In the wake of the COVID-19 pandemic, the legal battles over business interruption claims took center stage in the property/casualty insurance industry. The latest example of these disputes is New Jersey Supreme Court’s ruling in the case of AC Ocean Walk LLC v. American Guarantee and Liability Insurance Co.
At issue in the case was whether the Ocean Casino Resort was entitled to $50 million in primary policy limits resulting from business interruption losses caused the COVID-19 government-mandate closures that occurred around the county in 2020.
Just the facts
Ocean Walk opened the Ocean Casino Resort on the Atlantic City Boardwalk in 2018. Ocean Walk secured property insurance from American Guarantee and Liability Insurance Co., AIG Specialty Insurance Co, and Interstate Fire & Casualty Co., alongside a fourth insurer that was not involved in the case.
Collectively, these policies were supposed to offer Ocean Walk up to $50 million in primary policy limits. The insurance agreements shared a standard base policy form, providing coverage against direct physical loss or damage to the insured property due to covered causes, albeit with specific terms, conditions and a notable “contamination exclusion.”
This exclusion negated coverage for contamination-related losses unless they stemmed from direct physical loss or damage not excluded by the policy. However, there was a $1 million sublimit under an Interruption by Communicable Disease amendatory endorsement, which existed in the policies.
The onset of COVID-19 led Ocean Walk to close its doors in March 2020—reopening in July 2020, in line with Gov. Philip Murphy’s executive orders. When Ocean Walk filed a claim for the closure-related losses, the insurers largely denied coverage,[1] citing the absence of physical loss or damage, and pointing to the policies’ “contamination exclusion.” This prompted Ocean Walk to initiate legal action, leading to a complex judicial review of what constitutes “direct physical loss” or “damage” and whether the contamination exclusion applies to pandemic-related claims.
Initially, the trial court sided with Ocean Walk, interpreting the inability to use the casino and hotel facilities due to the virus as a “direct physical loss.” It also read the contamination exclusion as inapplicable, suggesting it was intended for traditional environmental and industrial damages.
However, this ruling was overturned by the Appellate Division, and the case escalated to the New Jersey Supreme Court for further scrutiny.
Court is in session
There are two questions at issue in this case that the Supreme Court addresses:
1. Did Ocean Walk suffer a direct physical loss of/or physical damage to its property due to COVID?
2. Does the contamination exclusion in the policies apply to the COVID-19 virus?
To answer the first question, the court looks to the plain definition of “loss,” “damage,” “direct,” and “physical” to see how those terms fit into the context of loss at issue. That riveting process results in the court concluding 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.
Applying that to the facts of the case, the court holds that Ocean Walk was required to, and failed to, demonstrate that its property was destroyed or altered in a manner that rendered it unusable or uninhabitable to show a “direct physical loss” of its property or “direct physical … damage” under the policy language.
You say contamination, I say contaminant
Having concluded on the first question that Ocean Walk was not successful in demonstrating a covered loss, technically the court does not need to answer the second question of whether the contamination exclusion in the policies would apply.
Nevertheless, the court decides to address it anyway. (Never a good sign for the side that had lost on the previous question, which proved to be true in this case for Ocean Walk.) In deciding the answer to this question, the court looks at two of Ocean Walk’s arguments:
- Does the definition of contamination and exclusion apply?
- What about environmental pollution risks?
The first argument is that the definition of contaminant does not include the term virus or pathogen. As such, Ocean Walk argued that the contamination exclusion would not apply. The court does not buy this argument and it states that the word “contaminant” is only used in provisions of the policy that are not relevant to the case at hand.
Specifically, the court notes that the word contaminant does not appear anywhere in the policies contamination exclusion. The court states the operative word is not “contaminant” but “contamination.” In the policy, the definition of contamination includes the presence of any pathogen or virus. As such, COVID-19 would fall squarely into the description of contamination.
Don’t confuse pollution with contamination
Then the court moved on to the second question regarding the contamination exclusion. Ocean Walk argued that the contamination exclusion should be read to only apply to environmental pollution risks and not to risks presented by viruses such as COVID-19.
In a completely unsurprising move, the court does not find this argument to be persuasive either. The court notes that Ocean View (and the trial court) incorrectly applied previous Supreme Court findings related to pollution exclusions to the case at hand that dealt with a contamination exclusion.
How does this decision fit with other COVID-19 BI cases?
This decision aligns with most COVID-19 business interruption cases across the United States, in which courts generally have found that the virus does not constitute the physical damage or loss required for coverage.
The Ocean Walk case underscores the importance of precise policy language and the challenges in applying traditional insurance concepts to unprecedented pandemic scenarios. For those in the insurance industry and policyholders, this ruling highlights the need for clear communication and understanding of coverage limits in the face of emerging risks.
[1] Ocean Walk was paid $850,000 under its policy’s Interruption by Communicable Disease amendatory endorsement, which has a $1 million sublimit.
Bradford J. Lachut, Esq.
Bradford J. Lachut, Esq., joined PIA as government affairs counsel for the Government & Industry Affairs Department in 2012 and then, after a four-month leave, he returned to the association in 2018 as director of government & industry affairs responsible for all legal, government relations and insurance industry liaison programs for the five state associations. Prior to PIA, Brad worked as an attorney for Steven J. Baum PC, in Amherst, and as an associate attorney for the law office of James Morris in Buffalo. He also spent time serving as senior manager of government affairs as the Buffalo Niagara Partnership, a chamber of commerce serving the Buffalo, N.Y., region, his hometown. He received his juris doctorate from Buffalo Law School and his Bachelor of Science degree in Government and Politics from Utica College, Utica, N.Y. Brad is an active Mason and Shriner.
