The New Jersey Supreme Court rules that COVID-19 business interruption claims can be dismissed at the pleading stage

The New Jersey Supreme Court rules that COVID-19 business interruption claims can be dismissed at the pleading stage

In a unanimous opinion issued yesterday, the New Jersey Supreme Court joined a majority of other courts in holding that business interruption losses due to the COVID-19 pandemic are not covered by the standard language of commercial property insurance policies. AC Ocean Walk, LLC v. AC Ocean Walk, LLC. am Warranty and Liability. Ins. Cho. Cho.__NJ__ (January 24, 2024).

The appeal arose out of the insurers’ motions to dismiss, which argued that the plaintiff’s complaint did not state a valid claim. The plaintiff insured operated a casino at Ocean Walk, Atlantic City. In its complaint, Ocean Walk alleged losses as a result of the “actual and/or threatened presence of coronavirus particles” in its premises and restrictions on its operations due to COVID-19 government directives. The trial court denied the insurers’ motions to dismiss on the grounds that (1) Ocean Walk’s alleged business losses could potentially amount to “direct physical loss or damage” to its property; and (2) these losses are not excluded from coverage under the policies’ Pollution Exclusion. The Appellate Division reversed both appointments in June 2022, and the New Jersey Supreme Court granted certification for the issues to be heard in January 2023.

Some observers believed that the New Jersey Supreme Court’s agreement to hear the appeal was a sign that the Court might be willing to overturn and agree with the trial court’s decision. Yesterday’s judgment proved the assumption wrong as the Court decided decisively in favor of the insurers.

The court found that Ocean Walk did not allege that its business losses were attributable to “direct physical loss or damage” to the property. The court explained that to establish “direct physical loss or damage” under the policies, “Ocean Walk was required to demonstrate that its property was destroyed or altered in a manner rendering it unusable or uninhabitable.” According to the court, “the facts provided by Ocean Walk fall far short of this mark.” The court observed that Ocean Walk had at most alleged “loss of business during the COVID-19 government shutdown of business operations” and that such a claim was “entirely divorced from the physical condition of the premises.” The court noted that the policy’s “time element” provisions undercut its interpretation of the policy language because those provisions would be meaningless absent physical damage to the property requiring repair, reconstruction, or replacement.

The court also found that the Pollution Exclusion barred coverage. Exception provided that policies do not cover “Pollution” and policies defined by “Pollution” include “any condition of property involving the actual presence of any “pathogenic or pathogenic organism” or “virus”. The court found that the alleged “presence of SARS-CoV-2 in Ocean Walk’s facilities fully met the description of ‘contamination’ in the policies.” In such a decision, the Court determined that its decision Nav-Its, Inc. Selective Insurance Co. of America183 NJ 110 (2005) did not justify an “interpretation contrary to the plain terms of the policies.”

If there is any remaining doubt, AC Ocean Walk Provides that property insurance policies do not cover business interruption losses due to COVID-19 under New Jersey law. The decision also reaffirms the procedural rule that a complaint may be dismissed at the trial stage if the factual allegations “do not support a finding that the plaintiff is entitled to coverage under the terms of the insurance policy.”

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