-19. Now, the highest courts of 15 states, including New Jersey, have held mere interruption of business activity during the pandemic did not trigger coverage conditioned on direct physical loss or damage to the insured property.

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Sources

[i] https://www.tysonmendes.com/new-jersey-supreme-court-takes-up-casinos-covid-19-coverage-fight/#_edn1

[ii] AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., No. A-1824-21, 2022 WL 2254864 *4 (N.J. Super. Ct. App. Div. June 23, 2022)

[iii] AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., No. A-1824-21, 2022 WL 2254864 *5 (N.J. Super. Ct. App. Div. June 23, 2022)

[iv] Ibid.

[v] Id. at 15.

[vi] Ibid.

[vii] Ibid.

[viii] https://www.njcourts.gov/cases/28-22

[ix] AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., 256 N.J. 294, 316 (2024)

[x] Id. at 317

[xi] Id. at 318

[xii] Id. at 320