A recent ruling by the New Jersey Division of Appeals follows the general trend nationally in which courts are, to a large extent, rejecting claims by insureds to cover for business income losses due to government orders related to preventing the spread of Covid-19. While there have been some outliers, such as the deeply divided plurality decision of the Louisiana Court of Appeals earlier this month in Cajun Conti LLC, et al. Against some insurance agents in Lloyd’s et al., the vast majority of courts have ruled in favor of the insurance companies. Specifically, courts have consistently recognized that physical alteration or damage to covered property is a prerequisite for initiating business interruption coverage under a first party insurance policy. Furthermore, courts have almost uniformly imposed virus exceptions. In this latest decision, the New Jersey Appeals Chamber followed suit, bolstering the national trend.
On June 20, 2022, the New Jersey Division of Appeals (the “Appellate Division”) handled six consolidated cases A ruling that insurers are not obligated to cover business losses resulting from executive orders issued by New Jersey Governor Philip Murphy that have forced businesses to close during the COVID-19 pandemic. In its decision, the Appeals Chamber affirmed the lower court’s dismissal of the plaintiffs’ claims on the grounds that the alleged business losses were not related to any “direct material loss or damage” of the covered property as required under the terms of the insurance policies.
The plaintiffs included restaurants, dining establishments, a gym, and children’s day care, who sued their insurers for breach of contract for failing to cover losses incurred due to executive orders, or sought declaratory provisions seeking to determine that their policies provide coverage for losses their commercial income. In the end, the Appeals Division concluded that the plaintiffs’ losses were not related to any “direct material loss or damage” of the plaintiffs’ property. In addition, the Appeals Chamber determined that the losses were not covered under the Civil Authority provisions of the plaintiffs’ policies, which provide coverage for losses for certain government actions. Finally, the Appeals Division held that the insurers’ refusal to cover was not prohibited by the regulatory shutdown. The Appeals Division also held that even if plaintiffs set grounds for coverage based on the above, virus exclusions in the policies would be grounds for denying coverage because executive orders were penalized for the spread of Covid-19.
The plaintiffs argued that the lower court erred in dismissing their complaints with bias For not making a claim in accordance with Rule 4:6-2(e), which states that the term “direct physical loss or damage to” as stated on their insurance policies is an ambiguous term. The Appeals Chamber did not agree, stating that coverage of physical loss is limited to when the insured property suffers a physical alteration or physical loss of property.
To start, the Appeals Division ruled that to start business interruption coverage, the suspension of operations must be caused by direct physical loss or damage to the insured’s covered property. In support of this ruling, the Appeals Chamber relied in part on the decision of the Seventh Circuit Court of Appeals in East Coast Entertainment of Durham, LLC v. Houston Casualty Co. (7The tenth Mr. 2022). East Coast It supports the suggestion that business loss due to Covid-19 related closures does not constitute a “direct material loss” when not accompanied by any material change in property.
Furthermore, the court cited another case in the Seventh Circuit Sandy Point Dental, BC v. Cincinnati Insurance, (7The tenth Mr. 2021) where the Seventh Circuit held that “the mere presence of the virus on surfaces does not alter the characteristic physically…”. Thus, the Appeals Chamber held that because the term “direct material loss or damage to it” is not ambiguous and there was no material loss of the plaintiffs’ property, the plaintiffs had no right to coverage on the basis of direct material loss.
Subsequently, the Appeals Chamber determined that the plaintiffs’ business income losses were not covered under the “civil authority” provisions of the insurance policies. To initiate civil authority coverage, the Appeals Chamber held that the plaintiffs’ policies required: (i) damage to other property within a certain distance of the insured property; (ii) damage caused by a “covered cause of loss”; (3) The civil authority has prevented entry to the insured building because of the damage. (4) Action by the civil authority is taken in response to the dangerous physical conditions resulting from the damage or to ensure unimpeded access to the affected area by the civil authority.
In rejecting the plaintiffs’ civil authority’s argument, the Appeals Division determined that the executive orders did not prohibit access to the plaintiffs’ premises but did limit activity in the building and that the building was not selectively closed due to property damage in the surrounding area. The Appeals Division relied on many federal cases, including the Fifth Circuit Court of Appeals, Dickie Brennan & Company vs. Lexington Enser. Company (5The tenth Mr. 2011). The Dickie Brennan The court held that the civil authority requirement did not apply where the plaintiff incurred business losses when a hurricane-ward eviction order requested its closure because there was nothing in the record to indicate that the eviction order was “due to” material damage to other property. Instead, an evacuation order is intended to address potential future property damage in the course of a storm.
Finally, the Appeals Division denied the plaintiffs’ request to amend their complaints to add a claim prohibiting enforcement of virus-specific policy exceptions and endorsements based on the principle of regulatory shutdown. The plaintiffs wanted the opportunity to investigate the regulatory history of virus exclusions to determine whether insurance company representatives had misrepresented state regulators who proposed virus exclusion language intended merely to make clear that coverage was prohibited by policies in place at the time, while the language was In fact, it led to a significant decrease in coverage. The plaintiffs argued that if this were true, the insurers might be prevented from enforcing those provisions under the principle of regulatory shutdown.
The Appeals Chamber did not agree, arguing that Defendant-Insurers had not taken a position regarding the interpretation of virus exceptions that differed from designated agent representations to regulators. In reaching this conclusion, the Appeals Division cited several federal court decisions in which the courts analyzed statements made by insurance company representatives to regulators, finding that no such misrepresentations were made. In those cases, the courts rejected the regulatory arguments made by the insured. The Appeals Chamber here found no reason to depart from this established authority and, therefore, rejected the plaintiffs’ requests to amend their complaints.
With this decision, the Appeals Chamber strengthened the prevailing and consistent legal precedent in the United States on these issues. Physical alteration or damage to covered property is a prerequisite for initiating business interruption coverage under a first party insurance policy, and virus exclusions will apply where applicable.
 Mac Property Group LLC et al. v. selective fire and accident insurance company; 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) against Wesco Insurance Co. et al.,; and Mattdog Inc. (d/b/a Pure Focus Sports Club) v. Philadelphia Indemnity Insurance Co.; (NJ Sup. Ct. Appellate Division).
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