AC OCEAN WALK, LLC v. AMERICAN GUARANTEE (L-0703-21, ATLANTIC COUNTY AND STATEWIDE) ( 2022 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1824-21
AC OCEAN WALK, LLC,
Plaintiff-Respondent,
v.
AMERICAN GUARANTEE
AND LIABILITY INSURANCE
COMPANY, AIG SPECIALTY
INSURANCE COMPANY,
and INTERSTATE FIRE AND
CASUALTY COMPANY,
Defendants-Appellants,
and
NATIONAL FIRE & MARINE
INSURANCE COMPANY,
Defendant.
__________________________
Argued May 9, 2022 – Decided June 23, 2022
Before Judges Sumners, Vernoia and Firko.
On appeal from an interlocutory order of the Superior
Court of New Jersey, Law Division, Atlantic County,
Docket No. L-0703-21.
David R. Roth (Wiggin & Dana, LLP) of the
Connecticut and New York bars, admitted pro hac
vice, argued the cause for appellant American
Guarantee and Liability Insurance Company (Ford
Marrin Esposito Witmeyer & Gleser, LLP and Wiggin
& Dana, LLP, attorneys; Edward M. Pinter, Jon R.
Grabowski, Caroline McKenna, Jeffrey R. Babbin
(Wiggin & Dana, LLP), of the Connecticut and
District of Columbia bars, admitted pro hac vice, and
David R. Roth, on the briefs).
Keith Moskowitz (Dentons US LLP) of the
Connecticut, New York, and Illinois bars, admitted
pro hac vice, argued the cause for appellant AIG
Specialty Insurance Company (Dentons US LLP,
attorneys; Shawn L. Kelly, on the brief).
DLA Piper LLP (US), attorneys for appellant
Interstate Fire & Casualty Company, join in the brief
of appellant American Guarantee and Liability
Insurance Company.
Justin F. LaVella (Blank Rome, LLP) of the District of
Columbia and Virginia bars, admitted pro hac vice,
argued the cause for respondent AC Ocean Walk, LLC
(Blank Rome, LLP, attorneys; Stephen M. Orlofsky,
Justin F. LaVella, Alexander H. Berman (Blank Rome,
LLP) of the Pennsylvania bar, admitted pro hac vice,
Michael A. Iannucci, and Michael R. Darbee, on the
briefs).
Wystan M. Ackerman (Robinson & Cole, LLP) of the
Connecticut, Massachusetts, and New York bars,
admitted pro hac vice, argued the cause for amicus
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2
curiae Insurance Council of New Jersey and American
Property Casualty Insurance Association (Robinson &
Cole, LLP, attorneys; Daniel E. Bryer, on the brief).
Paul E. Breene argued the cause for amicus curiae
United Policyholders (Reed Smith, LLP, Lorelie S.
Masters (Hunton Andrews Kurth), of the District of
Columbia, admitted pro hac vice, attorneys; Lorelie
S. Masters and Kevin V. Small (Hunton Andrews
Kurth), on the brief).
PER CURIAM
By way of leave to appeal granted, defendant insurance carriers
American Guarantee and Liability Insurance Company (AGLIC), AIG
Specialty Insurance Company (AIG), and Interstate Fire and Casualty
Company (IFCC) (collectively defendants), appeal from a December 22, 2021
Law Division order denying their motion to dismiss plaintiff AC Ocean Walk
LLC's (Ocean) complaint. 1 Ocean operates the Ocean Casino Resort in
Atlantic City. In its complaint, Ocean sought property and business
interruption insurance under defendants' policies for losses of income during
1
We granted defendants' motion for leave to appeal on February 22, 2022. In
addition, we permitted United Policyholders and Insurance Council of New
Jersey to participate as amicus curiae on behalf of plaintiff Ocean and
defendants respectively.
A-1824-21
3
closure of its casino pursuant to COVID-19 Executive Orders issued by the
Governor.
The trial court found Ocean sufficiently pled that COVID-19 caused a
direct physical loss or damage to its casino to surmount defendants' motion to
dismiss and the coverage sought by Ocean under various sections of the issued
policies. The court determined that the contamination exclusion contained in
the policies did not apply because they were ambiguous. 2 For the reasons that
follow, we reverse.
I.
The following facts are derived from the motion record. Ocean is a
138,000 square foot casino and gaming entertainment enterprise, the largest
gaming suite in the United States. Ocean provides overnight accommodations;
on-site bars, cafes, and restaurants; a nightclub and a beach club; meeting
spaces; pools; a spa; fitness centers; and an on-site concert venue. The record
shows Ocean purchased four separate property insurance policies (the policies)
from defendants and NFMIC "for the express purpose of obtaining broad,
2
The trial court granted defendant National Fire and Marine Insurance
Company's (NFMIC) motion to dismiss based on an endorsement exclusion in
its policy that was not included in defendants' policies. NFMIC is not
participating in this appeal.
A-1824-21
4
multi-risk protection for losses that it might incur due to various causes of loss
or damage to the Ocean."
Collectively, the policies insure Ocean for a cumulative $50,000,000 on
a "quota share" basis, where several insurers share losses and premiums at
fixed percentages. Thus, defendants and NFMIC issued their own policy and
share in the collective $50,000,000 policy limits at varying percentages. Of
the total $50,000,000 covered, AGLIC agreed to pay fifty percent or up to
$25,000,000; AIG agreed to pay twenty-five percent or up to $12,500,000;
IFCC agreed to pay ten percent or up to $5,000,000; and NFMIC agreed to pay
fifteen percent or up to $7,5000,000. The policy periods ran from January 4,
2020, to January 4, 2021.
Although defendants and NFMIC issued separate policies, each "were
contemporaneously underwritten and contain identical . . . base policy forms."
Specifically, "the [p]olicies provide numerous independent yet often
overlapping, coverages that each insure different types of eventualities and are
separately triggered by different factual circumstances found in [Ocean]'s
multi-faceted loss." The Insuring Agreement, § 1.01, found in each policy
states: "This Policy [i]nsures against direct physical loss of or damage caused
by a Covered Cause of Loss to Covered Property, at an Insured Location . . .
A-1824-21
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all subject to the terms, conditions and exclusions stated in this Policy."
(Emphasis added). The policies define "Covered Cause of Loss" as "[a]ll risks
of direct physical loss of or damage from any cause unless excluded."
(Emphasis added). However, the policies do not define the term "direct
physical loss of or damage."
"The [p]olicies also cover certain Time Element losses, i.e., the loss of
business income resulting from the suspension of [Ocean]'s business activities,
subject to the [p]olicies' terms and conditions." 3 The business interruption
coverage provisions found in each policy, § 4.01.01, states:
The [Insurer] will pay for the actual Time Element
loss the Insured sustains, as provided in the Time
Element Coverages, during the Period of Liability.
The Time Element loss must result from the necessary
Suspension of the Insured's business activities at an
Insured Location. The Suspension must be due to
direct physical loss of or damage to Property (of the
type insurable under this Policy other than Finished
Stock) caused by a Covered Cause of Loss at the
Location . . . .
[(Second emphasis added).]
Section 7.56.01 of the policies define "suspension" as "[t]he slowdown or
cessation of the Insured's business activities."
3
Time Element coverage is frequently referred to as and interchangeable with
"Business Interruption Coverage."
A-1824-21
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The policies also include various exclusions applicable to all the
coverage parts within the policies. Relevant to this appeal and common to all
four insurers is the "Contamination Exclusion." Section 3.03.01 of the polici es
states in pertinent part:
This Policy excludes the following 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, except as provided
by the Radioactive Contamination
Coverage of this Policy.
[(First and second emphases added).]
Section 7.09 of the policies defines "contamination" and "contaminated"
as "[a]ny condition of the property due to the actual presence of any foreign
substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or
pathogenic organism, bacteria, virus, disease causing or illness causing agent,
Fungus, mold or mildew." [(First and second emphases added).] Under
Section 7.10, contaminants are defined as "[a]ny solid, liquid, gaseous, thermal
or other irritant, pollutant or contaminant, including but not limited to smoke,
vapor, soot, fumes, acids, alkalis, chemicals, waste (including materials to be
A-1824-21
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recycled, reconditioned or reclaimed), asbestos, ammonia, other hazardous
substances, Fungus or Spores." (Emphases added). Notably, "virus" and
"pathogen or pathogenic organism" are not included.
"Each of the [p]olicies also contains a number of amendatory
endorsements, some of which are inconsistent between and among the
[p]olicies." Unique to NFMIC's policy is its "Biological or Chemical
Substances Exclusion Endorsement." This exclusion added that NFMIC's
policy does not provide any coverage for any loss,
cost, expense or damage of any nature, however
caused, directly or indirectly arising out of, resulting
from, or in any way related to the actual or suspected
presence or threat of any pathogenic or poisonous
biological or chemical substance or material of any
kind, including, but not limited to, any malicious use
of such substance or material, whether isolated or
wide-spread, regardless of any other cause or event
contributing at the same time or in any sequence.4
Defendants' policies contain an "Interruption by Communicable Disease"
(ICB) amendatory endorsement that provide business interruption coverage.
The endorsement states in pertinent part:
The [defendants] will pay for the actual Gross
Earnings loss sustained by the Insured, as provided by
this Policy, resulting from the necessary Suspension of
4
The trial court dismissed NFMCI from the action based on this exclusion,
which is not an issue on appeal.
A-1824-21
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the Insured's business activities at an Insured Location
if the Suspension is caused by order of an authorized
governmental agency enforcing any law or ordinance
regulating communicable diseases and that such
portions of the location are declared uninhabitable due
to the threat of the spread of communicable disease,
prohibiting access to those portions of the Location.
[(Emphases added).]
Defendants' potential responsibility for Ocean's losses under the ICB
endorsements is their "respective quota share of the losses not to exceed a
$1,000,000 sublimit of liability."
Of the defendants, IFCC's policy provides a "Pollution Contamination
Exclusion" endorsement that the trial court found "may not be used to preclude
coverage." The endorsement states IFCC "will not pay for loss, damage, cost
or expense caused directly or indirectly by" the "release, migration, discharge,
escape or dispersal of Contaminants" unless such a peril is affirmatively
covered by the policy. The endorsement continues to read:
In this exclusion . . . , the capitalized term
"Contaminants" means materials that may be harmful
to human health and include any impurity, pollutant,
poison, toxin, pathogen or pathogenic organism,
disease-causing or illness-causing agent, asbestos,
dioxin, polychlorinated biphenyls, agricultural smoke,
agricultural soot, vapor, fumes, acids, alkalis, bacteria,
virus, and hazardous substances as listed in the
Federal Water Pollution Control Act, Clean Air Act,
Resource Conservation and Recovery Act of 1976,
A-1824-21
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Toxic Substances Control Act, or as designated by the
United States Environmental Protection Agency or
any other local governmental agency.
[(Emphases added).]
And, AGLIC's policy includes an endorsement titled, "Amendatory
Endorsement – Louisiana" (Louisiana Endorsement). Relevant to the matter
under review is the portion of the endorsement that deletes and replaces the
Contamination Exclusion in its entirety with: "Contamination or asbestos, and
any cost due to Contamination or asbestos including the inability to use or
occupy property or any cost of making property safe or suitable for use or
occupancy." The endorsement proceeds to redefine "contamination" as "[a]ny
condition of property due to the actual presence of any Contaminant(s)."
"Contaminants" are redefined as "[a]ny solid, liquid, gaseous, thermal or other
irritant, including but not limited to smoke, vapor, soot, fumes, acids, alkalis,
chemicals, waste (including materials to be recycled, reconditioned or
reclaimed), other hazardous substances, Fungus or Spores."
A. COVID-19 Executive Orders
On March 9, 2020, Governor Murphy issued Executive Order (EO) 103
in response to the outbreak of COVID-19. EO 103 stated COVID-19 was an
imminent public health hazard and declared a state of emergency in New
A-1824-21
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Jersey. EO 103 also stated COVID-19 "is a contagious, and at times fatal,
respiratory disease caused by the SARS-CoV-2 virus."
On March 11, 2020, the World Health Organization (WHO) declared the
COVID-19 outbreak a global pandemic. As of March 16, 2020, the Centers
for Disease Control and Prevention (CDC) had reported that there were more
than 130,000 cases of COVID-19 worldwide, with more than 4,900 cases in
the United States. There were 178 positive cases in New Jersey. Based on
these facts, on March 16, 2020, Governor Murphy issued EO 104, which
established "social mitigation strategies for combatting COVID-19."
To mitigate the spread of COVID-19 by limiting person-to-person
interaction, EO 104 designated a subset of businesses within the State as
"essential" and limited the scope of service and hours of operation for
restaurants and some retail establishments, all to limit the spread of the
disease. EO 104 also ordered certain facilities to close and remain closed to
the public for as long as EO 104 remained in effect effective 8:00 p.m. March
16, 2020. Among such facilities were "nightclubs," "[c]asino gaming floors,
including retail sports wagering lounges, and casino concert and entertainment
venues." However, "[o]nline and mobile sports and casino gaming services
A-1824-21
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[were permitted to] continue to be offered notwithstanding the closure of the
physical facility."
In response to the rising infection rate of COVID-19, the Governor
issued EO 107 on March 21, 2020. To that end, EO 107 "ordered all non-
essential retail businesses in the [S]tate to close and require[ed] individuals in
the [S]tate to stay at home." EO 107 also required that all brick-and-mortar
premises of "non-essential" businesses remain closed to the public for as long
as the order remained in effect. See New Jersey Executive Order No. 107
(Mar. 21, 2020), https://nj.gov/infobank/eo/056murphy/pdf/EO-107.pdf.
EO 107 also required "[a]ll recreational and entertainment businesses"
closed to the public, if not already closed pursuant to EO 104. Among this
non-exhaustive list of such businesses were casino gaming floors, casino
concert and entertainment venues, and nightclubs. Restaurants and other
"dining establishments" were "permitted to operate their normal business
hours," but were "limited to offering only food delivery and/or take -out
services." EO 107 closed by stating:
It shall be the duty of every person or entity in this
State or doing business in this State and of the
members of the governing body and every official,
employee, or agent of every political subdivision in
this State and of each member of all other
governmental bodies, agencies, and authorities in this
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State of any nature whatsoever, to cooperate fully in
all matters concerning this [EO].
The order took effect on March 21, 2020, at 9:00 p.m.
On June 29, 2020, Governor Murphy rescinded the stay-at-home order,
but the restrictions on non-essential businesses—like casinos—remained in
effect. Shortly thereafter, the Governor issued EO 157 on July 2, 2020. EO
157 permitted limited reopening of specific recreational and entertainment
businesses, such as casino gaming floors and retail sports wagering lounges,
subject to restrictions intended to mitigate the spread of COVID-19. See
Executive Order No. 157, Off. Governor (Jul. 2, 2020),
https://www.nj.gov/infobank/eo/056murphy/pdf/EO-157.pdf.
B. Coverage Issues
Because of EO 104 and the growing risk of COVID-19, Ocean
suspended its casino and entertainment operations on March 16, 2020. Ocean
reopened its casino gaming and waging operations in a restricted fashion
according to EO 157 on July 2, 2020. Ocean submitted a timely claim under
the policies to defendants and NFMIC on March 23, 2020. The parties
corresponded for several months disputing whether coverage was owed or not
under the policies. On October 2, 2020, defendants agreed to pay their
proportionate share of a total $850,000 in ICB coverage to Ocean. Ultimately,
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on February 24, 2021, defendants and NFMIC's claims adjuster issued a letter
denying coverage to Ocean under all provision of the policies, excluding the
ICB endorsement.
Ocean alleged it was entitled to coverage under the following policy
sections: Section 3.01 for Property Damage Coverage; Section 4.01 for Time
Element Coverage; Section 4.02.03 for Extra Expense Coverage; Section
5.02.03 for Civil or Military Authority Coverage; and Section 5.02.25 for
Ingress/Egress Coverage. Each of these sections conditions coverage on there
being direct physical loss or damage.
On March 3, 2021, Ocean filed a complaint alleging that beginning
March 16, 2020, it incurred "the physical loss of use of its property" and "loss
of business revenue" "as a result of the risks associated with the [COVID-19]
pandemic, including direct physical loss of or damage to covered property, and
in compliance with government guidance and orders." Ocean averred that the
"actual presence" of COVID-19 on the property created "near-certain risk of
danger and harm to its employees and customers" because of "airborne
transmission."
Furthermore, Ocean asserted the property became unsafe due to
respiratory droplets discharged from infected individuals landing on surfaces
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and objects, thus "becoming a part of that surface" and physically changing the
property. Consequently, Ocean sought damages for breach of contract based
on the denied coverage following a direct physical loss of or damage t o Ocean
and a declaration of coverage. Defendants moved to dismiss the complaint in
lieu of filing answers under Rule 4:6-2(e).
First, defendants asserted Ocean failed to and could not allege it
"suffered direct physical loss or damage to the property, and all of the
provisions under which [it] seek[s] coverage require[s] direct physical loss or
damage." The second reason advanced by defendants was "the policies at
issue contain a contamination exclusion" and "[t]he contamination exclusion
clearly and unambiguously uses the word 'virus'" in its definition that
precludes coverage. NFMIC argued independently that its "Biological or
Chemical Substances Exclusion Endorsement" precluded coverage. On
December 8, 2021, the trial court heard oral arguments on the motions and
reserved decision.
On December 22, 2021, the trial court issued a written opinion. The
court granted NFMIC's motion to dismiss but denied defendants' joint motions
to dismiss the complaint. The court found NFMIC's "Biological or Chemical
Substance Exclusion Endorsement" precluded coverage because the
A-1824-21
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endorsement did not contain language derived from industrial or
environmental pollution. Instead, "[t]he language substantially mirrors a virus
such as COVID-19" since COVID-19 is a pathogen.
The court denied defendants' motions on three grounds:
(1) Ocean's claims constituted fact-based pleadings
under Rule 4:6-2(e) because the pleadings sufficiently
demonstrated COVID-19 damaged Ocean;
(2) the phrase "direct physical loss of or damage" in
the Insuring Agreement was found by the court to be
ambiguous and "may be satisfied if the property
becomes unusable for its intended purpose, whether or
not the property is altered by the COVID-19 virus."
The trial court examined several New Jersey state and
federal cases holding a risk that renders an insured
property unfit for its intended purpose can constitute a
"direct physical loss or damage" under a policy
without a physical alteration to the property. Relying
largely on Wakefern Food Corp. v. Liberty Mutual
Fire Insurance Co., 406 N.J. Super. 524 (App. Div.
2009), the trial court concluded plaintiff sufficiently
pled "a cause of action as to the insuring agreements
entitling plaintiff to coverage for COVID-19
damages;" and
(3) the court held the Contamination Exclusion found
in defendants' policies did not preclude coverage here
because it related to "traditional environmental and
industrial damages."
Construing the Contamination Exclusion as a traditional pollution exclusion
clause, the trial court cited Nav-Its, Inc. v. Selective Insurance Co. of America,
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183 N.J. 110 (2005), and concluded "the exclusion remains applicable to more
traditional environmental-related damages[,] and as such will not fulfill
[defendants'] reasonable expectations." Furthermore, noting the ind ependent
definitions of "contamination" and "contaminant," the court held inserting the
term "virus" in the "contamination" definition "does not change the substance
of the exemption." The court denied defendants' motions and entered a
memorializing order.
II.
On appeal, defendants argue that the trial court erred by denying their
motions to dismiss. They contend COVID-19 did not cause direct physical
loss of or damage to any of Ocean's covered property as required by the
policies and Ocean's conclusory complaint is insufficient as a matter of law.
Defendants also assert the complaint does not allege causation; the trial court
misapplied the holding in Wakefern and other key decisions; and the
contamination exclusion bars coverage.
Because this appeal comes to us from the denial of defendants' motion to
dismiss the complaint for failure to state a claim, we treat Ocean's "version of
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the facts as uncontradicted and accord it all legitimate inferences. We pass no
judgment on the truth of the facts alleged; we accept them as fact only for the
purpose of reviewing the motion to dismiss." Banco Popular N. Am. v. Gandi,
184 N.J. 161, 166 (2005) (citing R. 4:6-2(e)). The critical concern is whether,
upon review of the complaint, exhibits attached thereto and matters of public
record, there exists "the fundament of a cause of action"; "the ability of the
plaintiff to prove its allegations is not at issue." Id. at 183 (citing Printing
Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989)).
We review a decision denying a motion to dismiss for failure to st ate a
claim de novo applying the same standard as the Law Division judge. MasTec
Renewables Constr. Co. v. SunLight Gen. Mercer Solar, LLC, 462 N.J. Super.
297, 309 (App. Div. 2020) (citing Castello v. Wohler, 446 N.J. Super. 1, 14
(App. Div. 2016)). "Moreover, when analyzing pure questions of law raised in
a dismissal motion, . . . we undertake a de novo review." Smith v. Datla, 451
N.J. Super. 82, 88 (App. Div. 2017) (citing Royster v. N.J. State Police, 227
N.J. 482, 493 (2017); Town of Kearny v. Brandt, 214 N.J. 76, 91 (2013)).
Because Rule 4:6-2(e) motions to dismiss "are usually brought at the
earliest stages of litigation, they should be granted in 'only the rarest
instances.'" Lieberman v. Port Auth. of N.Y. & N.J., 132 N.J. 76, 79 (1993)
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(quoting Printing Mart, 116 N.J. at 772). Nevertheless, "dismissal is mandated
where the factual allegations are palpably insufficient to support a claim upon
which relief can be granted," Rieder v. State, Dep't of Transp., 221 N.J. Super.
547, 552 (App. Div. 1987), or if "discovery will not give rise to such a claim ,"
Dimitrakopoulos v. Borrus, Goldin, Foley, Vignuolo, Hyman & Stahl, P.C.,
237 N.J. 91, 107 (2019).
Where, as in this case, the issue raised on appeal involves the
interpretation of a contract and applying case law to the facts, we review the
trial court's decision de novo. Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
Cantone Rsch., Inc., 427 N.J. Super. 45, 57 (App. Div. 2012). In doing so, we
accord no "special deference" to the "trial court's interpretation of the law" or
its judgment on "the legal consequences that flow from established facts."
Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378
(1995). Here, the trial court found Ocean suffered a "direct physical loss of or
damage to" its property as a result of the EO's issued relative to COVID-19 as
was necessary to trigger coverage for revenue losses under the terms of
defendants' policies. We disagree.
The insured has the burden "to bring [a] claim within the basic terms of
[an insurance] policy." Reliance Ins. Co. v. Armstrong World Indus., 292 N.J.
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Super. 365, 377 (App. Div. 1996). There is a "general rule that an insured is
chargeable with knowledge of the contents of an insurance policy in the
absence of fraud or inequitable conduct" by the carrier. Edwards v. Prudential
Prop. & Cas. Co., 357 N.J. Super. 196, 204 (2003). "[I]nsurance purchasers
are expected to read their policies and 'the law may fairly impose upon [them]
such restrictions, conditions and limitations as the average insured would
ascertain from such reading.'" Sears Mortg. Corp. v. Rose, 134 N.J. 326, 348
(1993) (second alteration in original) (quoting Bauman v. Royal Indem. Co.,
36 N.J. 12, 25 (1961)).
When determining the meaning of an insurance policy provision, a court
must "first look to the plain meaning of the language at issue." Oxford Realty
Grp. Cedar v. Travelers Excess & Surplus Lines Co., 229 N.J. 196, 207 (2017).
As with other types of contracts, the parties' agreement must "be enforced as
written when its terms are clear in order that the expectations of the parties
will be fulfilled." Flomerfelt v. Cardiello, 202 N.J. 432, 441 (2010). Thus, in
the absence of a specific definition in a policy, a word or term "must be
interpreted in accordance with [its] ordinary, plain and usual meaning." Daus
v. Marble, 270 N.J. Super. 241, 251 (App. Div. 1994).
A-1824-21
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"[A] court should not 'engage in a strained construction to support the
imposition of liability' or write a better policy for the insured than the one
[they] purchased." Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195
N.J. 231, 238 (2008) (quoting Progressive Cas. Ins. Co. v. Hurley, 166 N.J.
260, 272-73 (2001)). Thus, if there is no ambiguity in a policy's terms, those
terms should be enforced "as written." Zacarias v. Allstate Ins. Co., 168 N.J.
590, 597 (2001).
In contrast, if a policy's language is ambiguous, the court may utilize
rules of construction beyond the four corners of the contract. Oxford Realty,
229 N.J. at 207. For example, courts will ordinarily "construe insurance
contract ambiguities in favor of the insured via the doctrine of contra
proferentem." Id. at 208. This doctrine takes into consideration "the vast
differences in the bargaining positions between an insured and an insurance
company in the drafting of an insurance policy," allowing a court to interpret a
contract against the drafter. Villa v. Short, 195 N.J. 15, 23 (2008).
Additionally, a court may consider the insured's "reasonable expectations."
Oxford Realty, 229 N.J. at 208. That is, if the "policy's language fairly
supports two meanings, one that favors the insurer, and the other that favors
A-1824-21
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the insured, the policy should be construed to sustain coverage." President v.
Jenkins, 180 N.J. 550, 563 (2004).
Because insurance policies are very often contracts of adhesion, "courts
must assume a particularly vigilant role in ensuring their conformity t o public
policy and principles of fairness." Voorhees v. Preferred Mut. Ins. Co., 128
N.J. 165, 175 (1992). To that end, the above doctrines are intended to protect
members of the public, who "should not be subjected to technical
encumbrances or to hidden pitfalls" in insurance contracts. Kievit v. Loyal
Protective Life Ins. Co., 34 N.J. 475, 482 (1961). The intent is for a policy be
"construed liberally" in the insured's "favor to the end that coverage is
afforded 'to the full extent that any fair interpretation will allow.'" Ibid.(quoting Danek v. Hommer, 28 N.J. Super. 68, 76 (App. Div. 1953)).
However, these doctrines typically should only be utilized by a court to
"read the policy in favor of the insured" if there is a "genuine ambiguity" in the
contract, meaning "the phrasing of the policy is so confusing that the average
policyholder cannot make out the boundaries of coverage." Templo Fuente De
Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189, 200 (2016)
(quoting Progressive Cas. Ins., 166 N.J. at 274). A term or phrase in a "policy
is not ambiguous merely because two conflicting interpretations of it are
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suggested by the litigants." Powell v. Alemaz, Inc., 335 N.J. Super. 33, 44
(App. Div. 2000).
If the policy's language is "direct and ordinary," can "be understood
without employing subtle or legalistic distinctions," is not "obscured by fine
print," and does not "require[] strenuous study to comprehend," it is not
ambiguous. Zacarias, 168 N.J. at 601; accord Katchen v. Gov't Emps. Ins. Co.,
457 N.J. Super. 600, 606 (App. Div. 2019) (holding while insurer "could have
included a definition of 'motor vehicle' in its policy," the term was not
ambiguous simply because a definition was missing, since "[a]ny ordinary
reasonable person understands" its meaning).
More rarely, an insurance contract may be read in favor of the insured if
the language at issue is "perhaps not ambiguous," but "nevertheless
insufficiently clear to justify depriving the insured of [his or] her reasonable
expectation that coverage would be provided." Sparks v. St. Paul Ins. Co., 100
N.J. 325, 336 (1985). A court may "examine whether more precise policy
language, if chosen by the insurance company, would have 'put the matter
beyond reasonable question.'" Homesite Ins. Co. v. Hindman, 413 N.J. Super.
41, 46 (App. Div. 2010) (quoting Doto v. Russo, 140 N.J. 544, 557 (1995)).
Nevertheless, in general "the insured's reasonable expectations should not be
A-1824-21
23
considered where the policy is plain in its meaning unless the policy is
'inconsistent with public expectations [and] commercially accepted standard s.'"
Nunn v. Franklin Mut. Ins. Co., 274 N.J. Super. 543, 550 (App. Div. 1994)
(alteration in original) (quoting Werner Indus. v. First State Ins. Co., 112 N.J.
30, 36 (1988)).
Ultimately, the language of an insurance policy "underscores the basic
notion that the premium paid by the insured does not buy coverage for all . . .
damage but only for that type of damage provided for in the policy." Weedo v.
Stone-E-Brick, Inc., 81 N.J. 233, 237 (1979). Thus, a policy may contain
"limitations on coverage" that "are designed 'to restrict and shape the coverage
otherwise afforded.'" Hardy ex rel. Dowdell v. Abdul-Matin, 198 N.J. 95, 102
(2009) (quoting Weedo, 81 N.J. at 237). The doctrines dictating a court
construe an insurance contract in the insured's favor thus should not be used to
read into the agreement coverage "which is not there," if there is no showing
that the policy somehow did not meet the insured's reasonable expectations at
the time the contract was signed. Werner Indus., 112 N.J. 30 at 38 (quoting
Tomaiuoli v. U.S. Fidelity & Guar. Co., 75 N.J. Super. 192, 207 (App. Div.
1962)).
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24
Here, the policies provide that defendants would pay Ocean for business
income lost because of a suspension in its operations due to a "direct physical
loss of or damage to" the property caused by a "covered cause of loss."
"Direct physical loss of or damage to" was not defined in the property
coverage sections of the policies. Our courts have "adopted a broad notion of
the term 'physical.'" Phibro Animal Health Corp. v. Nat'l Union Fire Ins. Co.,
446 N.J. Super. 419, 437 (App. Div. 2016). However, when "physical" is
paired with another word, such as in "physical injury," courts have found that
the resulting term means a "detrimental alteration," or "damage or harm to the
physical condition of a thing." Id. at 438 (quoting Farm Bureau Mut. Ins. Co.
of Am. v. Earthsoils, Inc., 812 N.W.2d 873, 876 (Minn. Ct. App. 2012)). The
Third Circuit, applying New Jersey law, has also stated that "[i]n ordinary
parlance and widely accepted definition, physical damage to property means "a
distinct, demonstrable, and physical alteration" of its structure." Port Auth. of
N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3rd Cir. 2002)
(internal quotation marks omitted) (quoting 10 Couch on Insurance, § 148.46
(3d ed. 1998)).
While "[f]ire, water, smoke and impact from another object are typical
examples of physical damage" that can "demonstrably alter the components of
A-1824-21
25
a building and trigger coverage" under a property insurance policy, damage to
a building as an entity "by sources unnoticeable to the naked eye must meet a
higher threshold." Ibid. For example, in Port Authority, the Third Circuit
found that the presence of "large quantities of asbestos in the air of a building"
would "make the structure uninhabitable and unusable" and would therefore
cause a "physical loss" of property to its owner. Id. at 236. By contrast, if
asbestos was present but "not in such form or quantity as to make the building
unusable," there would be no such physical loss since the structure would
"continue[] to function" without any detrimental change to its "utility." Ibid.
In Wakefern, the plaintiff, a supermarket, purchased an insurance policy
providing coverage "for consequential loss or damage resulting from
interruption of" electrical power at its premises if the interruption resulted
from "physical damage" to electrical equipment and property located
elsewhere. 406 N.J. Super. at 531-32. Wakefern filed a claim after a power
outage at its store occurred when an "electrical 'cascade'" disrupted a large part
of the nation's power grid. Id. at 532-38. It was determined in some places
throughout the grid, the cascade damaged power generation and transmission
equipment, but in other places, power was automatically shut off to protect
equipment from experiencing power surges that could have caused damage.
A-1824-21
26
Ibid. The defendant insurance company argued Wakefern was not entitled to
coverage for economic losses resulting from the power outage, because it had
not shown any of the power lines or other equipment that supplied its
supermarket had been physically damaged. Id. at 537-38.
But we disagreed, finding "the undefined term 'physical damage'" in
Wakefern's policy was "ambiguous" because it was susceptible to "at least two
different reasonable interpretations": (1) that the part of the grid serving
Wakefern was not damaged because there was no detrimental alteration to its
structure; and (2) that the grid was damaged because it was shut down due to
the cascade elsewhere, rendering it physically incapable of providing
electricity. Id. at 540-41. We concluded that in the context of the case, the
term "physical damage" should be construed in Wakefern's favor, since "due to
a physical incident or series of incidents" elsewhere, the grid as a whole had
become "physically incapable of performing [its] essential function." Id. at
540. In addition, we explained that the average policyholder should "not be
expected to understand the arcane functioning of the power grid" when
submitting an insurance claim after an outage. Id. at 541. However, we stated
we would have "reach[ed] a different result if, for example, a governmental
A-1824-21
27
agency had ordered that the power [to the supermarket] be shut off to conserve
electricity." Id. at 540 n.7.
In reaching our conclusion in Wakefern, we cited cases from this State
and other states wherein coverage was found for a "physical loss of or damage
to" property based on a "loss of functionality" rather than harm to the
property's structure. Id. at 542-43. For example, in Customized Distribution
Services v. Zurich Insurance Co., 373 N.J. Super. 480, 483-84 (App. Div.
2004), the plaintiff warehouse failed to appropriately store a customer's drink
products before their expiration, rendering the goods unusable. The customer
sued plaintiff, who in turn sued the defendant insurer. Ibid. In our opinion,
we determined "that, for coverage to apply, it was not necessary that the
product's material or chemical composition be altered" because the bottles
could have broken thus damaging the property without a change to its chemical
composition. Id. at 488. Moreover, because the products had expired "as a
result of an undue passage of time" caused by the plaintiff, the end-consumers'
perception of the beverages changed, i.e., consumers would not purchase
expired drinks from the plaintiff's customer. Id. at 490. Because of the
expiration dates, and the consumers' new perception of the expired drinks, "the
A-1824-21
28
product lost value as much from the outdating as if it had turned sour or gone
bad in some more tangible or material way." Ibid.Other cases from various federal and state courts throughout the country
have also found insurance coverage in situations involving intangible physical
damage to property causing a loss of that property's usability. For example, in
Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America, Civ.
No. 12-04418, 2014 U.S. Dist. LEXIS 165232, at *13 (D.N.J. Nov. 25, 2014),
the District Court found that "property can sustain physical loss or damage
without experiencing structural alteration." In that case, the federal court
concluded the plaintiff suffered such a loss when ammonia was inadvertently
released within its facility, "physically transform[ing] the air" inside and
rendering it unfit for occupancy until the gas could be dissipated. Id. at *16-
17.
The District Court held the ammonia discharge caused a "direct physical
loss of or damage to" the facility "because the ammonia physically rendered
the facility unusable for a period of time." Id. at *17; accord Essex Ins. Co. v.
BloomSouth Flooring Corp., 562 F.3d 399, 401 (1st Cir. 2009) (physical injury
to property found where unpleasant odor causing "headaches or other ill
effects" rendered building unusable); Motorists Mut. Ins. Co. v. Hardinger,
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29
131 Fed. Appx. 823, 825-27 (3rd Cir. 2005) (direct physical loss found where
home rendered uninhabitable by bacterial contamination of water supply);
TRAVCO Ins. Co. v. Ward, 715 F.Supp. 2d 699, 709-10 (E.D. Va. 2010)
(finding direct physical loss where home rendered uninhabitable by toxic gases
released by defective drywall), aff'd. 504 F. Appx. 251 (4th Cir. 2013).
By contrast, New Jersey courts have found that losses of business
income were not covered where the link between the insured premises and
physical damage to property elsewhere was more attenuated. See, e.g., Arthur
Andersen LLP v. Fed. Ins. Co., 416 N.J. Super. 334, 349 (App. Div. 2010)
(finding plaintiff's losses following September 11th attacks on the World Trade
Center and Pentagon were not covered under its insurance policy because no
evidence supported the property damage at those locations caused any
interruption of plaintiff's business).
Other federal and state courts throughout the country have reached
similar conclusions. In Newman Myers Kreines Gross Harris, P.C. v. Great N.
Ins. Co., 17 F. Supp. 3d 323, 325 (S.D.N.Y. 2014), a utility provider shut off
power to an area of New York City that included the plaintiff's premises in
advance of Superstorm Sandy's arrival, to prevent greater damage to the
electrical grid and related equipment. The District Court held the plaintiff's
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30
loss of income during the outage was not covered by its insurance policy,
finding that the plaintiff did not suffer "physical loss or damage" to its office,
but merely a loss of use. Id. at 331; c.f. Wakefern, 406 N.J. Super. at 540 n.7
(noting the court would not have found a "direct physical loss or damage to"
insured property if "a governmental agency had ordered that the power be shut
off to conserve electricity").
The District Court stated the words "direct" and "physical," when used
to modify the phrase "loss or damage," "ordinarily connote actual,
demonstrable harm of some form to the premises itself, rather than forced
closure of the premises for reasons exogenous to the premises themselves, or
the adverse business consequences that flow from such closure." Great N. Ins.
Co., 17 F. Supp. 3d at 331. The court found the limitation on coverage in the
plaintiff's policy to a "period of restoration" lent support to this conclusion,
stating that "[t]he words 'repair' and 'replace' contemplate physical damage to
the insured premises as opposed to loss of use of it." Id. at 332.
Addressing the same COVID-19-related issue before this court and
applying New Jersey law, the United States District Court for the District of
New Jersey has recently granted several insurance companies' motions to
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31
dismiss for failure to state a claim under the F.R.C.P. 12(b)(6) standard.5 The
District Court found that insurance policies containing similar, if not identical,
clauses to those in plaintiff's policies here "unambiguously limit[ed]" coverage
to "physical loss or damage to . . . commercial property." 7th Inning Stretch
LLC v. Arch Ins. Co., Civ. No: 20-8161, 2021 U.S. Dist. LEXIS 58477, at *4
(D.N.J. Mar. 26, 2021). And, the District Court has further found this requires
a showing of tangible damage to property, that the functionality of the property
was nearly eliminated or destroyed, or that the property was made useless or
uninhabitable as a result of a covered cause of loss. Id. at *4-5.
The District Court has found that businesses requesting coverage for lost
income resulting from Governor Murphy's EO's have not made and cannot
make such a showing because there has been no physical loss of or damage to
their property, and the presence of COVID-19 virus in the air or on the
surfaces of their property is insufficient to demonstrate property loss or
damage. Ibid. (holding it is "not enough" to show the EOs limited access to
plaintiff's facility without alleging the property was physically damaged);
5
The Third Circuit currently has fifty COVID-19 coverage-related appeals
pending but has yet to render a decision. See Covid Coverage Litigation
Tracker: Appeals in Business Interruption Cases, PENN LAW,
https://cclt.law.upenn.edu/appeals/ (last visited June 8, 2022).
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32
accord Emami v. CNA & Transp. Ins. Co., Civ. No. 20-18792, 2021 U.S. Dist.
LEXIS 60753, at *4 (D.N.J. Mar. 11, 2021); Blvd. Carroll Ent. Grp. v.
Fireman's Fund Ins. Co., Civ. No. 20-11771, 2020 U.S. Dist. LEXIS 234659,
at *4 (D.N.J. Dec. 14, 2020); Ralph Lauren Corp. v. Factory Mut. Ins. Co.,
Civ. No. 20-10167, 2021 U.S. Dist. LEXIS 90526, at *6-9 (D.N.J. May 12,
2021); Child.'s Place, Inc. v. Zurich Am. Ins. Co., Civ. No. 20-7980, 2021 U.S.
Dist. LEXIS 177269, at *12-18 (D.N.J. Sept. 17, 2021); Manhattan Partners,
LLC v. Am. Guar. & Liab. Ins. Co., Civ. No. 20-14342, 2021 U.S. Dist.
LEXIS 50461, *4-6 (D.N.J. Mar. 17, 2021).
Additionally, an overwhelming majority of federal Circuit Courts have
similarly held that the mere loss of use of business property caused by the
presence of COVID-19, and government restrictions in response to COVID-19,
do not constitute a direct physical loss or damage to property under a
commercial property insurance policy. See, e.g., 10012 Holdings, Inc. v.
Sentinel Ins. Co,, 21 F.4th 216, 220-23 (2d Cir. 2021); Uncork & Create LLC
v. Cincinnati Ins. Co., 27 F.4th 926, 933-34 (4th Cir. 2022); Q Clothier New
Orleans, L.L.C. v. Twin City Fire Ins. Co., 29 F.4th 252, 259 (5th Cir. 2022);
Santo's Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398, 401 (6th Cir. 2021);
Sandy Point Dental, P.C. v. Cincinnati Ins. Co,, 20 F.4th 327, 335 (7th Cir.
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33
2021); Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144-45, 1145
n.3 (8th Cir. 2021); Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th
885, 892 (9th Cir. 2021); Goodwill Indus. of Cent. Okla. Inc. v. Phila. Indem.
Ins. Co., 21 F.4th 704, 710 (10th Cir. 2021); Gilreath Fam. & Cosm. Dentistry,
Inc. v. Cincinnati Ins. Co., Civ. No. 21-11046, 2021 U.S. App. LEXIS 26196,
at *2 (11th Cir. Aug. 31, 2021).
Numerous state appellate courts have reached the same conclusion in
actions involving similar terms and claims. See, e.g., Verveine Corp. v.
Strathmore Ins. Co., 184 N.E.3d 1266, 1278-79 (Mass. 2022); accord Wakonda
Club v. Selective Ins. Co. of Am., ___ N.W.2d ___, ___ (Iowa Apr. 22, 2022)
(slip op. at 9-21); Inns-by-the-Sea v. Cal. Mut. Ins. Co., 286 Cal. Rptr. 3d 576,
593 (Ct. App. 2021); Ind. Repertory Theatre v. Cincinnati Cas. Co., 180
N.E.3d 403, 410-11 (Ind. Ct. App. 2022); Gavrilides Mgmt. Co., LLC v. Mich.
Ins. Co., No. 354418, 2022 Mich. App. LEXIS 632, at *6 (Mich. Ct. App. Feb.
1, 2022).
Here, defendants assert that even if the COVID-19 virus was on the
surfaces and in the air at Ocean, the property did not sustain any "direct
physical loss of or damage" sufficient to trigger coverage under the policies.
Instead, defendants maintain Ocean merely suffered a temporary loss of
A-1824-21
34
business due to Governor Murphy's EO's without any tangible physical
alteration to the property.
The term "direct physical loss of or damage to" insured premises was not
defined in the policies. However, as noted, the lack of a definition does not
always mean that a term is ambiguous. Katchen, 457 N.J. Super. at 606.
"Sophisticated commercial insureds[] [like plaintiff] do not receive the benefit
of having contractual ambiguities construed against the insurer." Oxford
Realty, 229 N.J. at 208.
The matter under review clearly differs from Wakefern and the other
cases cited above where insurance coverage was found despite a lack of
damage to the structure of an insured building. In Wakefern, the plaintiff's
policy explicitly covered losses of electrical power due to damage to offsite
equipment owned by others. 406 N.J. Super. at 531-32. We found the policy
included damage anywhere on the greater electrical grid that caused the
plaintiff's power to be shut off. Id. at 540. In that case, unlike here, there was
actual physical damage to property, which caused the plaintiff's losses of
income. In Wakefern, we contrasted the facts with a situation where a
business's loss of use of its property stemmed from a government order to shut
off electrical power. Id. at 540 n.7; c.f. Newman Myers, 17 F. Supp. 3d at 330
A-1824-21
35
(finding loss of income was not a result of direct physical loss or damage to
property because governmental agency ordered shutting down electrical to
conserve energy).
Moreover, some of these cases involved intangible damage to premises,
such as toxic fumes, a landslide, or a noxious odor, that rendered the premises
physically uninhabitable or unusable for a period of time. Specifically, the
circumstances in Port Authority and Gregory Packaging differ from those here
because the respective courts found such large quantities of asbestos and
ammonia in the air that precluded human occupancy. Consequently, the
respective properties were stripped of their uses entirely until remediated. Port
Authority, 311 F.3d at 235-36; Gregory Packaging, slip op. at 16-17.
Saliently, none of the cases that found coverage due to "loss of use" involved a
government shutdown in the absence of demonstrable physical damage to
structures or physical unfitness for human use or habitation.
As defendants argue, and prevalent caselaw maintains, the COVID-19
virus's presence in Ocean's air and on its surfaces did not physically alter the
property's physical structure such that it qualifies as a direct physical loss of or
damage to Ocean's property. Whereas certain quantities of asbestos and
ammonia in the air require extensive remediation before making a property fit
A-1824-21
36
for humans, the COVID-19 virus can be eliminated from surfaces with
household cleaning products and dissipates on its own. See Sandy Point
Dental, 20 F.4th at 335 (finding COVID-19 "may be wiped off surfaces using
ordinary cleaning materials, and it disintegrates on its own in a matter of
days"); Verveine Corp., 184 N.E. 3d at 1276 ("Evanescent presence of a
harmful airborne substance [like COVID-19] that will quickly dissipate on its
own, or surface-level contamination that can be removed by simple cleaning,
does not physically alter or affect property.").
Here, the record supports the conclusion there was no damage to
equipment or property on- or off-site that caused Ocean to lose its physical
capacity to operate, and there was no physical alteration that made the casino
resort too dangerous to enter. Instead, Ocean was forced to close its casino
gaming floor, sports wagering lounges, and entertainment venues to the public
in accordance with Governor Murphy's EO's. However, Ocean was able to
continue operating its restaurants, bars, and hotel accommodations in a
restricted manner, as well as its online gambling services, from March 16 to
July 2, 2020.
Saliently, Ocean would have been able to continue operating its casino
and performance venue without interruption had the EO's not been issued. As
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37
Insurance Council argues in its amici brief, COVID-19 did not preclude Ocean
from using its business for all purposes, "and it resumed all activities at its
premises when government orders allowed it do so, even while the COVID-19
virus was still circulating." COVID-19 continued to spread, and the risks it
presented during the government-mandated shutdown remained after EO 107
was superseded by EO 157 on July 2, 2020.
The trial court and Ocean's reliance on Customized Distribution is also
misplaced. As an initial matter, Customized Distribution involved a third-
party liability insurance policy for beverages whereas the policies here are
first-party property insurance contracts. 373 N.J. Super. at 485-86. We held
the beverages suffered the functional equivalent of a physical alteration
sufficient to constitute a physical loss because they had lost all their value to
the beverage company. Id. at 490-91. The drinks lost their value because they
expired, making them unusable. Ibid. But here, Ocean did not lose its value
and continued to operate some of its services in a limited fashion during the
government shutdown, such as on-line betting.
Therefore, even applying a "generous and hospitable approach," Printing
Mart, 116 N.J. at 746, Ocean's complaint does not allege facts "which, if
proven, would constitute a valid cause of action" as to afford coverage under
A-1824-21
38
defendants' policies. Leon v. Rite Aid Corp., 340 N.J. Super. 462, 472 (App.
Div. 2001). The COVID-19's presence and/or the government-mandated
shutdown does not constitute a direct physical loss of or damage to Ocean as
required under the policies. Additionally, because Ocean's claims are based
solely upon the language of the policies, further discovery would not render
them viable. Dimitrakopoulos, 237 N.J. at 107-108. Therefore, the trial court
erred in not granting defendants' motion to dismiss Ocean's complaint under
Rule 4:6-2(e). In our recent opinion in Mattdogg, Inc. v. Philadelphia
Indemnity Insurance Co., we considered and extensively addressed these
identical issues. ___ N.J. Super. ___, ___ (App. Div. 2022) (slip op. at 22-52).
Our reasoning and holdings in Mattdogg, Inc. apply in the matter under
review.
III.
Even assuming Ocean successfully pled the COVID-19 virus caused an
actual or imminent physical loss or damage to Ocean, the Contamination
Exclusion unambiguously excludes coverage. Defendants assert the trial court
"violated fundamental rules of insurance-policy interpretation by ignoring the
plain language of this exclusion and re-writing it to include only traditional
environmental pollutants." Ocean, however, argues that the court's narrow
A-1824-21
39
interpretation was appropriate under Nav-Its. The trial court found "it is not
unreasonable to conclude that pollution exclusions in an all-risk policy that are
substantially directed at traditional environmental and industrial damaged do
not pertain to damages for a virus such as COVID-19, which damages are the
result of naturally occurring communicable diseases." Again, we disagree.
Exclusionary provisions in insurance contracts "are presumptively valid
and will be given effect if 'specific, plain, clear, prominent, and not contrary to
public policy.'" Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997)
(quoting Doto, 140 N.J. at 559). However, "exclusions must be narrowly
construed," and "the burden is on the insurer to bring the case within the
exclusion." Ibid. This rule serves the greater doctrine that an "insured is
entitled to protection to the full extent that any reasonable interpretation of
[exclusionary clauses] will permit." S.N. Golden Ests., Inc. v. Cont'l Cas. Co.,
293 N.J. Super. 395, 401 (App. Div. 1996) (quoting Ruvolo v. Am. Cas. Co.,
39 N.J. 490, 498 (1963)).
Nevertheless, "where the words of an exclusionary clause are clear and
unambiguous, 'a court should not engage in a strained construction to support
the imposition of liability.'" Aviation Charters v. Avemco Ins. Co., 335 N.J.
Super. 591, 594 (App. Div. 2000) (quoting Longobardi v. Chubb Ins. Co. of
A-1824-21
40
N.J., 121 N.J. 530, 537 (1990)). "[W]hile where there are several
interpretations of an exclusion's meaning" a court "would tend to favor the one
for coverage," however, this does not mean "that any far-fetched interpretation
of a policy exclusion will be sufficient to create an ambiguity requiring
coverage." Id. at 59-95 (second and third alterations in original) (quoting
Stafford v. T.H.E. Ins. Co., 309 N.J. Super. 97, 105 (App. Div. 1998)). This is
because "clear, unambiguous exclusionary clauses . . . . directly affect the risk
the insurer assumes and upon which premiums are established." Id. at 596.
Here, the Contamination Exclusion unambiguously excludes coverage
for "[c]ontamination, and any cost due to [c]ontamination including the
inability to use or occupy property or any cost of making property safe or
suitable for use or occupancy." The policies further define "contamination"
unambiguously as "[a]ny condition of property due to the actual presence of
any . . . pathogen or pathogenic organism, bacteria, [or] virus."
Unquestionably, this would encompass the COVID-19 virus. Moreover,
Ocean alleged in its complaint the COVID-19 virus was actually present at
Ocean and caused it to incur losses. And, because Governor Murphy issued
the EO's to mitigate the spread of this highly contagious virus, as pled by
A-1824-21
41
Ocean, the relief it seeks is inexplicably intertwined to the presence of the
virus and is excluded under the policy.
"[W]here the words of an exclusionary clause are clear and
unambiguous," as they are here, "a court should not engage in a strained
construction to support the imposition of liability." Aviation Charters, 335
N.J. Super. at 594 (quoting Longobardi, 121 N.J. at 537). Furthermore,
Ocean's complaint also confirms COVID-19 "is a highly contagious and easily
transmitted human pathogen," thus excluding coverage under the
Contamination Exclusion. 6
Additionally, the definition of "contaminant" in the policies does not
include the term virus. However, the term "contaminant" is not used or
referred to in the Contamination Exclusion or definition of "contamination."
Instead, the word "contaminant" is used in the base policies only in special
coverages for environmental cleanup costs unrelated to the Contamination
Exclusion. Nonetheless, the Pollution Contamination Exclusion endorsement
in IFCC's policy, unique to IFCC, states IFCC "will not pay for loss, damage,
6
"SARS-CoV-2, the coronavirus that causes COVID-19, is a pathogenic
virus." See Coronavirus: What is an emerging viral pathogen claim?, EPA,
https://www.epa.gov/coronavirus/what-emerging-viral-pathogen-claim (last
updated Apr. 11, 2022).
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42
cost or expense caused directly or indirectly by" the "release, migration,
discharge, escape or dispersal of [c]ontaminants." The endorsement continues
to include "virus" in its definition of contaminants.
In an attempt to reconcile the differences between these definitions, the
trial court erroneously found them ambiguous and confusing. Relying on Nav-
Its, the court held those "pollution exclusions are overly broad[] [and] unfair."
In applying Nav-Its, the court concluded "the contaminants are associated with
traditional environmental pollution damages, not reasonably related to the
damages in this case, which are derived from a communicable disease."
However, the court erred by conflating the applicability of terms used in the
general Contamination Exclusion found in all the policies, and the Pollution
Contamination Exclusion endorsement, along with its specific terms and
definitions, only found in IFCC's policy.
Nonetheless, grouping viruses with environmental and industrial
pollutants may be unusual, but Ocean does not cite any controlling cases
construing "contamination" in its contractual definition. A court may not
interpret an insurance contract in a way that leaves part of the contract
meaningless. Cypress Point Condo. Ass'n v. Adria Towers, L.L.C., 226 N.J.
A-1824-21
43
403, 416 (2016). We conclude it was improper for the trial court to essentially
rewrite the unambiguous and applicable Contamination Exclusion at issue.
Lastly, although not addressed in the trial court's decision, Ocean argued
in opposition to defendants' motion to leave for appeal, and reiterates again on
appeal, that the Contamination Exclusion does not bar coverage because the
Louisiana Endorsement AGLIC included in its policy "deleted and replaced"
the Contamination Exclusion and contamination definition. The endorsement
defines "contamination" as "the actual presence of any [c]ontaminant(s)" and
removes "pollutants or contaminant" from the definition of "contaminant."
Defendants argue this is a state-specific endorsement applicable only to
Ocean's property under its contract located in Louisiana. However, Ocean
asserts this endorsement also applies in New Jersey. As mentioned, the
endorsement is titled "Amendatory Endorsement – Louisiana." Ocean
highlights the difference in prefatory language in the Louisiana Endorsement,
"THIS ENDORSEMENT CHANGES THE POLICY," versus the language in
the Connecticut Endorsement, 7 which states "THIS ENDORSEMENT
CHANGES THE POLICY AND APPLIES TO THOSE RISKS IN
7
The relevant endorsement is similarly titled, "Amendatory Endorsement –
Connecticut" (Connecticut Endorsement).
A-1824-21
44
CONNECTICUT." Ocean argues this difference in language demonstrates
AGLIC's intent to make the Louisiana endorsement a generally applicable
endorsement. Notably, in addition to the Connecticut Endorsement, the New
York Endorsement 8 is the only other amendatory endorsement to use the same
prefatory language. The remaining twenty-nine of thirty-one state-titled
amendatory endorsements use the same general prefatory language found in
the Louisiana Endorsement.
Applying Ocean's analysis, several state-titled endorsements present
conflicting amendments to various sections. For example, multiple
endorsements delete and replace "SECTION VI-GENERAL POLICY
CONDITIONS, CANCELLATIONS/NON-RENEWAL" in its entirety,
including the Louisiana Endorsement. However, some endorsements present
different and conflicting replacement terms from each other despite using the
same general prefatory language found in the Louisiana Endorsement that
Ocean relies on.
8
The relevant endorsement is similarly titled, "Amendatory Endorsement –
New York" (New York Endorsement). The endorsement precedes with "THIS
ENDORSEMENT CHANGES THE POLICY AND APPLIES TO THOSE
RISKS IN NEW YORK."
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Had AGLIC intended for state-titled endorsements using the general
prefatory language to ignore geographical boundaries, then it would not put
forth geographic identifiers with conflicting terms between endorsements
unless the endorsements were meant to be state-specific. See Couch on
Insurance § 18:20 ("[T]he policy [and its endorsements] must be considered as
a whole and the caption read in connection with the remainder of the
contents."). Because a court may not interpret an insurance contract in a way
that leaves part of the contract meaningless, we reject plaintiff's claim the
Louisiana Endorsement applies to the Contamination Exclusion because it
would render the geographic identifier of all the state-titled endorsements
meaningless. Cypress Point Condo., 226 N.J. at 416.
The Federal District Court of New Jersey, among other courts, have
faced the same dilemma in COVID-19 insurance actions involving identical
language and have held the Louisiana Endorsement amending the
Contamination Exclusion is state-specific to Louisiana. See, e.g., Manhattan
Partners, slip op. at 6 n.3. ("Had the parties intended to remove 'virus' from the
Contamination provision, they could have done so with a general endorsement
that was not limited to a single state.") We agree and reject Ocean's argument.
We conclude Ocean's remaining arguments—to the extent we have not
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46
addressed them—lack sufficient merit to warrant any further discussion in a
written opinion. R. 2:11-3(e)(1)(E).
For these reasons, we reverse the matter under review. The matter is
remanded to the Law Division for entry of an order dismissing Ocean's
complaint as to all defendants.
Reversed and remanded. We do not retain jurisdiction.
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