On January 24, 2024, the New Jersey Supreme Court in AC Ocean Walk, LLC v. American Guarantee & Liability Insurance Company issued a unanimous decision rejecting a claim by a casino in Atlantic City, New Jersey for coverage for business interruption losses sustained during the Covid-19 pandemic. This is a significant ruling, as it reflects the first time that New Jersey's high court has addressed the issue of coverage for Covid-19 business interruption losses. The Court's decision comports with the majority of other U.S. jurisdictions, which have generally held that Covid-19 losses do not trigger business interruption coverage.

Ocean Casino, the policyholder in AC Ocean Walk, sought to recover for $50 million of losses sustained during a shutdown at the start of the Covid-19 pandemic under property policies issued by several insurers. The policies provided coverage covering "against direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property ...." The policies defined "Covered Cause of Loss" as "[a]ll risks of direct physical loss of or damage from any cause unless excluded."

An endorsement excluded coverage for "contamination," which was defined as "[a]ny condition of [the] property due to the actual presence of any foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent, Fungus, mold or mildew."

The policies also included an endorsement that provided separate coverage for "Interruption by Communicable Disease," where losses were sustained due to suspension of business caused by an order issued by a civil authority. Coverage under the amendatory endorsement was subject to a $1,000,000 sublimit. The carriers paid their proportional share of that sublimit but denied coverage under the policies' general limits.

The New Jersey Supreme Court sided with the insurers, rejecting Ocean Casino's claims and holding that the casino did not sustain "direct physical loss or damage" to its property as required to trigger coverage. The Court determined that "the phrase 'direct physical loss of . . . property' clearly denotes the destruction of the property or a physical change to the property that renders it unusable or uninhabitable." The justices recognized that the casino was not damaged, that its losses were a result of the government shutdown order, and that, but for the order, the property was otherwise intact and functional.

The Court also concluded that the casino's business interruption claims fell within the scope of the contamination exclusion. The Court rejected the argument that the exclusion should be read narrowly and limited to instances of traditional environmental contamination. In so doing, the Court declined to follow a line of cases that applied a theory of "regulatory estoppel" to limit the application of pollution exclusions based upon representations about those exclusions made by the insurance industry to New Jersey regulators. The Court found that there were no allegations that comparable representations were made about the contamination exclusion.

The decision is available here.

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