Early Indications Reveal that New Jersey Courts Will Uphold a Virus Exclusion Regarding COVID-19 Business Interruption Claims

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It has been almost a year since federal, state, and local orders dramatically impacted many businesses’ ability to host customers and created a number of other related issues. Not long after these restrictions took effect, businesses that were impacted began making claims with insurers for first-party coverage related to the loss of business income. Consequently, these cases were heard by both the New Jersey Superior Court and the United States District Court for the District of New Jersey.
 

Most of these cases remain at the trial level. As such, there has been a limited opportunity for the courts to rule on the substance of these types of claims. However, in some instances, the parties have sought early dismissal through motions to dismiss.  These early orders and opinions have revealed that New Jersey federal and state courts are willing to enforce virus exclusions when applicable. However, the courts have been unwilling to determine if COVID-19 represents a direct physical loss without the benefit of discovery. 

Considering these cases are still relatively new, very few have made it to final disposition.  But a close reading of the rulings so far can provide some insight into how these matters will likely fare as more lawsuits are filed. Below is a summary of some decisions that provide guidance as to what the future will hold as more similar lawsuits are filed. 

In Mac Prop. Grp. LLC v. Selective Fire & Cas. Ins. Co., 2020 N.J. Super. Unpub. LEXIS 2244, plaintiffs filed suit against their insurer for loss of business income as a result of New Jersey Executive Orders that caused the plaintiffs to suspend business operations.  The plaintiffs also asserted that they suffered direct physical loss and damage to property because they were unable to use their property for its intended purpose.  The applicable policy contained a virus exclusion. The Superior Court found this virus exclusion to be clear and unambiguous, and therefore enforceable. The plaintiffs raised reasonable expectations in opposition to the motion to dismiss, but the court found the policy language to be clear—no expectation of coverage for losses due to a virus was reasonable. The court limited its holding, only dismissing those claims relating to the virus exclusion. The court noted that plaintiffs failed to plead direct physical damage to the property or direct physical damage that led to closure by civil authority. However, reading this in context, the court likely would have allowed the plaintiffs to amend the complaint but for the virus exclusion. 

Moving on to the United States District Court for the District of New Jersey, in the matter of N&S Rest. LLC v. Cumberland Mut. Fire Ins. Co., 2020 U.S. Dist. LEXIS 206972, the court granted an insurer’s motion to dismiss based upon a virus exclusion. The defendant (the insurer) filed a motion to dismiss raising two main issues: (1) the claim was barred by the virus exclusion; and (2) the claim did not arise out of physical loss or damage either to the insured premises or elsewhere to trigger civil authority coverage. In opposition to this motion to dismiss, the plaintiffs argued that it was not the virus that underlies the claim, but rather the government shut-down orders. The court found these arguments unpersuasive in light of anti-concurrent language in the virus exclusion which was enforceable under New Jersey law. The court in that case also noted:

The Court is only aware of one opinion in which a federal court did not find, at the motion to dismiss phase, that the Virus Exclusion barred coverage. In Urogynecology Specialist of Florida LLC v. Sentinel Insurance Company, the court found that "ambiguous aspects of the Policy ma[d]e determination of coverage inappropriate at this stage." 20-cv-1174, 2020 U.S. Dist. LEXIS 184774, 2020 WL 5939172, at *4 (M.D. Fla. Sept. 24, 2020). However, that policy and its exclusions referenced several other documents that were unattached to the insurance policy and were unavailable to the court. Id. Accordingly, the court found that "[w]ithout the corresponding forms which [we]re modified by the exclusions,  [it would] not make a decision on the merits of the plain language of the Policy to determine whether Plaintiff's losses were covered." Id. That is not the case here. Rather, the Court has all relevant Policy documents, and neither party argues otherwise.

Accordingly, based on the court's independent evaluation of the policy's virus exclusion and the benefit and guidance “of well-reasoned opinions from other districts holding similarly,” the court found that the virus exclusion bars coverage. However, the court did not analyze whether direct physical loss occurred, as the virus exclusion was applicable and did not require any further analysis. 

In a third case, a virus exclusion was once again upheld on a motion to dismiss in the United States District Court for the District of New Jersey in the matter of Blvd. Carroll Entm't Grp., Inc. v. Fireman's Fund Ins. Co., 2020 U.S. Dist. LEXIS 234659. While the court expressed sympathy for those business owners who have suffered during the pandemic, the court held in a short letter opinion that the plaintiff's losses were "tied inextricably” to the virus and were not covered.

The plaintiffs are offering in advancing in a novel theory of insurance coverage in this matter that warrants a denial of the Motion to Dismiss at this early stage of the litigation. As such, this Court must afford the plaintiffs an opportunity to engage in issue-oriented discovery with FMI in order to fully establish the record with respect to direct covered losses and to amend the Complaint accordingly if required. To that end, the Motion to Dismiss is denied.

The holding in Optical Servs. USA/JCI v. Franklin Mut. Ins. Co. is very notable in that the trial court expressed a willingness to at least allow the parties to conduct discovery before making a determination that there was no direct physical loss. While this holding is not binding precedent, it signals that the issue of whether direct physical loss occurred is likely to be fact-specific to each claim.

Finally, and most recently, the United States District Court for the District of New Jersey once again granted an insurer’s motion to dismiss based on a virus exclusion in the matter of 7th Inning Stretch LLC, et al. v. Arch Insurance Co. The holding of the court was very similar to the recent prior orders and opinions in the District of New Jersey. However, 7th Inning Stretch LLC may have gone one step further in stating the following:

Here, Plaintiffs have not alleged any facts that support a showing that their properties were physically damaged. Instead, Plaintiffs plead that the Stay-At-Home Orders and resultant actions by the government and others forced the cessation of the minor league baseball season and caused Plaintiffs to lose income and incur expenses. This is not enough.

In reaching this conclusion, the court cited to Mac Property Grp. LLC v. Selective Fire & Cas. Ins.Co., discussed above. The 7th Inning Stretch LLC court then briefly discussed the virus exclusion with analysis similar to the above-cited cases. While the court in Mac Property Grp. LLC seemed to suggest that the failure to plead direct physical loss could be corrected, the court in 7th Inning Stretch LLC seemed to suggest that failing to plead direct physical loss could serve as the basis for a motion to dismiss even without a virus exclusion.

7th Inning Stretch LLC included one other issue that is somewhat unique to New Jersey, and that is regulatory estoppel. Regulatory estoppel relies on representations made by insurers when having policy terms and exclusions approved by regulators to limit or shape the scope of coverage. The court noted that New Jersey is one of only three states that recognize the defense, but the court declined to rule on the issue due to contractual choice of law provisions at issue in the claim. Accordingly, the New Jersey State and Federal Courts have not substantively addressed the defense of regulatory estoppel.

As recently as February 10, 2021, the United States District Court for District of New Jersey once again upheld a virus exclusion regarding a business interruption claim. The unpublished opinion in Causeway Auto., LLC v. Zurich Am. Ins. Co., 2021 U.S. Dist. LEXIS 25325 provides similar analysis to the cases above, but also addressed arguments from the policyholder based on reasonable expectations and public policy. The matter before the court in Causeway Auto., LLC was a motion to dismiss, and the court determined that the complaint did not allege facts to support the policyholder’s claim that it expected the losses related to COVID-19 to be covered. Similarly, the policyholder failed to plead facts sufficient to support the claim that a virus exclusion is contrary to public policy.

While there are likely a number of similar cases making their way through the New Jersey court system, these early orders and opinions suggest that when a policy contains a specific virus exclusion, the insurer will have a strong likelihood of success when filing a motion to dismiss in lieu of an answer. If the only policy defense available is the lack of a direct physical loss, plaintiffs are likely going to be given some leeway to plead that a direct physical loss did occur.  However, it is not enough simply to plead that ceasing operations due to a government order was a direct physical loss.

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