United States: New Jersey State Appeals Court Issues Precedential Opinion Holding That COVID-19 Business Losses Due To Government Orders Are Not Covered By Insurance Policies

On June 20, 2022, the Appellate Division of the New Jersey Superior Court issued a precedential decision holding that COVID-19 business losses stemming from governmental closure orders are not covered by insurance policies for a number of reasons, including that the business losses were not related to any "direct physical loss of or damage to" covered properties as required by the terms of standard property insurance policies. The decision is just the latest appellate ruling among dozens across the country that have almost universally held that business losses from governmental orders regarding COVID-19 are not "direct physical loss of or damage to" covered property. The case is Mac Property Grp. LLC, et al. v. Selective Fire and Casualty Ins. Co., Nos. A-0714-20, A-0962-20, A-1034-20, A-1110-20, A-1111-20, A-1148-20, ___ N.J. Super. __, __ (App. Div. June 20, 2022) (slip op. at 5).

In this consolidated appeal, insureds sought insurance coverage for COVID-19 related business losses. Id. In each case, the trial court had dismissed plaintiffs' complaints with prejudice under Rule 4:6-2(e) for failure to state a claim.

The Appellate Division, New Jersey's intermediate state appellate court, concluded that the dismissals were proper because: (1) plaintiffs' business losses were not related to any "direct physical loss of or damage to" covered property as set forth in their insurance policies; (2) plaintiffs' business losses were not covered under the civil authority clauses; (3) a regulatory estoppel claim would not overcome dismissal of the complaint with prejudice; and (4) the virus exclusions and endorsements contained in the policies barred coverage in any event. The Mac Property decision is noteworthy in several respects.

First, the court noted that the term "direct physical loss of or damages to" is not ambiguous. The court held that when the term "physical" is combined with "injury", "the resulting term means a 'detrimental alteration' or 'damage or harm to the physical condition of a thing.'" Id. at 22. Accordingly, under the plain meaning of the term, the court concluded that plaintiffs' business losses were not related to any "direct physical loss of or damages to" property, because "there was no damage to plaintiffs' equipment or property on or offsite that caused their premises to lose their physical capacity to operate, and there was no physical alteration that made their premises dangerous to enter." Id. at 23; 24-32. The court noted that no plaintiff alleged the coronavirus was present on their properties or rendered their properties uninhabitable, but instead were simply shut down or had their operations limited by virtue of the governmental orders. Importantly, the Appellate Division distinguished its prior holding in Wakefern Food Corp., v. Liberty Mutual Fire Ins. Co., 406 N.J. Super. 524 (App. Div. 2009), involving a power outage at a supermarket that occurred as part of a widespread "electrical cascade" that disrupted a large part of the nation's power grid.

Second, the court determined that the "Civil Authority" clauses in the insurance policies do not apply in this context because the Executive Orders ("EOs") issued by New Jersey Governor Phil Murphy "neither prohibited access to plaintiffs' premises nor prevented plaintiff owners from being on their premises" and that "plaintiffs' premises were not selectively closed by the EOs due to damage to nearby property." Id. at 36-37.

Third, the court rejected plaintiffs' regulatory estoppel arguments. The court explained that it would have been "futile" for the trial court to allow plaintiffs to amend their complaints to add regulatory estoppel claims "because defendants have not taken a position regarding the interpretation of the virus exclusions that is any different from ISO's representation to regulators." Id. at 42.

Lastly, the court found that it was proper for the trial judges to consider the virus exclusions and endorsements when deciding defendants' motion to dismiss because the virus exclusions and endorsements in plaintiffs' insurance policies were presented on the face of the plaintiffs' pleadings and clearly precluded coverage for plaintiffs' insurance claims. Id. at 48-51.

The Mac Property decision is one of the first precedential decisions in New Jersey to address "regulatory estoppel" since the New Jersey Supreme Court articulated that theory in 1993. The decision is also important in that it clarifies the court's prior decision in Wakefern, and narrowed the notion of "direct physical loss or damage" to comport with the more traditional view that the term requires some physical alteration of property to grant coverage.

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