Insurance Law Posts

Ocean Casino Loses Bid for $50 Million in COVID-19 Pandemic Insurance Coverage before New Jersey Supreme Court

January 26, 2024
By: Richard J. Barca and Lisa A. Cumming

In the Process, the Court Affirms the Validity of the Contamination Exclusion in Commercial Property Insurance Policies

The proverb that the “house always wins” does not hold true in the courtroom. On January 24, 2024, the New Jersey Supreme Court unanimously ruled against AC Ocean Walk, LLC’s attempt to obtain insurance coverage under its commercial property insurance policies for losses sustained during the COVID-19 pandemic in AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Company. In this case, AC Ocean Walk, LLC, the operator of the Ocean Casino Resort and other entertainment facilities, argued that the presence of SARS-CoV-2 (the COVID-19 virus) in its entertainment facility, and a resulting government-mandated suspension of its operations, caused it to sustain a “direct physical loss” of or a “direct physical . . . damage” to property so as to trigger coverage under its commercial property insurance policies. 

AC Ocean Walk also argued that the Contamination Exclusion in its property insurance policies should not apply to viral contamination because it is not a traditional environmental and industrial pollutant. On both issues, the New Jersey Supreme Court ruled in favor of the property insurers, American Guarantee and Liability Insurance Company (AGLIC), AIG Specialty Insurance Company (AIG), and Interstate Fire & Casualty Company (IFCC), and affirmed the decision of the Appellate Division.

Background

The loss at issue occurred when Ocean Walk suspended its operations in compliance with executive orders from New Jersey Governor Phil Murphy mandating the closure of casinos and other entertainment venues in light of the COVID-19 pandemic. Ocean Walk thereafter submitted a claim for coverage under several policies, including the property insurance policies issued by AGLIC, AIG, and IFCC. After a subsequent executive order authorized the limited reopening of certain businesses, Ocean Walk resumed operations approximately three months after it was initially ordered closed.

Following a reservation of rights, AGLIC, AIG, and IFCC denied coverage under their respective policies, save for coverage provided under an endorsement subject to a $1,000,000 sublimit. Ocean Walk then filed its action for declaratory judgment, damages, and other relief claiming it was entitled to up to $50,000,000 in coverage.  

Ocean Walk argued that it had sustained a “direct physical loss” of or “direct physical . . . damage” to its property due to “the presence of SARS-CoV-2 in its facilities and its government mandated temporary suspension of operations . . . .” Further, Ocean Walk argued that the contamination exclusion in the policies did not apply to bar coverage for its claims. 

The policies issued by AGLIC, AIG, and IFCC contained identical insuring agreements, in that each policy insured “‘against direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property, at an Insured Location,’ subject to the terms, conditions, and exclusions stated in the policy.” The policies also contained a “contamination exclusion” providing, in part, that the policies

exclude[] the following unless it results from direct physical loss or damage not excluded by this Policy:

      Contamination, and any cost due to Contamination including the
      inability to use or occupy property or any cost of making property safe
      or suitable for use or occupancy, except as provided by the Radioactive
      Contamination Coverage of this Policy . . . .     

The policies defined “contamination” 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 Decision

The trial court denied the motions to dismiss filed by AGLIC, AIG, and IFCC. Specifically, the trial court held: 

(1) that Ocean Walk’s alleged business losses constituted a “direct physical loss” of or “direct physical . . . damage” to its property, and (2) that those losses were not excluded from coverage under the policies' contamination exclusion.

First, the Supreme Court held that “in order to show a ‘direct physical loss’ of its property or ‘direct physical . . . damage’ to its property under the policy language at issue, Ocean Walk was required to demonstrate that its property was destroyed or altered in a manner that rendered it unusable or uninhabitable.” The Supreme Court then found that Ocean Walk did not sufficiently plead a “direct physical loss” of or “direct physical . . . damage” to its property. The Supreme Court’s decision is in accord with the majority of federal and state courts applying the policy language “direct physical loss” of property or “direct physical . . . damage” to property to alleged damages arising out of the COVID-19 pandemic.  

Second, although having disposed of Ocean Walk’s claims, the Supreme Court addressed Ocean Walk’s argument regarding the contamination exclusion. Ocean Walk argued on two fronts that the contamination exclusion did not bar coverage for its claim: the definition of “contaminants” did not include a “virus” or “pathogen or pathogenic organism,” and the contaminants exclusion should only exclude environmental pollution risks, as the Supreme Court’s decision in Nav-Its, Inc. v. Selective Insurance Co. of America, 183 N.J. 110, 869 A.2d 929 (2005) held that the “pollution exclusion” only applied to “traditional environmentally related damages.” Significantly, the Supreme Court found that its decision in Nav-Its “d[id] not govern this appeal.” 

The Supreme Court disposed of Ocean Walk’s first argument after finding that the contamination exclusion did not rely on the defined term “contaminants” but instead used the defined term “contamination”, which included “any condition of the property due to the actual presence” of any “pathogen or pathogenic organism,” or “virus.  

The Supreme Court also disposed of Ocean Walk’s argument relying on Nav-Its. The Supreme Court differentiated Nav-Its on the basis that the exclusion in Nav-Its “was exclusively a ‘pollution exclusion’” and “did not exclude coverage for the specific claim at issue in that case,” whereas the contamination exclusion 

bars coverage not only for certain claims premised on loss or damage caused by a “pollutant” but also for certain claims premised on loss or damage resulting from other causes. Those causes include the presence of a “virus” or a “pathogen or pathogenic organism” on covered property.

The Supreme Court thus declined the “limited reading” advocated for by Ocean Walk. The Supreme Court further distinguished Nav-Its on the basis that a significant consideration in Nav-Its was the history behind New Jersey regulators’ approval of the pollution exclusion and how there was “no analogous contention that insurance regulators were misled by the defendant insurers or their representatives about the import of the contamination exclusion.” The Supreme Court concluded that Ocean Walk’s allegations fell “squarely within” the contamination exclusion, barring coverage for Ocean Walk’s claims. 

Takeaways for Insurers

AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Company, et al., is not just another case in which courts have declined to find insurance coverage for alleged damages arising out of the COVID-19 pandemic. In this decision, the New Jersey Supreme Court has limited the application of Nav-Its, Inc. v. Selective Insurance Co. of America, 183 N.J. 110, 118-24, 869 A.2d 929 (2005) to pollution exclusions, and not to contamination exclusions generally. Insurers issuing policies in New Jersey can now expect contamination exclusions will be applied as written.