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What to Expect from Future Business Interruption Coverage Cases in New Jersey: COVID-19 Closures May Be Considered a Covered Loss

Author: Rachael Marvin, Robert Modica

Guest Editors: Amy Chambers, Ashley Kaye

January 11, 2021 9:00am

Background

Two important lawsuits have paved the way for business interruption coverage cases in New Jersey due to COVID-19: Optical Services USA v. Franklin Mutual Insurance Co. and Mac Property Group LLC v. Selective Fire & Casualty Insurance Co.[1] Both are recent Superior Court decisions, decided on August 13, 2020, and November 5, 2020, respectively.[2] In both cases, New Jersey Superior Courts addressed the key issue of whether COVID-19 caused physical loss or damage to the insured premises.[3]

In Optical Services, the New Jersey Superior Court of Bergen County denied the insurer’s motion to dismiss, holding plaintiff should have an opportunity to engage in issue-oriented discovery to establish whether they experienced direct covered losses.[4] This was an unprecedented win for policyholders in business interruption coverage cases in New Jersey, as COVID-19 related business interruption claims are skyrocketing across the country. In denying the insurer’s motion, the Superior Court discussed the possibility that a COVID-19 closure may be a covered event where civil authorities prohibit occupancy of the premises.[5] Specifically, the Court held more discovery was needed to determine whether the closure of all non-essential businesses in New Jersey constituted a direct physical loss to the insured under the policy.[6]

In contrast, the New Jersey Superior Court of Camden County in Mac Property Group LLC dismissed plaintiff’s complaint with prejudice, reasoning there was, “no direct physical loss or damage to the covered property which resulted in the order of civil authority.”[7] In Mac Property Group LLC, plaintiff alleged New Jersey’s governmental actions forced it to suspend business operations in response to COVID-19.[8] However, plaintiff’s own insurance policy contained a virus exclusion commonly known as an “anti-concurrent causation provision.”[9] This was evidenced by the policy language preceding the virus or bacteria exclusion, which excluded coverage, “regardless of any other cause of event that contributes concurrently or in any sequence to the loss.”[10] New Jersey Courts have previously enforced anti-concurrent causation provisions in first party property insurance cases where the policy contains clear and unambiguous language.[11] Thus, the Court examined the policy language to determine whether a COVID-19 closure fell within the virus exclusion.

The decision in Mac Property Group LLC rested on the specific policy language and facts at issue.[12] Ultimately, the Court dismissed plaintiff’s complaint with prejudice because reasonable expectations of coverage are based on the insurance contract itself, and the policy language and its virus exclusion were clear.[13] In contrast, in Optical Services, there was no plain meaning of “direct physical loss” to interpret Optical Services’ policy. Because the policy language was ambiguous, the Court was unable to determine whether a COVID-19 closure constituted a covered loss and held the motion to dismiss was premature.[14]

Takeaway

In examining both cases, the key takeaway is that ambiguous policy language interpreting “direct physical loss” puts insurance companies in the hot seat when litigating business interruption coverage cases. Future New Jersey business interruption coverage cases may follow a similar approach, specifically by examining the policy’s language and its interpretation of “direct physical loss” to determine whether COVID-19 related closures constitute covered events.

 

[1] See Transcript of Oral Argument and Decision, Optical Servs. USA v. Franklin Mut. Ins. Co., Case No. BER-L-3681-20 (N.J. Sup. Ct. Law Div. Aug. 13, 2020); Mac Prop. Grp. LLC v. Selective Fire & Cas. Ins. Co., Case No. CAM-L-2629-20 (N.J. Sup. Ct. Law Div. Nov. 5, 2020).

[2] See id.

[3] See Optical Servs., BER-L-3681-20 at *8-9; see also Mac Prop. Grp., CAM-L-2629-20 at *2.

[4] See Optical Servs., BER-L-3681-20 at *25.

[5] See Optical Servs., BER-L-3681-20 at *27.

[6] See Optical Servs., BER-L-3681-20 at *28.

[7] See Mac Prop. Grp. LLC, CAM-L-2629-20 at *21-22.

[8] See Mac Prop. Grp. LLC, CAM-L-2629-20 at *2.

[9] See Mac Prop. Grp. LLC, CAM-L-2629-20 at *17-18.

[10] See Mac Prop. Grp. LLC, CAM-L-2629-20 at *20-21.

[11] See Mac Prop. Grp. LLC, CAM-L-2629-20 at *17-19.

[12] See Mac Prop. Grp. LLC, CAM-L-2629-20 at *21-22.

[13] See id.

[14] See Optical Servs., BER-L-3681-20 at *25.

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