Case Information
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY OTG MANAGEMENT PHL LLC, et al. ,
Plaintiff, Civil Action No.: 2:21-cv-01240-WJM-MF v. EMPLOYERS INSURANCE COMPANY OPINION OF WAUSAU, Defendant.
WILLIAM J. MARTINI, U.S.D.J.:
This matter arises out of Defendant Employers Insurance Company of Wausau’s (“Defendant”) alleged breach of an insurance contract and denial of insurance coverage to Plaintiff OTG Management LLC and certain of its subsidiaries (collectively, “Plaintiffs”) related to losses caused by the ongoing COVID-19 pandemic. Before the Court is Defendant’s motion (the “Motion”) to dismiss the Complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure (“FRCP”) 12(b)(6), ECF No. 14. For the reasons set forth below, Defendant’s Motion is GRANTED . I. BACKGROUND [1]
A. Plaintiff’s Insurance Claim and COVID-19 Losses Plaintiff OTG Management LLC is a Delaware limited liability company and ultimate parent of each of the other Plaintiffs in this action. [2] Together, Plaintiffs operate and manage a variety of airport concessions, including restaurants, bars, markets providing food and beverage services, and other airport retail concessions, in airports across the United States. Compl. ¶ 4. Defendant is an insurance company organized under the laws of Wisconsin with its principal place of business in Massachusetts. Id. at ¶ 20. Defendant issued a commercial property insurance policy to Plaintiff OTG Management LLC as named insured (the “Policy”) covering the period from June 1, 2019 through June 1, 2020. Id. at ¶¶ 24, 26; Compl., Ex. A. The Policy also provides coverage to each of the other Plaintiffs as subsidiaries of OTG Management LLC. Id. at ¶ 25; Compl., Ex. A., § I.A.
Unfortunately, Plaintiffs’ business was among the many that sustained losses throughout 2020 as a result of the COVID-19 pandemic. Specifically, Plaintiffs allege that, because their retail operations are located inside of airports, they were particularly hard hit by the damage caused by COVID-19 itself as well as the preventative measures taken by governments and the public to limit non-essential travel and other activities. See Compl. ¶¶ 57-69, 76-77.
Plaintiffs submitted a business interruption claim for their losses due to the COVID- 19 pandemic under the Policy to Defendant on March 16, 2020. Id. at ¶ 107. Shortly thereafter, Defendant responded to Plaintiffs’ claim by asking several questions about the nature of Plаintiffs’ losses, and, on April 15, 2020, issued a reservation of rights letter. Id. at ¶¶ 108-11. On June 26, 2020, Plaintiffs responded to Defendant’s inquiries about the nature of their losses. Id. at ¶ 114. On September 16, 2020, Defendant denied coverage under the Policy, stating, among other things, that neither COVID-19 nor government orders related thereto was a risk of physical loss or damage and that Plaintiffs’ claim fell under certain applicable coverage exclusions in the Policy.
B. The Policy
The Policy is an all-risk commercial property insurance policy that provides coverage against “all risks of direct physical loss or damage” to Plaintiffs’ insured property except as otherwise limited or excluded therein. Comрl., Ex. A., § I.C. The Policy is comprised of two types of insurance coverage: (1) “Property Damage”; and (2) “Time Element.” See generally id. at §§ II-III. The former provides coverage for direct physical loss or damage to certain specified types of real or personal property, except for loss or damage caused by certain excludable events or circumstances. Id. at §§ II.A, C. Among these exclusions, and of particular importance here, are (a) “loss or damage from enforcement of any law or ordinance . . . [r]egulating the construction, repair, replacement, use or removal, including debris removal, of any property” (the “Law or Ordinance Exclusion”), id. at § I.C.1(f)(1); and “unless directly resulting from a covered loss, [3] ” (b) “[c]ontamination, 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 elsewhere in th[e] Policy” (the “Contamination Exclusion”), id. at § I.C.4(a). The Policy defines “contamination” broadly as “[a]ny condition of property that results from a contaminant.” at § VII.4. In turn, the Policy further defines “contaminant” as “[a]ny foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or pathogenic organism, bacteria, virus , disease сausing or illness causing agent, fungus, mold or mildew.” Id. at § VII.(3) (emphasis added).
“Time Element” coverage, meanwhile, covers certain losses and expenses incurred as a result of a necessary interruption in business operations directly resulting from physical loss or damage to Plaintiffs’ insured property. Id. at § III.A. In addition, the Policy extends such Time Element coverage to a variety of circumstances in which Plaintiffs’ business operations may be interrupted even though Plaintiffs’ insured property may not have suffered any direct physical loss or damage, including (1) physical loss or damage to a nearby “attraction property” Plaintiffs depend on to attract customers (“Attraction Property Coverage”), id. at § III.E.1; (2) orders of civil or military authorities caused by physical loss or damage to Plaintiffs’ insured property or similar nearby property prohibiting access to Plaintiffs’ insured property (“Civil Authority Coverage”), id. at § III.E.2; (3) physical loss or damage to locations of certain of Plaintiffs’ direct or indirect customers, suppliers, contract manufacturers or contract service providers (“Contingent Time Element Coverage”), id. at § III.E.4; and (4) physical loss or damage to certain property which directly prevents ingress or egress to Plaintiffs’ insured premises, (“Ingress/Egress Coverage”), id. at § III.E.8. In a section titled “Time Element Exclusions,” the Policy identifies several specific exclusions to Time Element coverage, none of which are themselves applicable to the present dispute. Before going on to identify these specific losses excluded from Time Element coverage, however, the section’s introductory clause provides that “[i]n addition to the exclusions elsewhere in this Policy, the following exclusions apply to TIME ELEMENT loss . . . .” at § III.D.
C. Procedural History
On January 27, 2021, Plaintiffs filed their four-count Complaint asserting claims arising out of Defendant’s denial of their claim for business interruption insurance coverage. Broadly speaking, Plaintiffs allege that they suffered financial losses due to the necessary closure of their businesses in light of the physical loss or damage caused by the presence of COVID-19 on their premises and by various government shut-down orders issued to try and mitigate the spread thereof, and that Defendant wrongfully denied insurance coverage for such losses. The Complaint seeks both a declaration stating that Plaintiffs’ losses are insured under the Policy as well as money damages for Defendant’s alleged breach of the insurance contract. In addition, the Complaint sets forth claims for bad faith denial of insurance coverage and for violations of the New Jersey Consumer Fraud Act (the “NJCFA”), N.J.S.A. 56:8-2.
II. LEGAL STANDARD
FRCP 12(b)(6) provides for the dismissal of a complaint if the plaintiff fails to state
a claim upon which rеlief can be granted. The movant bears the burden of showing that no
claim has been stated.
Hedges v. United States
, 404 F.3d 744, 750 (3d Cir. 2005). In
deciding a motion to dismiss under FRCP 12(b)(6), “all allegations in the complaint must
be accepted as true, and the plaintiff must be given the benefit of every favorable inference
to be drawn therefrom.”
Malleus v. George
,
To survive a 12(b)(6) motion, “a complaint must contain sufficient factual
matter . . . to ‘state a claim to relief that is plausible on its face.’” (quoting
Bell Atl.
Corp. v. Twombly
,
III. DISCUSSION
Plaintiffs allege that Defendant’s denial of coverage under the Policy for losses suffered as a result of the COVID-19 pandemic constituted a breach of the insurance contract, and that Defendant’s denial of such coverage and its investigation with respect thereto were made in bad faith and violated the NJCFA. The Court disagrees and addresses each claim in turn.
A. Counts I and II: Declaratory Judgment and Breach of Contract 1. Choice of Law
At the outset, the Court must resolve an apparent dispute between the parties as to which state’s law governs Plaintiffs’ breach of contract claim. Defendant argues that the choice-of-law provision in Section I.H of the Policy’s Declarations requires the application of New York law. See Mot. at 14 n.6; Compl., Ex. A., § I.H. Plaintiffs suggest that the Court can apply both New Jersey and New York law because there is no discernible substantive difference between the two with respect to breaches of insurance contracts.
Though Plaintiffs may be correct that there is no substantive difference between the
laws of New York and New Jersey as it relates to the interpretation of insurance contracts,
for the avoidance of doubt, the Court finds that New York law governs Plaintiffs’ contract
сlaim. In diversity cases, the Court applies the choice-of-law rules of New Jersey to
determine the controlling substantive state law.
Collins v. Mary Kay, Inc.
,
2. Interpretation of Insurance Contracts Generally
Under New York law, “insurance policies are interpreted according to general rules
of contract interpretation.”
Olin Corp. v. Am. Home Assurance Co.
,
As the party seeking coverage, the insured “bears the burden of showing that the
insurance contract covers the loss.”
Morgan Stanley Grp. Inc. v. New England Ins. Co.
,
3. The Contamination Exclusion Excludes Coverage for Plaintiffs’ Claim
Defendant argues that the Contamination Exclusion categorically bars any coverage under the Policy for losses sustained due to COVID-19. Plaintiffs, unsurprisingly, disagree, and argue that the Contamination Exclusion is inapplicable to losses and expenses for which coverage is sought under the Time Element section of the Policy, is otherwise ambiguous in its application to pandemics as opposed to industrial pollution claims, is inapplicable to Plaintiffs’ claim for coverage because the efficient proximate cause of their losses is the various government closure orders rather than COVID-19 itself, and that Defendant is estopped from claiming that the Contamination Exclusion applies. The Court agrees with Defendant that the Contamination Exclusion bars Plaintiffs’ claim for coverage under the Policy.
i. The Contamination Exclusion Applies to Plaintiffs’ Claim Plaintiffs argue that the Contamination Exclusion applies only to claims made under the Property Damage section of the Policy, rather than the Time Element section under which they seek coverage, and only for certain “costs” as opposed to “losses” and “extra expenses.” The Court disagrees.
First, although set forth in the Property Damage sеction of the Policy, it is clear that the Contamination Exclusion applies to both the Property Damage and Time Element coverages provided for therein. The section of the Policy describing the exclusions applicable to Time Element coverage is unambiguous and makes clear that, in addition to the “Time Element”-specific exclusions set forth in that section, the “exclusions elsewhere in [the] Policy . . . apply to Time Element loss.” Compl., Ex. A., § III.D. Carving out exclusions set forth in the Property Damage section – the only other section in which exclusions to coverage are listed – as Plaintiffs suggest would impermissibly render the phrase “exclusions elsewhеre in [the] Policy” a null set, and therefore meaningless. To that end, Plaintiffs’ argument that the Policy’s acknowledgment that Time Element coverage is subject to “applicable exclusions,” and that therefore there is some unknown set of exclusions which do not apply, is unpersuasive: See Compl., Ex. A, § III(B). The Policy makes clear that the exclusions set forth in the other coverage sections, i.e., Property Damage, are “applicable exclusions” with respect to Time Element coverage.
For this same reason, Plaintiffs’ narrow reading of the Contamination Exclusion itself is untenable. Plaintiffs argue that because the Contamination Exclusion excludes coverage for contamination “except as provided elsewhere in th[e] Policy” it obviously cannot apply to losses that fall squarely under the specific Time Element coverages set forth in separate sections of the Policy. This reading of the Policy, however, is backwards: it requires to Court to find that the Contamination Exclusion is the rule, and the coverage types provided in the Policy the exceptions which necessarily swallow that rule. Taken to its logical conclusion, Plaintiffs’ theory would effectively write out all coverage exclusions contrary to the intention of the parties and the clear language of the Policy. Rather, reading the Policy as a whole, it is clear that the phrase “except as provided elsewhere in th[e] Policy” as used in the Contamination Exclusion refers to specific forms of contamination which are expressly covered by the Policy. See, e.g. , Compl., Ex. A, §§ II.D.7-8 (providing certain coverage for debris removal and decontamination costs resulting from a covered loss); id. at § II.D.26 (providing coverage for certain radioactive contamination); id. at § IV.C.1(b) (covering certain losses caused by ammonia contamination).
Second, Plaintiffs’ distinction between “
costs
of Contamination” excluded from
coverage by the Contamination Exclusion and “losses” or “extra expenses” covered undеr
the Time Element coverage is similarly unpersuasive. As noted, the Policy broadly defines
the term “contamination” to mean “any condition of property that results from a
contaminant” such as a virus.
Id.
at § VII(3)-(4). In other words, the Contamination
Exclusion unambiguously provides that Defendant will not cover “any condition of
property” resulting from a virus nor any cost due to any condition of property resulting
from a virus. Moreover, the Contamination Exclusion clearly and unambiguously
encompasses “the inability to use or occupy property.” Thus, regardless of whether there
is a distinction between “costs” on the one hand and “losses” and “extra expenses” on the
other, it is clear that the Contamination Exclusion cannot be so limited without rendering
parts of it entirely meaningless.
See Ralph Lauren Corp. v. Factory Mut. Ins. Co.
, No. 20-
10167 (SDW) (LDW),
ii. The Contamination Clause is Unambiguous Plaintiffs argue that even if the Contamination Exclusion could theoretically apply to claims for Time Element loss under the Policy, it is nonetheless ambiguous, and therefore cannot be applied, with respect to their present claim for coverage. Specifically, Plaintiffs argue that the Contamination Exclusion refers only to viruses and various pollutants, not pandemic diseases caused by viruses, and that it was intended to apply only to the localized release or spread of a virus as part of an industrial pollution claim. Once again, the Court disagrees.
The distinction Plaintiffs appear to draw between a pandemic disease and the virus
it is caused by is unavailing and has been overwhelmingly rejected by other courts that
have considered the issue, including recent decisions of federal courts in New York
applying New York law.
See, e.g.
,
Midvale
,
Moreover, in defining the contaminants that could result in “contamination” within
the meaning of the Contamination Exclusion, the Policy makes clear that the Exclusion
applies to “[a]ny . . . virus” without any limitation as to whether that virus occurs in the
context of a global pandemic or industrial pollution.
See Off. Sol. Grp.
,
The Court joins the overwhelming majority of courts that have considered Plaintiffs’ argument with respect to the interpretation of similar insurance coverage exclusions in the context of the COVID-19 pandemic and concludes that the Contamination Exclusion is unambiguous and applies to insurance claims under the Policy for losses due to the COVID-19 pandemic.
iii. COVID-19 Was the Efficient Proximate Cause of Plaintiffs’ Losses
Plaintiffs further argue that the Contamination Exclusion does not apply to their losses because Defendant has not sufficiently demonstrated that the virus itself is the efficient proximate cause thereof rather than the government shutdown orders or the voluntary closure of Plaintiffs’ business operations due to the presence of someone infected with COVID-19 on their premises. This argument, however, is unavailing.
Under New York law, “where a covered and excluded peril combine to cause a covered loss, courts typically apply the efficient proximate cause rule – meaning, that the insured is entitled to coverage only if thе covered peril is the predominant cause of the loss or damage.” Parks Real Estate , 472 F.3d at 48 (quotations omitted). “The efficient proximate cause of a loss is the cause that originally sets other events in motion” Id. (quotations omitted). Thus, in the context of interpreting an exclusionary provision in an insurance policy which does not contain an anti-concurrent or anti-sequential clause, the Court must look to “the most direct and obvious [efficient] cause” of an insured’s loss” rather than attempt to “trace events back to their metaphysical beginnings.” (alterations in original) (quotations omitted). In so doing, the Court must ask “whether the parties contemplated that the exclusion would apply in a circumstance such as that presented in light of the reasonable expectation and purpose of the ordinary business person when making an ordinary business contract.” 100 Orchard St. , 2021 WL 2333244, at *2 (quotations omitted).
Here, the Contamination Exclusion does not contain an anti-sequential or anti-
concurrent clause. This does not mean, however, that the Contamination Exclusion is
inapplicable simply because some specific event other than the outbreak of COVID-19 was
the last in a series of events which lead to the closure of Plaintiffs’ businesses. Rather, it is
clear that the singular event which is directly responsible for, and therefore the efficient
proximate cause of, Plaintiffs’ losses is the outbreak of COVID-19. Indeed, neither the
government shutdown or closure orders nor the presence of an infected person on
Plaintiffs’ premises would have occurred absent the spread of COVID-19. To that end, as
courts in New York, this district, and around the country have consistently found, a
reasonable business person would unquestionably anticipate that a provision which
excludes coverage for “any condition of property that results from a . . . virus” and any cost
thereof would also apply to any such costs or conditions of property that result from “the
immediate efforts to mitigate a viral outbreak.”
100 Orchard St.
,
iv. Defendant is Not Estopped From Denying Coverage Under the Contamination Exclusion
Finally, the Court finds Plaintiffs’ argument that Defendant is estopped from
invoking the Contamination Exclusion to deny coverage for Plaintiffs’ claim similarly
unpersuasive. The doctrine of regulatory estoppel prevents an insurer from advancing an
interpretation of an exclusion to insurance coverage in litigation that is inconsistent with
representations it made regarding the scope and meaning of that exclusion to state
insurance regulators when initially seeking its approval.
See Benamax Ice, LLC v.
Merchant Mut. Ins. Co.
, – F.3d –,
The Court notes that there is an apparent conflict between New York and New
Jersey law with respect to the doctrine of regulatory estoppel which Plaintiffs do not
address. Although New Jersey courts have recognized the doctrine in certain contexts,
see
Morton Int’l v. Gen. Accident Ins. Co.
,
Second, Plaintiffs have not alleged any inconsistency or misleading statement made by Defendant to state regulators with respect to the Contamination Exclusion. The Complaint alleges that Defendant told state regulators that the Policy itself did not cover losses resulting from disease-causing agents and that the Contamination Exclusion was simply an explicit clarification of that understanding. Compl. ¶ 104. Whether or not that understanding of the scope of the Policy was itself accurate is irrelevant. The fact of the matter is that Defendant’s current litigation position is entirely consistent with the alleged position it took in front of state regulators: the Policy does not cover loss or damage resulting from contamination.
4. Plaintiffs Have Not Alleged Physical Loss or Damage Even if the Court were to conclude that the Contamination Exclusion was, for some reason, not applicable to Plaintiffs’ claim for coverage, Plaintiffs still have not adequately stated a claim for relief under the Policy. In order for coverage to be available under the Policy, including coverage under the Time Element section and the various extensions thereof, Plaintiffs must be able to demonstrate that their property or certain nearby properties suffered some direct physical loss or damage. Compl., Ex. A at 45, 75. Plaintiffs argue that they have adequately alleged the requisite physical loss or damage by alleging that (1) the government closure orders resulted in the loss of use of Plaintiffs’ insured property; and (2) the presence of COVID-19 itself physically damaged or rendered unusable Plaintiffs’ insured property. Neither argument is persuasive.
As an initial matter, New York courts have consistently held that the phrase
“physical loss or damage” in an insurance policy requires “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.”
Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co.
, 17 F.
Supp. 3d 323, 331 (S.D.N.Y. 2014);
see also Food for Thought Caterers Corp. v. Sentinel
Ins. Co.
, – F.3d –,
Weighlock Drive, LLC v. Springhill SMC Corp.
, – N.Y.S.3d –,
New York courts have similarly rejected the argument that the physical presence of
COVID-19 on an insured premises constitutes “physical loss or damage.” Though
Plaintiffs are correct that physical loss or damage does not need to be “tangible, structural
or even visible” to trigger coverage, there must still be “some compromise to the physical
integrity” of the insured premises.
Newman
,
The Court agrees with and adopts the reasoning of the courts that have considered this issue under New York law. Neither the government closure orders nor the presence of COVID-19 itself constitute “direct physical loss or damage” or an imminent threat thereof within the meaning of the Policy. Accordingly, Plaintiffs have failed to satisfy their burden that their claim is within the scope of coverage provided by the Policy.
B. Count III: Bad Faith
Plaintiffs’ claim for bad faith denial of insurance coverage must also be dismissed.
Though the parties do not discuss whether New York or New Jersey law applies to this
claim, the Court finds that Plaintiffs’ claim fails under the law of either state. First, “New
York does not recognize the tort of bad faith denial of insurance coverаge.”
Core-Mark
Int’l Corp. v. Commonwealth Ins. Co.
, No. 05-Civ.-183 (WHP),
Second, under New Jersey law, to state a claim for bad faith denial of insurance coverage, Plaintiffs were required to show that: “(1) [Defendant] lacked a reasonable basis for its denying benefits, and (2) [Defendant] knew or recklessly disregarded the lack of a reasonable basis for denying the claim.” Nationwide Mut. Ins. Co. v. Caris , 170 Supp. 3d 740, 748-49 (D.N.J. 2016). A denial of coverage is, by definition, not made in bad faith where the claim itself is “fairly debatable.” See id. Here, because the Court has already determined that Plaintiffs’ claim was not, as a matter of law, covered under the Policy, it stands to reason that Plaintiffs’ claim was “fairly debatable” and Defendant’s denial of coverage therefor was reasonable.
C. Count IV: NJCFA
Finally, the Court concludes that Plaintiffs’ claim under the NJCFA must also
dismissed. Even assuming the NJCFA applied to Plaintiffs’ insurance relationship with
Defendant embodied in a contract governed by New York law, Plaintiffs have failed to
state a proper claim under the NJCFA. “[W]hile the CFA ‘encompass[es] the sale of
insurance policies as goods and services that are marketed to consumers,’ it was not
intended as a vehicle to recover damages for an insurance company’s refusal to pay
benefits.”
Myska v. N.J. Mfrs. Ins. Co.
, 440 N.J. Super. 458, 485 (Super. Ct. App. Div.
2015) (quoting
Lemelledo v. Beneficial Mgmt. Corp. of Am.
,
IV. CONCLUSION
For the reasons set forth above, Defendant’s Motion is GRANTED . An appropriate order follows.
/ s / William J. Martini William J. Martini, U.S.D.J. Date: August 2 , 2021
Notes
[1] Unless otherwise indicated, all facts in this section are taken from the Complaint, ECF No. 1, and are assumed to be true for purposes of this Opinion.
[2] The other Plaintiffs are: (1) OTG Management PHL LLC; (2) OTG Management PHL B, LLC; (3) LaGuardia USA LLC; (4) LGA Airport Restaurants, L.P.; (5) OTG DCA Venture II LLC; (6) OTG JFK T2 Venture, LLC; (7) OTG JFK T5 Venture, LLC; (8) OTG Management T8 LLC; (9) OTG Management JFK LLC; (10) OTG Management EWR LLC; (11) OTG Management IAH, LLC; (12) OTG Management Midwest LLC; (13) OTG Management YYZ, LLC; (14) OTG MCO Venture II LLC; (15) OTG ORD Venture LLC; (16) OTG Experience, LLC; and (17) OTG Concepts Franchising, LLC.
[3] The Policy defines a “covered loss” as “[a] lоss to covered property caused by direct physical loss or damage insured by th[e] Policy.” Compl., Ex. A, § VII.5.
[4] Mattdogg is the only decision by a New Jersey court of which the Court is aware that considered
[5] For this reason, Plaintiffs’ reliance on
Pepsico, Inc v. Winterthus Int’l Am. Ins. Co.
, 24 A.D.3d
743, 744 (N.Y. Sup. Ct. App. Div. 2005) is misplaced. There, the court concluded that the use of
faulty raw ingredients which rendered certain beverage products unmerchantable constituted
“physical damage” because “the product’s function and value have been seriously impaired, such
that the product [could not] be sold.” at 744. However, unlike the ingredients used to create a
product, COVID-19 itself has not altered the physical function or value of the Plaintiffs’ property
and, as noted, does not constitute “physical loss or damage” or create a risk thereof.
Buffalo
Xerographix, Inc. v. Sentinel Ins. Co.
, No. 1:20-cv-520,