Courts across the country have struggled to determine whether insurance policies that provide coverage for “direct physical loss or damage” insure losses arising from COVID-19. Many courts have applied too high a pleading standard, inappropriately granting insurers’ motions to dismiss due to policyholders’ alleged failure to allege that COVID-19 caused damages covered by their policies or because certain exclusions would have banned coverage. However, two courts in the state of New Jersey have recently decided these issues in favor of policyholders in well-reasoned opinions that respect procedural standards and the substantive law of insurance coverage.
A. COVID-19 causes “direct physical loss or damage”
In AC Ocean Walk, LLC v. American Guarantee and Liability Ins. Co., the New Jersey Superior Court ruled that the physical alteration of an insured’s property is not a prerequisite for coverage of losses due to COVID-19. The insured, Ocean Casino, sued several insurers for losses related to COVID-19, alleging that the virus caused the closure of Ocean Casino and suffered loss of use of its property. Reviewing the wording of the policies, the court explained that the insurance agreement for each policy read essentially the same:
This policy insures against direct physical loss or damage caused by, a covered cause of loss of covered property, at an insured location [the casino] …subject to the terms, conditions and exclusions set out in this policy.
A central question in COVID-19 insurance litigation has been whether this language, commonly found in commercial property policies, provides coverage when there is no physical change in the property of the property. ‘an insured. In assessing this issue, the court of AC Ocean Walk noted that New Jersey courts have ruled that an insured’s property need not have “physical damage or alteration of material composition” to have suffered direct physical loss or damage. Consistent with this approach, New Jersey courts have held that “loss of function amounts to direct physical damage”. The court also pointed out that federal Third Circuit courts have come to the same conclusion, holding that the presence of an invisible substance that renders an insured’s property uninhabitable constitutes physical loss or damage.
While the AC Ocean Walk the notice did not go so far as to state that COVID-19 was causing “direct physical loss or damage” to the property, it found the term “direct physical damage” to be ambiguous, and although carriers could have define the term, they refused to do so. Therefore, the court ruled that Ocean Casino’s loss of enjoyment claims constituted sufficient cause of action for it to be entitled to coverage for damages related to COVID-19.
B. Contamination exclusions do not apply to COVID-19
In addition to offering a broad interpretation to the expression “direct physical loss or damage”, the AC Ocean The court ruled that the policies’ pollution contamination exclusions did not apply to losses arising from COVID-19. The policies at issue contained broad exclusions that excluded coverage for losses caused by various substances, including viruses. However, the court found it significant that the contaminants listed in the exclusions are “associated with traditional environmental pollution damages, unreasonably related to the damages in this case, which are derived from a communicable disease”. Further, the court noted that where insurers had previously attempted to enforce these exclusions outside of traditional environmental pollution claims, the courts had ruled in favor of policyholders. Therefore, the court ruled that the exclusions “are overbroad, unfair and are undoubtedly contrary to the objectively reasonable expectations of the insured” and therefore did not prohibit coverage of Ocean Casino’s COVID-19 losses.
C. COVID-19 and Survival of a Motion to Dismiss
Finally, there has been an unfortunate trend in COVID-19 insurance litigation in which courts have wrongly dismissed policyholder lawsuits during the motion to dismiss phase of litigation. Rather than allowing plaintiffs to litigate their claims and test their factual claims through litigation, courts have ruled on policyholders’ claims prematurely.
This model was rejected by the court in AC Ocean Walk, which said the Insured’s complaint alleging loss of enjoyment due to COVID-19 constitutes “factual pleadings from which a cause of action that COVID-19 damaged Ocean’s physical premises may be gleaned. The facts may be disputed, but that’s a problem for another day. In another case, Rowan University. v. Factory Mut., the New Jersey Superior Court also expressly rejected the insurer’s “attempts to lead the Court to a higher standard of pleading than that required by a motion to dismiss.” The court explained that when ruling on a motion to dismiss, its investigation is limited to “an examination of the legal sufficiency of the alleged facts apparent from reading the contested claim”. The court acknowledged that the plaintiff’s role is “not to prove the case, but only to make allegations which, if proven, would constitute a valid cause of action. Since the plaintiffs alleged that the COVID- 19 caused physical loss or damage to insured property and alleged that the insurer wrongfully refused to pay the claim under the policy, the court allowed the suit.Put simply, the question of whether COVID- 19 constitutes physical harm is a factual decision to be resolved at trial and not prematurely decided at the argument stage of the litigation.
The New Jersey courts’ interpretation of “physical loss or damage” and their refusal to apply pollution contamination exclusions to losses unrelated to traditional environmental pollution are notable victories for policyholders. Perhaps most importantly, policyholders’ claims have survived motions to dismiss, and policyholders will not be deprived of their right to conduct a discovery and present evidence to prove their claims. Based on the courts’ reasoned, logical and legally sound approach to assessing COVID-19 insurance claims during the pleadings phase, this could be the start of a nationwide trend of policyholders spending their day in front of courts.