Another state court has issued a ruling favoring insurance policyholders in a COVID-19 business interruption dispute. This decision further confirms the trend of state courts recognizing the potential for coverage where many federal courts have not.

Most recently, a New Jersey judge delivered an early Christmas present to an Atlantic City casino by denying three motions to dismiss by insurance companies seeking to avoid their coverage obligations for COVID-19 business interruption losses. For over a year, a central question has been at the heart of COVID-19 litigation: Is it appropriate for judges to make factual findings on whether COVID-19 constitutes “direct physical loss or damage,” based solely on pleadings and without any evidence or expert testimony? While nationwide legal precedent dictates that the answer should be “no,” many courts have still waded into this unprecedented scientific issue. But on December 22, 2021, Judge Winkelstein in the Atlantic County Superior Court resisted the temptation and held that Ocean Walk sufficiently alleged “direct physical loss or damage” caused by the presence of the SARS-CoV-2 virus. Judge Winkelstein also refused to extend traditional pollution exclusions to the insured’s COVID-19 claim.

Policyholders have argued that it is improper for courts to dismiss “presence” cases – those lawsuits that are premised on loss and damage caused by the actual presence of COVID-19 and its causative virus, SARS-CoV-2. Ocean Walk is such a case, where the complaint alleged that COVID-19 caused physical change to its property and, among other things, rendered the casino unsafe. As required at the motion to dismiss stage, the court accepted the factual allegations as true and recognized that the “facts may be in dispute, but that is an issue for another day.” Here, “the pleadings are sufficient to show that the COVID-19 damaged the Ocean’s premises; this meets the requirements for coverage pursuant to the insuring agreements, and, accordingly, the complaint satisfies [New Jersey law] to survive a R.4:6-2(e) motion.”

Many insurers have secured dismissals of similar lawsuits by arguing that “physical loss or damage” each require some physical alteration to the insured property, even when contradicted by analogous precedent in other contexts. Here, however, Judge Winklestein relied upon New Jersey precedent in Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co., 406 N.J. Super 524 (App. Div. 2009), Customized Distribution Services v. Zurich Ins. Co., 373 N.J. Super. 480 (App. Div. 2004), Port Authority v. Affiliated FM Ins. Co., 311 Fed. 3d 226 (3d Cir. 2002), and Gregory Packaging Co., Inc. v. Traveler’s Property Cas. Co. of Am., 2014 Dist. Lexis 165232 (Dist. Of N.J. Nov. 25, 2014), which make clear that physical alteration is not required to trigger coverage and that the operative phrase “direct physical damage” is ambiguous, in any event, because the phrase is reasonably susceptible to multiple meanings. As Judge Winklestein explained, “[t]he carriers could have defined the term physical damage but declined to do so.” Thus, the court construed the language against the insurers and held that Ocean Walk sufficiently stated a claim for its COVID-19 losses.

The court also rejected the insurers’ argument that the pollution or contamination exclusion prevented coverage for the claim.

The Zurich and AIG policy included a contamination exclusion that listed “virus” in the definition of contamination. The court reasoned that the stated contaminants “are associated with traditional environmental pollution damages, not reasonably related to the damages in this case.” Likewise, Interstate Fire’s and National Fire’s pollution exclusion “overwhelmingly refer to environmental and industrial pollution contaminants.” As Judge Winkelstein found, to construe these exclusions more broadly to apply to a communicable disease would be contrary to the reasonable expectations of the insured. And, inserting “virus”  “does not change the substance of the exemption.” The court also noted that the insurers failed to come forth with compelling evidence that the pollution exclusion was intended to be read as broadly as the insurance companies argued. Thus, the traditional pollution exclusions did not apply.

The court stopped short of a total win for the policyholder and granted a second insurer’s motion to dismiss based on that policy’s biological or chemical substances exclusion, which more narrowly focused on the type of loss alleged in the complaint.

The AC Ocean Walk decision highlights many ingredients that have been lacking in COVID-19 opinions around the country.  Here, the court correctly accepted the factual allegations as true, read the insurance policies’ provisions broadly in favor of coverage, construed the exclusions narrowly, and resolved all doubts in favor of the non-moving insured.  This led to the conclusion that the policyholder alleged a covered business interruption claim and that the factual dispute over whether COVID-19 causes physical loss or damage is “an issue for another day.” This result appropriately subjects the central inquiry to discovery and expert testimony rather than judgment calls at the motion to dismiss stage before a policyholder ever has a chance to prove its allegations.

The full opinion in AC Ocean Walk LLC v. American Guarantee and Liability Ins. Co. et al., Case No. ATL-L-0703-21, can be found here.