A recent New Jersey Appellate Division ruling follows the general trend nationally in which courts are, by and large, rejecting insureds’ claims for coverage for business income losses due to government orders related to preventing the spread of Covid-19. While there have been certain outliers, like the Louisiana Fourth Circuit Court of Appeal’s deeply divided plurality decision earlier this month in Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, et al., the overwhelming majority of courts have ruled in favor of insurers. Specifically, courts have consistently recognized that physical alteration or damage to covered property is a prerequisite for triggering business interruption coverage under a first-party insurance policy. Further, courts have almost uniformly enforced virus exclusions. In this recent decision, the New Jersey Appellate Division followed suit, thereby reinforcing the national trend.
On June 20, 2022, the New Jersey Appellate Division (“Appellate Division”), in addressing six consolidated cases ruled that insurers are not obligated to cover business losses resulting from Executive Orders issued by New Jersey Governor Philip Murphy which forced businesses to close during the Covid-19 pandemic. In its decision, the Appellate Division affirmed the lower court’s dismissal of Plaintiffs’ lawsuits on the basis that the claimed business losses were not related to any “direct physical loss of or damage to” covered properties as required by the terms of the insurance policies.
Plaintiffs included restaurants and dining establishments, a gym, and a child day care center, who sued their insurers alleging a breach of contract for failure to cover losses sustained due to the Executive Orders, or sought declaratory judgments seeking a determination that their policies provided coverage for their business income losses. Ultimately, the Appellate Division concluded that Plaintiffs’ losses were not related to any “direct physical loss of or damage to” the plaintiffs’ properties. Additionally, the Appellate Division held that the losses were not covered under Plaintiffs’ policies’ civil authority clauses, which provide coverage for losses for certain governmental actions. Finally, the Appellate Division held that the insurers’ declination of coverage was not barred by regulatory estoppel. The Appellate Division further held that even if the Plaintiffs established grounds for coverage based on the above, the virus exclusions of the policies would be grounds to deny coverage because the Executive Orders were sanctioned due to the spread of Covid-19.
Plaintiffs argued that the lower court erred in dismissing their complaints with prejudice for failure to state a claim pursuant to Rule 4:6-2(e), stating that the term “direct physical loss of or damage to” as stated in their insurance policies is ambiguous. The Appellate Division disagreed, stating that coverage for physical loss is limited to when the insured property suffers from physical alteration or physical loss to the property.
To begin, the Appellate Division ruled that to trigger business interruption coverage, the suspension of operations must be caused by direct physical loss of or damage to the insured’s covered property. In support of this ruling, the Appellate Division relied, in part, on the Seventh Circuit Court of Appeals decision in East Coast Entertainment of Durham, LLC v. Houston Casualty Co. (7th Cir. 2022). East Coast stands for the proposition that business loss due to Covid-19 related closures did not constitute “direct physical loss” when unaccompanied by any physical alteration to the property.
Further, the Court cited to another Seventh Circuit Case Sandy Point Dental, P.C. v. Cincinnati Insurance Co., (7th Cir. 2021) in which the Seventh Circuit held that “the mere presence of the virus on the surfaces did not physically alter the property…”. Thus, the Appellative Division held that because the term “direct physical loss of or damage thereto” is not ambiguous and there was no physical loss sustained to Plaintiffs’ properties, Plaintiffs were not entitled to coverage on direct physical loss grounds.
Next, the Appellate Division held that Plaintiffs business income losses were not covered under the policies’ “Civil Authority” clauses. To trigger civil authority coverage, the Appellate Division held that Plaintiffs’ policies required: (1) damage to other properties within a certain distance of the insured properties; (2) damage resulted from a “Covered Cause of Loss”; (3) civil authority prohibited access to the insured premises because of the damage; and (4) the civil authority action was taken in response to dangerous physical conditions resulting from the damage or ensure civil authority’s unimpeded access to the damaged area.
In rejecting Plaintiffs’ civil authority argument, the Appellate Division held that the Executive Orders did not prohibit access to the Plaintiffs’ premises but rather limited the activity on the premises and that the premises were not selectively closed due to damage of properties in the surrounding area. The Appellate Division relied upon numerous federal cases, including a Fifth Circuit Court of Appeals case, Dickie Brennan & Co. v. Lexington Insr. Co. (5th Cir. 2011). The Dickie Brennan court held that a civil authority clause did not apply where the plaintiff incurred business losses when an evacuation order due to an incoming hurricane required its closure because nothing in the record indicated that the evacuation order was “due to” physical damage to other property. Instead, the evacuation order intended to address possible future harm of properties in the storm’s path.
Finally, the Appellate Division rejected Plaintiffs’ request to amend their complaints to add a claim barring the enforcement of the policies’ virus exclusions and endorsements based on the doctrine of regulatory estoppel. Plaintiffs wanted the opportunity to investigate the regulatory history of the virus exclusions to determine whether insurer representatives misrepresented to state regulators that proposed virus exclusion language was intended to merely clarify that coverage was barred under policies that existed at that time, when in reality, the language resulted in a substantial reduction in coverage. If this was true, Plaintiffs argued, the insurers may be prevented from enforcing those provisions pursuant to the doctrine of regulatory estoppel.
The Appellate Division disagreed, holding that the Defendant-Insurers have not taken a position regarding the interpretation of the virus exclusions that is any different from their designated agent’s representations to regulators. In arriving at this finding, the Appellate Division cited several federal court decisions in which courts analyzed the statements made by insurer representatives to regulators, and found that no such misrepresentations were made. In those cases, the courts rejected regulatory estoppel arguments advanced by the insureds. The Appellate Division here found no reason to depart from such well-established authority and, accordingly, rejected Plaintiffs request to amend their complaints.
With this decision, the Appellate Division reinforced the prevailing and consistent legal precedent in the United States on these issues. Physical alteration or damage to covered property is a prerequisite for triggering business interruption coverage under a first-party insurance policy, and virus exclusions will be enforced where applicable.
 Mac Property Group LLC et al. v. Selective Fire and Casualty Insurance Co.; Precious Treasures LLC v. Markel Insurance Co.; FAFB LLC (d/b/a Salted Lime Bar & Kitchen) v. Blackboard Insurance Co.; Country Diner of Mullica Hill Inc. (d/b/a Harrison House) v. Wesco Insurance Co., et al.; Pearl Three Two LLC (d/b/a Route 40 Diner) v. Wesco Insurance Co. et al.,; and Mattdogg Inc. (d/b/a Pure Focus Sports Club) v. Philadelphia Indemnity Insurance Co; (NJ Sup. Ct. Appellate Division).