A New Jersey trial court recently denied an insurer’s motion to dismiss a COVID-19 business interruption suit brought by a group of optometry practices finding unsettled questions under New Jersey law about whether loss of a property’s functional use can constitute “direct physical loss” under a property policy. Optical Services USA/JC1 v. Franklin Mutual Ins. Co., No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020) (transcript). Based on this finding, the court determined that the optometrists were entitled to issued-oriented discovery and to amend their complaint accordingly.

The optometrists alleged that New Jersey’s executive orders closing non-essential businesses, which included their practices, constituted a covered cause of loss under the policy. The optometrists did not allege the actual presence of the coronavirus on their property, but they claimed such an allegation was not needed to establish coverage. Instead, they argued that New Jersey case law says that property can sustain physical loss without experiencing structural alteration. See Wakefern Food Corp. v. Liberty Mut. Fire. Ins. Co., 406 N.J. Super. 524, 968 A.2d 724 (App. Div. 2009) (finding an electrical grid that suffered non-structural damage was “physically damaged” because “the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity”).

The court characterized the argument as “interesting” and that it advanced a “novel theory of insurance coverage” arising from an unprecedented, historic event that merited denial of the insurer’s motion to dismiss. Importantly, the court found that the argument rebutted the insurer’s position that the plain meaning of “direct physical loss” could not include the closure of the practices in the absence of physical loss or damage.

Finally, although the policy contained a virus exclusion, the insurer did not attempt to rely on it in this case. Rather, as counsel for the insurer explained at oral argument, the exclusion did not apply under the facts of this loss, which was due to the pandemic risk of virus proliferation, rather than the virus itself. Other insurers have attempted to apply the same or similar virus exclusions more broadly, ignoring the exclusions’ plain meaning and shirking their obligation to apply exclusions narrowly.