Business Interruption Loss Claims During COVID-19
In Optical Services USA/JC1 v. Franklin Mutual Insurance Co., No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cty. August 13, 2020), the court denied Franklin Mutual’s motion to dismiss a COVID-19 business interruption lawsuit instituted by a group of optometry practices, holding that there were unsettled questions under New Jersey law regarding whether loss of a property’s functional use can constitute “direct physical loss” under a property policy.
Franklin Mutual Insurance Company (FMI) issued businessowners policies to the plaintiffs. The policyholders filed separate claims seeking loss of business income caused by the closure of their respective businesses mandated by New Jersey Governor Murphy’s March 21, 2020, Executive Order No. 107 suspending the operation of non-essential retail businesses due to the COVID-19 pandemic. The plaintiffs closed their businesses on March 20, 2020, and as of the date of the motion, had not reopened. FMI issued disclaimer letters to the policyholders denying their claims for business income and related expenses.
Both policies contained a BU04010110 Businessowner’s policy form. The plaintiffs alleged that they purchased business interruption insurance from carriers to protect their businesses from an unanticipated crisis. The plaintiffs further alleged that the policies issued by FMI provided coverage for loss of income resulting from a necessary interruption of their businesses caused by direct covered losses and temporary closures required by orders of a civil authority.
In the complaints, 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 complaints did not allege the actual presence of the coronavirus on their property but, instead, claimed such an allegation was not needed to establish coverage under the policy. Instead, the optometrists argued that New Jersey case law holds that property can sustain physical loss without experiencing structural alteration, citing 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 transmissions lines were physically incapable of performing their essential function of providing electricity.”).
FMI immediately disclaimed coverage. No answer had yet been filed by FMI; therefore, the discovery end date had not been established. Thereafter, FMI filed a motion to dismiss the complaint pursuant to R.4:6-2(a).
The court noted that there was no established record in the case and there had been no discovery presented to the court for consideration with respect to the arguments and events from the respective legal counsel. Notwithstanding this, counsel for FMI argued three points before the court:
- The court should dismiss the complaint for failure to state a legally cognizable claim;
- The plaintiffs did not sustain direct physical loss or direct physical damage to or destruction of covered property precluding coverage for business income or extra expenses under the policy;
- The plaintiffs’ occupancy of their respective properties were not prohibited by civil authorities because of a loss at a local premises not owned or occupied by the plaintiffs precluding civil authority coverage under the FMI policies.
The plaintiffs argued that they stated claims for coverage under the policies because they suffered a direct covered loss and were forced to close their business by an order of a civil authority. The plaintiffs further alleged that they stated claims for loss of income coverage because they suffered a direct covered loss under the policy and they stated claims for civil coverage because the closure order prohibited them from accessing their businesses.
The court characterized the optometrists’ argument “as interesting” in that it advanced a “novel survey of insurance coverage” arising from what is an unprecedented, historic event, and that the argument by the plaintiffs rebutted FMI’s position that the plain meaning of “direct physical loss” could not include the closure of the optometry practices in the absence of physical loss or damage.
The FMI insurance policy did contain a virus exclusion; however, FMI did not rely on it in support of its disclaimer. Rather, FMI argued 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.
Counsel for FMI agreed during oral argument that there was no case directly on point construing the precise policy language in the context of a claim where there was a closure of a business because of the risk of contamination by a virus. The court inquired of counsel during oral argument why the insurance policy did not contain specific exclusions for an event such as the COVID-19 pandemic, meaning “for virus proliferation.” Counsel for FMI responded that the policy did have an exclusion for virus proliferation, it just did not have an exclusion for a closure of a business based on the risk of virus proliferation.
The court noted that each of the respective arguments advanced by the parties required a fact-sensitive analysis and that the parties had failed to present a sufficient record before the court for a legal determination of their respective positions. The court noted that there had been no discovery produced to the court for consideration; no affidavits, no certifications or sworn testimony derived from depositions. In fact, no discovery had been undertaken by the parties whatsoever. Notwithstanding these “deficiencies,” the court endeavored to address the legal arguments posed by the respective parties on the extremely limited record provided to the court.
The plaintiff did provide the court with a citation from Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524 (App. Div. 2019) in support of their argument. Their argument based on the Wakefern holding is that there was a finding of coverage for a grocery store that lost power when an electrical grid and transmission lines were physically incapable of performing their essential function of providing electricity even though they were not necessarily damaged. The court in Wakefern did hold that:
Since the term “physical” can mean more than material alteration or damage, it is incumbent on the insurer to clearly and specifically rule out coverage in the circumstances where it was not to be provided.
Wakefern v. Liberty Mut. Ins. Co., 406 N.J. Super. At 542.
As a result, the court found the plaintiffs’ argument “compelling” for purposes of surviving the motion to dismiss pursuant to R.4:6-2(e) in the absence of any complete record for disposition.
The court, therefore, held that the plaintiffs should be afforded the opportunity to develop their case and prove before the court that the event of the COVID-19 closure may be a covered event under the Coverage C, loss of income, when occupancy of the described premises is prohibited by civil authorities.
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