Why it matters

A New York federal court recently ruled that the discharge of ammonia at a manufacturing plant – causing a facility shutdown for several days – constituted “direct physical loss” pursuant to the insured’s policy and required payment from the insurer. In addition to seriously injuring one employee, the release of ammonia required the plant to close for several days and be cleaned by a remediation company before operations could resume. The insurer refused to pay for the policyholder’s damages, arguing that no “direct physical loss of or damage to” as required under the policy, had occurred at the facility. Although there was no actual physical change or alteration to the property, the court reasoned that the presence of ammonia rendered the facility physically unusable, so the discharge inflicted the necessary “direct physical loss of or damage to” property to trigger coverage under the policy.

Detailed Discussion

Gregory Packaging, Inc., makes and sells juice cups. While preparing a new factory for production of its product, a refrigeration system malfunctioned, releasing ammonia gas into the facility. The release and continued presence of the gas rendered the facility “physically unfit for normal human occupancy and continued use until the ammonia was sufficiently dissipated.” A third party was engaged to remediate the contamination.

Gregory Packaging sought coverage under a policy issued by Travelers Property Casualty Company. The policy provided that the insurer “will pay for direct physical loss of or damage to Covered Property,” defined to include the new facility.

Travelers denied coverage on multiple grounds, including that "physical loss or damage" necessarily involves "a physical change or alteration to insured property, requiring its repair or replacement."

The court disagreed with Travelers, finding that the presence of ammonia gas in the facility, which rendered the facility uninhabitable and inoperable for seven days, constituted “direct physical loss of or damage to Covered Property.” The court based its ruling on case law from New Jersey state and federal courts, as well as the law of other jurisdictions. (The court found no conflict between the law of New Jersey, the corporation’s home state, and that of Georgia, the location of the damaged property.)

The phrase “direct physical loss of or damage to” was not defined by the policy, but the court found that the ammonia discharge satisfied the term under either New Jersey or Georgia law.

The court explained: “In the present case, there is no genuine dispute that the ammonia release physically transformed the air within Gregory Packaging’s facility so that it contained an unsafe amount of ammonia or that the heightened ammonia levels rendered the facility unfit for occupancy until the ammonia could be dissipated.”

While Travelers argued that genuine disputes of material fact precluded a grant of summary judgment to Gregory Packaging, the court found that none of those disputes -- as to whether the ammonia leak caused an explosion and whether the facility was rendered inoperable and required repair — were material to the question of whether "the ammonia-induced incapacitation” constituted 'direct physical loss of or damage to' Gregory's packaging facility.

To read the opinion in Gregory Packaging, Inc. v. Travelers Property Casualty Co., click here.