278 A.3d 272
N.J. Super. Ct. App. Div.2022Background
- Consolidated appeals from six business owners (restaurants, gym, bakery, daycare) whose claims for COVID-19 shutdown losses were denied by their insurers; motions to dismiss under R. 4:6-2(e) were granted and are appealed.
- Governor Murphy issued Executive Orders in March 2020 (EO 103, 104, 107) declaring a public-health emergency and mandating closures/limits on nonessential businesses, indoor dining, gyms, and schools to curb COVID-19.
- Plaintiffs sought business-income and civil-authority coverage, alleging they were forced to suspend operations and suffered direct physical loss or damage; some complaints alleged no known presence of COVID-19 on premises.
- Motion judges dismissed all complaints with prejudice for failure to state a claim (no direct physical loss/damage; civil-authority clauses inapplicable); insurers also relied on virus exclusions/endorsements.
- Appellate Division affirmed: losses were not from "direct physical loss of or damage to" property; civil-authority coverage did not apply; regulatory estoppel failed; alternatively virus exclusions/endorsements barred coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether EO-driven suspensions constitute "direct physical loss of or damage to" insured property | Loss of use/function (suspension) is a direct physical loss; premises were "physically impacted" by EOs | "Direct physical loss/damage" requires a tangible, detrimental physical alteration or dispossession; mere loss of use from orders is insufficient | Court: No — policies require demonstrable physical alteration or loss (period of restoration language); EO restrictions are not physical damage |
| Whether civil-authority clauses cover EO restrictions | Civil-authority coverage applies because government orders prohibited access/use and nearby properties were affected | Civil-authority requires action taken "as a result of" physical damage to other property that prohibited access; EOs were preventive, statewide orders, not responses to nearby property damage | Court: No — EOs did not prohibit access or result from damage to nearby property; restrictions on activity are not the clause's trigger |
| Whether regulatory estoppel bars insurers from invoking virus exclusions | Industry statements misled regulators about scope of virus exclusion; discovery could show misrepresentation | ISO and insurers clearly informed regulators that virus exclusions would bar virus-related claims; Morton is distinguishable | Court: No — plaintiffs failed to identify misleading regulator statements like Morton; ISO representations were consistent with exclusion, so estoppel fails |
| Whether virus exclusions/endorsements bar coverage (causation issue) | Even if virus caused EO, insurer must prove exclusion applies; causation is contested and not resolvable on a Rule 4:6-2(e) motion | Virus exclusions/endorsements (some with anti-concurrent/anti-sequential language) exclude losses caused by viruses; EOs were issued because of COVID-19, making virus the efficient proximate cause | Court: Yes (alternative): COVID-19 is a virus; EOs were issued to curb it; where exclusions/endorsements apply they bar coverage (anti-concurrent language is dispositive for some policies) |
Key Cases Cited
- Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524 (App. Div. 2009) (construed “physical damage” ambiguously in power-grid outage context and favored insured)
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir.) (business losses from COVID-19 closures do not allege direct physical loss without physical alteration)
- East Coast Ent. of Durham, LLC v. Houston Cas. Co., 31 F.4th 547 (7th Cir.) (affirming dismissal where policy language required direct physical loss or damage)
- Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266 (Mass. 2022) (direct physical loss requires distinct, demonstrable physical alteration; civil-authority clause not triggered by COVID-19 orders)
- Morton Int'l v. Gen. Accident Ins. Co., 134 N.J. 1 (1993) (regulatory estoppel can bar enforcement of exclusion when insurers mislead regulators about coverage reduction)
- Port Murray Dairy Co. v. Providence Washington Ins. Co., 52 N.J. Super. 350 (Ch. Div. 1958) (business-interruption recovery tied to property damage requiring repair/replacement; mere blockade or deprivation is not covered)