Last month, a New Jersey federal court held that the term “direct physical loss of or damage to” property did not require that the property be physically altered in any permanent way.  In Gregory Packaging, Inc. v. Travelers Property Cas. Co., 2014 WL 6675934, 2014 U.S. Dist. LEXIS 165232 (D.N.J., Nov. 25, 2014), the court determined that an ammonia release that rendered the insured manufacturing plant unusable until the gas had been dissipated “physically transformed the air” within the facility and thereby inflicted direct physical loss or damage to the plant.

Gregory Packaging manufactured and sold juice cups, and it was in the process of installing a refrigeration system at a new plant in Newman, Georgia when anhydrous ammonia was accidentally released into the facility, severely burning a subcontract worker.  The plant was evacuated, and a remediation company was retained to dissipate the gas.  That process took several days.

The facility was insured by Travelers Property Casualty Company under a contract of insurance that afforded coverage for “direct physical loss of or damage to Covered Property caused by or resulting from a Covered Cause of Loss.”  The insurer denied liability for Gregory Packaging’s property damage and business interruption claims, arguing that there had been no physical loss or damage because the term connoted a physical change or alteration to insured property requiring its repair or replacement.  The policyholder responded by placing the matter in suit in federal court in New Jersey, and it then sought partial summary judgment on the sole issue of whether the ammonia release constituted an instance of direct physical loss or damage to the property.

On November 25th, Judge William H. Walls held that it did under either New Jersey or Georgia law.  The court explained that it was undisputed “that the ammonia release . . . rendered Gregory Packaging’s facility physically unfit for normal human occupancy and continued use until the ammonia was sufficiently dissipated.”  According to Judge Walls, both Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J.Super. 524, 968 A.2d 724 (2009) and Port Authority of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3rd Cir. 2002) stood for the proposition that that constituted physical loss or damage.  In the former, an electrical grid that suffered temporary and non-structural damage was held to be “physically damaged” because “the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity.”  In the latter, “the presence of large quantities of asbestos in the air of a building . . . such as to make the structure uninhabitable and unusable” was held to constitute “a distinct loss to its owner [and] physical loss.”

With respect to Georgia, the judge recognized that there were no cases on point, but he nonetheless found in favor of the insured, stating:

Before the ammonia discharge, the facility was in a satisfactory state for human occupancy and continued build-out, but after the ammonia discharge its state was unsatisfactory and required remediation.  The Court find that Gregory Packaging would be entitled to partial summary judgment that the ammonia discharge caused “physical loss of or damage to” its facility under Georgia law because there is no genuine dispute that the ammonia released physically changed the facility’s condition to an unsatisfactory state needing repair.

The decision did not address whether the release was itself caused by a covered cause of loss or by an excluded peril as the insurer alleged.