COVID-19 business income loss / NJ Federal Court
Marilyn’s Kids, Inc. d/b/a Denny’s v. Continental Casualty Company, Civil Action No. 20-8641, 2021 WL 4488598, (D.N.J. June 30, 2021)
This case involved a claim for business income losses from COVID-19 under a first-party property insurance policy. The plaintiff, a children’s clothing retailer, sought coverage for losses caused by New Jersey Governor Phil Murphy’s closure of all physical locations for non-essential businesses. Defendant Continental Casualty Company moved to dismiss the complaint on the ground that the plaintiff failed to allege any direct physical loss of or damage to property, as required to trigger coverage under the business income, extra expense, and civil authority provisions in the policy. The plaintiff opposed the motion, arguing that whether its business sustained physical loss or damage was a question of fact, that physical loss occurs when a property becomes uninhabitable and unusable for its intended purpose, and that COVID-19 can cause direct physical loss to property.
By decision and order dated June 30, 2021, the court held that the plaintiff did not meet its burden of showing a covered loss under the policy. As the policy did not contain a virus exclusion, the court looked to cases within the Third Circuit that have addressed the physical damage requirement, and the policy’s definition of the term “period of restoration,” to hold that some physical condition of or on the premises needed to be impacted for there to be coverage under the policy. The court held that nothing in the complaint suggested that the plaintiff’s property was damaged or physically impacted such that the property needed to be repaired, rebuilt or replaced. Additionally, the court held that any argument by the plaintiff that executive orders—but not COVID-19—caused a physical loss would be without merit, because governmental closure orders had no impact on the physical condition of an insured’s property. Accordingly, the court granted Continental Casualty Company’s motion and dismissed the complaint.
The decision is one of the few in New Jersey in which a court applied the threshold requirement of physical damage under first-party property policies to COVID-19 business income losses. As the court noted, having found that the virus exclusion barred coverage, most courts in the District of New Jersey have declined to address the question of what constitutes “direct physical loss of or damage to” property. Here, the court answered that question, adding to the growing body of case law around the country finding that COVID-19 does not physically alter property in a way that would trigger coverage under a first-party property insurance policy.