New Jersey Supreme Court finds in favour of insurers in business interruption case

A New Jersey Supreme Court decision, decided January 24, 2024, has found that an Atlantic City Boardwalk casino did not sustain direct physical loss or direct physical damage to its property by virtue of the presence of the SARS-CoV-2 virus, also known as COVID-19 in its facilities.

In the case, AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Company, the casino alleged that American Guarantee and Liability Insurance Co., AIG Specialty Insurance Co, and Interstate Fire & Casualty Co, along with National Fire & Marine Insurance Co*., were obligated to pay up to $50-million of primary policy limits per occurrence. According to court documents, the polices included identical base policy forms and each contained a contamination exclusion, which included the use of word “virus.”

When Ocean Walk was required to close its facilities in accordance with an executive order, the insurers denied the casino’s claim, aside from agreeing to pay proportionate shares of a $1-million sublimit under the polices’ interruption by communicable disease endorsement.

In the first court case, the trial court concluded that the casino was unable to operate its gaming floor and hotel rooms and found the contamination exclusion inapplicable. The Appellate Division reversed the decision, and the Supreme Court in the state agreed to hear the case in January 2023. 

The Supreme Court found that absent the executive orders to close, Ocean Walk would have been able to use its property with no suspension of operations.

“We concur with the Appellate Division that Ocean Walk has not pled facts supporting a conclusion that its business losses were caused by a direct physical loss or direct physical damage under the policy language. We further agree with the appellate court 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 decision states.

Relying on dictionary definitions for the words loss, damage, direct and physical, as these were undefined in the insurance policies, the court’s decision continues, saying applying these definitions “clearly denotes the destruction of property or a physical change to the property that renders it unusable or uninhabitable.” The insurers themselves, in defending their case, also noted that their position – that the pandemic did not cause a direct physical loss – has already been considered by the courts. “They note that the Appellate Division’s holding on that question is consistent with the decisions of nearly every federal and state court that has considered the issue,” the decision states.

The court also found that the casino’s argument that the contamination clause should be read as nothing more than a pollution exclusion, was “unpersuasive.” 

“We conclude that those allegations fall squarely within the contamination exclusions in the defendant’s policies, and that the exclusion bars coverage here.” 

* National Fire & Marine Insurance Co. was not included in the appeal after a lower court granted that insurer’s motion to dismiss based on the wording of its exclusion.