Courts across the nation have struggled to determine whether insurance policies that provide coverage for “direct physical loss or damage” insure losses stemming from COVID-19. Many courts have been applying an overly stringent pleading standard, inappropriately granting insurers’ motions to dismiss as a result of the insureds’ purported failure to allege that COVID-19 caused damages covered by their policies or because certain exclusions supposedly barred coverage. However, two New Jersey state courts recently decided these issues in favor of the insureds in well-reasoned opinions that give proper deference to procedural pleading standards and substantive insurance coverage law.
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 held that physical alteration to an insured’s property is not a prerequisite to coverage for losses due to COVID-19. The insured, Ocean Casino, sued multiple insurers for COVID-19 losses, alleging that the virus caused Ocean Casino to shut down and suffer a loss of use of its property. Looking at the language of the policies, the court explained that each policy’s insuring agreement substantially read the same:
“This policy insures against direct physical loss of, or damage caused by, a covered cause of loss to covered property, at an insured location [the casino] … subject to the terms, conditions, and exclusions stated in this policy.”
A central issue of COVID-19 insurance litigation has been whether this language, which is commonly found in commercial property policies, provides coverage when there is no physical alteration to an insured’s property. In evaluating this issue, the court in AC Ocean Walk noted that New Jersey courts have held that an insured’s property does not need to have “any physical damage to or alteration of the material composition” in order to have suffered direct physical loss or damage. Consistent with this approach, New Jersey courts have held that “loss of function was akin to direct physical damage.” The court also pointed out that federal courts in the Third Circuit have reached 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 opinion did not go as far as to state that COVID-19 causes “direct physical loss or damage” to property, it held that the term “direct physical damage” is ambiguous, and while the carriers could have defined the term, they declined to do so. Therefore, the court held that Ocean Casino’s allegations of loss of use sufficiently pled a cause of action that it was entitled to coverage for COVID-19 damages.
B. Contamination Exclusions Do Not Apply to COVID-19
In addition to affording a broad interpretation to the phrase “direct physical loss or damage,” the AC Ocean court held that the policies’ pollution contamination exclusions did not apply to losses stemming from COVID-19. The policies at issue contained broad exclusions that precluded coverage for losses caused by a variety of substances, including viruses. However, the court found it significant that the contaminants listed in the exclusions were “associated with traditional environmental pollution damages, not reasonably related to the damages in this case, which are derived from a communicable disease.” Further, the court emphasized that where insurers previously attempted to apply these exclusions outside of traditional environmental pollution contamination claims, courts held in favor of insureds. Consequently, the court held that the exclusions “are overly broad, unfair, and are without a doubt contrary to objectively reasonable expectations of the insured” and therefore did not bar coverage for Ocean Casino’s COVID-19 losses.
C. COVID-19 and Surviving a Motion to Dismiss
Finally, there has been an unfortunate trend in COVID-19 insurance litigation in which courts have been improperly dismissing insureds’ suits at the motion to dismiss phase of litigation. Rather than allow plaintiffs to plead their claim and test their factual allegations through litigation, courts have been disposing of insureds’ claims prematurely.
This pattern was rejected by the court in AC Ocean Walk, which stated that the insured’s complaint alleging loss of use due to COVID-19 constitutes “fact-based pleadings from which a cause of action that the COVID-19 damaged Ocean's physical premises may be gleaned. The facts may be in dispute, but that is an issue for another day.” In another case, Rowan Univ. v. Factory Mut., the New Jersey Superior Court likewise expressly rejected the insurer’s “attempts to lead the Court to a higher standard of pleading than a Motion to Dismiss requires.” The court explained that when deciding a motion to dismiss, its inquiry is confined to “a consideration of the legal sufficiency of the alleged facts apparent on the face of the challenged 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.” Given that the plaintiffs alleged that COVID-19 caused physical loss or damage to the insured property and alleged that the insurer wrongfully refused to pay the claim pursuant to the policy, the court allowed the suit to proceed. Simply put, whether COVID-19 constitutes physical damage is a factual determination to be resolved at trial and not prematurely disposed of at the pleadings stage of 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 noteworthy victories for insureds. Perhaps even more significantly, the insureds’ claims survived motions to dismiss, and the insureds will not be deprived of their right to conduct discovery and present evidence to prove their claims. Based on the courts’ well-reasoned, logical, and legally sound approach to evaluating COVID-19 insurance claims at the pleadings phase, this may be the beginning of a national trend of insureds getting their day in court.