In AC Ocean Walk v. American Guarantee and Liability Insurance, (A-28-22/087304) (Decided January 24, 2024), the Supreme Court of New Jersey held that the presence of the COVID-19 virus did not constitute the kind of “direct physical loss or damage” required to support a business-interruption insurance claim.
Facts of AC Ocean Walk v. American Guarantee and Liability Insurance
In 2018, Ocean Walk opened Ocean Casino Resort, located on the Atlantic City Boardwalk. Ocean Walk obtained property insurance policies from defendants American Guarantee and Liability Insurance Company, AIG Specialty Insurance Company, and Interstate Fire & Casualty Company.
After suffering losses due to the COVID-19 pandemic, plaintiff AC Ocean Walk, LLC (Ocean Walk) sought coverage under its commercial property insurance policies. Ocean Walk closed its facilities in March 2020 and then reopened them in July 2020, both in accordance with Executive Orders issued by Governor Philip D. Murphy.
Ocean Walk maintained that by virtue of the presence of SARS-CoV-2 in its facilities and its government-mandated temporary suspension of operations, it sustained a “direct physical loss” of or “direct physical . . . damage” to its property as those terms are used in the insurance policies issued by defendants. Ocean Walk further argued that an exclusion in the policies for certain claims based on “contamination” did not bar its coverage claims.
The property insurance policies issued by defendants set forth identical base policy forms. Each policy provided that it insured “against direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property, at an Insured Location,” subject to the terms, conditions, and exclusions stated in the policy. Each policy contained a “contamination exclusion” providing in part that — “unless it results from direct physical loss or damage not excluded by this Policy” — “Contamination, and any cost due to Contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy” is excluded.
When the defendants denied coverage — aside from agreeing to pay their proportionate shares of a $1,000,000 sublimit under the policies’ Interruption by Communicable Disease amendatory endorsement — Ocean Walk filed a complaint. All defendants moved to dismiss the complaint for failure to state a claim.
The trial court concluded that Ocean Walk had adequately pled facts supporting a finding of “direct physical loss” of or “direct physical . . . damage” to its property because it had alleged that due to the SARS-CoV-2 virus, it was unable to “operate its gaming floor and hotel rooms” or to “operate according to its essential functions.” Citing Nav-Its, Inc. v. Selective Insurance Co. of America, 183 N.J. 110, 118-24 (2005), the trial court further found the contamination exclusion inapplicable to the claims asserted. The Appellate Division reversed the trial court’s denial of the motions to dismiss filed by the defendants.
NJ Supreme Court’s Decision in AC Ocean Walk v. American Guarantee and Liability Insurance
The New Jersey Supreme Court affirmed. “We agree with the Appellate Division that Ocean Walk did not allege facts supporting coverage under the policy language in dispute, and that the deficiency in its allegations cannot be remedied by discovery,” Justice Anne M. Patterson wrote on behalf of the Court. The Court further held that even if Ocean Walk had pled facts supporting a finding of a covered “loss” or “damage,” the losses it alleges are excluded from coverage by the policies’ contamination exclusion.
The New Jersey Supreme Court first found that Ocean Walk failed to allege facts supporting coverage under the policy language in dispute. “Based on the plain terms of the policies, we conclude that in order to show a ‘direct physical loss’ of its property or ‘direct physical . . . damage’ to its property under the policy language at issue, (parent company AC Ocean Walk LLC) was required to demonstrate that its property was destroyed or altered in a manner that rendered it unusable or uninhabitable,” Justice Patterson wrote.
The Court went on to find that absent the executive orders, Ocean Walk would have been able to use its property for casino and other entertainment functions with no suspension of its operations. “At most, it has alleged that it sustained a loss of business during the COVID-19 government-mandated suspension of business operations because it was not permitted to use its property as it would otherwise have done,” Justice Patterson wrote.
The New Jersey Supreme Court also addressed the contamination exclusion. “Although it is not strictly necessary given our conclusion that Ocean Walk did not allege facts to establish a ‘direct physical loss’ of or ‘direct physical damage’ to its property, we nonetheless briefly address Ocean Walk’s argument that the contamination exclusion in the policies issued by AGLIC, AIG, and IFCC does not apply here,” Justice Patterson wrote. According to the Court, presence of SARS-CoV-2 in Ocean Walk’s facilities falls squarely within the description of “contamination” in the policies. It also found that its decision in Nav-Its did not alter that conclusion. “Here, in contrast, the contamination exclusion in the policies at issue bars coverage not only for certain claims premised on loss or damage caused by a ‘pollutant’ but also for certain claims premised on loss or damage resulting from other causes,” Justice Patterson explained. “Those causes include the presence of a ‘virus’ or a ‘pathogen or pathogenic organism’ on covered property. The exclusion’s terms do not support the limited reading that Ocean Walk advocates.”