No Property Damage, No Claim for Business Interruption: New Jersey Appellate Division Affirms Dismissal of Six COVID-19 Business Loss Claims
In a recent decision, the New Jersey Appellate Division held that six businesses were not entitled to insurance coverage for losses sustained when they were forced to close or limit their operations as a result of Executive Orders (“EOs”) issued by Governor Phil Murphy to halt the spread of COVID-19. This ruling follows the general trend nationally in which courts have rejected claims by insureds for business interruption losses incurred due to government orders related to the spread of COVID-19.
The decision arose from the consolidated appeals of six businesses that reported losses as a result of the EOs and sued their insurance companies, alleging they improperly refused to cover the plaintiffs’ insurance claims for business losses sustained due to the issuance of the EOs.
All six suits were dismissed with prejudice at the trial level pursuant to Rule 4:6-2(e) for failure to state a claim, because the plaintiffs’ business losses were not related to any “direct physical loss of or damage to” covered properties as required by the terms of their insurance policies. The Appellate Division affirmed all six dismissals and further concluded that the losses were not covered under “their insurance policies’ civil authority clauses, which provided coverage for losses sustained from governmental actions forcing closure or limiting business operations under certain circumstances.”
In affirming the dismissal of the plaintiffs’ complaints, Judge Thomas W. Sumners explained, “[w]e recognize that COVID-19 has caused overwhelming economic losses to untold businesses and individuals dependent on those businesses in our state, nation, and the world.” However, he further explained that “in the context of the issues presented in this appeal, plaintiffs’ insurance claims are restricted by the clear and plain meaning of their insurance policies, which we cannot rewrite to cover their unfortunate losses.”
Specifically, the court rejected the plaintiffs’ argument that the phrase “direct physical loss of or damage to” was ambiguous by noting that the text of the policies themselves only provides business income coverage during a “period of restoration.” Permitting coverage in the absence of physical damage requiring a property to be “repaired, rebuilt, or replaced,” the court held, would render the policies “meaningless.”
The court also concluded that the business owners were not covered under their policies’ civil authority clauses. “To trigger coverage,” the court explained, “the action of the civil authority needed to be taken ‘as a result of the damage’ to nearby property, and either ‘in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage’ or ‘to enable a civil authority to have unimpeded access to the damaged property.’”
In affirming the dismissal of the six complaints, the court acknowledged the national trend of other courts in dismissing similar actions in the absence of property damage, as the court noted, “[w]e discern no reason to depart from the persuasive reasoning expressed in … the scores of federal courts and other state appeal courts that have rejected identical insurance claims seeking business losses as a result of being forced to shut down or significantly limit their operations due to the imposition of government orders to curb the COVID-19 pandemic.”
This decision comes as no surprise to those who have followed the national trend in addressing COVID-19 business interruption claims, as courts have consistently dismissed complaints for business interruption coverage that do not involve physical alteration or damage to covered property. And while a party may in some cases be able to survive a motion to dismiss as a result of creative pleading, clients and counsel alike should be on full notice of the challenges insureds face in attempting to recover for business interruption claims as a result of governmental restrictions implemented to curb COVID-19 or other potential viruses.