Over three years after the onset of the COVID-19 health crisis, courts across the nation continue to struggle in determining whether “direct physical damage” results from COVID-19 under many insurance policies. Last year, the New Jersey Appellate Division overturned a trial court ruling that an Atlantic City casino sustained the kind of direct physical damage required for coverage. Now, New Jersey’s High Court is set to provide clarity to the many policyholders involved in litigation seeking coverage for pandemic-related losses.

Atlantic City casinos were among the thousands of New Jersey businesses forced to shut their doors following Governor Phil Murphy’s Executive Orders closing non-essential businesses in response to the outbreak of COVID-19. Because of Governor Murphy’s Executive Orders and the growing risk of COVID-19, Ocean Casino Resort, the largest gaming suite in the United States, suspended its casino and entertainment operations from March 16, 2020 to July 2, 2020.

Ocean submitted claims under insurance policies from multiple insurers, including Zurich unit American Guarantee and Liability Insurance Co., Allianz subsidiary Interstate Fire and Casualty Co., and AIG Specialty Insurance Co., alleging it was entitled to coverage under a number of policy sections, each of which conditioned coverage on there being direct physical loss or damage to the insured property. After corresponding for several months and disputing whether coverage was owed or not under the policies, the insurers ultimately denied coverage, with the exception of certain “Interruption by Communicable Disease” (ICB) endorsements.[i]

In March of 2021, Ocean filed a complaint alleging that, beginning March 16, 2020, it incurred “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.”[ii] Ocean argued the “actual presence” of COVID-19 on the property created “near-certain risk of danger and harm to its employees and customers” because of “airborne transmission.”[iii] 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.” Consequently, Ocean sought damages for breach of contract based on the denied coverage following a direct physical loss of or damage to Ocean and a declaration of coverage.

The insurer defendants moved to dismiss the complaint in lieu of filing answers. The insurers asserted Ocean failed to and could not allege 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.”[v] The insurers further argued the policies contained a “contamination exclusion” which clearly and unambiguously used the word “virus” in its definition, which precluded coverage.[vi]

Ocean scored a partial win in December of 2021; the trial court ruled in its favor and held physical alteration to an insured’s property is not a prerequisite to coverage for losses stemming from COVID-19, and the contamination exclusions found in the policies did not preclude coverage because they were ambiguous.

However, in June of 2021, the Appellate Division overturned 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. The Appellate Division reasoned:

“[T]here was no damage to equipment or property on- or off-site that caused Ocean to lose its physical capacity to operate, and there was no physical alteration that made the casino resort too dangerous to enter. Instead, Ocean was forced to lose its casino gaming floor, sports waging lounges, and entertainment venues to the public in accordance with Governor Murphy’s [Executive Orders].”[vii]

“Saliently, Ocean would have been able to continue operating its casino and performance venue without interruption had the Executive Orders not been issued.”[viii] The Appellate Division reasoned the contamination exclusions unambiguously excluded coverage for “contamination,” which was unambiguously defined to include the presence of any “virus,” which unquestionably encompassed the COVID-19 virus.[ix]

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.[x] In January of this year, New Jersey’s High Court granted certification and agreed to hear the case.

During oral argument, the justices questioned the casino about why the contamination exclusion did not apply, given the definition of contamination included “viruses.” In response, the casino argued the contamination exclusion was ambiguous and should not apply because the definition of “contaminant” did not include “virus,” which would cause a reasonable policyholder to believe the policy does not exclude viruses. However, multiple justices questioned the casino’s reading of the exclusion, including Justice Wainer Apter, who asked why the definition of the word “contaminant” would be relevant when the exclusion did not use the word “contaminant.”[xi] “If it said contamination by a contaminant then I would totally be with you . . . but it doesn’t actually say contaminant in any of the substantive provisions that are being raised,” she said.[xii]

Takeaway

There is much at stake – the New Jersey Supreme Court will soon resolve two critical questions for insurers in the wake of COVID-19. Can insured property can be damaged or rendered unusable by the presence of COVID-19? Can state law prohibit insurers from including a “virus” reference in a general pollution exclusion to restrict coverage of pandemic-related losses? Follow this case closely to find out where New Jersey falls.

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Sources

[i] 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)

[ii] 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)

[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] 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)

[v] 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)

[vi] 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)

[vii] AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., No. A-1824-21, 2022 WL 2254864 *13 (N.J. Super. Ct. App. Div. June 23, 2022)

[viii] AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., No. A-1824-21, 2022 WL 2254864 *13 (N.J. Super. Ct. App. Div. June 23, 2022)

[ix] AC Ocean Walk, LLC v. Am. Guarantee & Liab. Ins. Co., No. A-1824-21, 2022 WL 2254864 *14 (N.J. Super. Ct. App. Div. June 23, 2022)

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

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

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