Bergen County Superior Court Judge Michael N. Beukas ruled against a motion by Franklin Mutual Insurance Co., which sought to dismiss a lawsuit filed by Optical Services USA. The vision services company filed suit against the insurer for refusing to cover business income losses caused by New Jersey Governor Phil Murphy’s state-ordered lockdown.
Judge Beukas said, “The term ‘physical’ can mean more than material alteration or damage.” Therefore, he ruled, the burden is on the insurer to show why the loss isn’t covered by the business owner’s policy.
The judge commented during a telephone conference on Aug. 13. The law firm representing Optical Services said the decision contradicts the non-coverage interpretation the insurance industry has promoted in its attempts to encourage policyholders not to seek coverage for their pandemic-related losses.
That non-coverage story has worked for insurers in most of the cases which have ruled against businesses so far. A Michigan state judge as well as federal judges in Texas, California, New York and the District of Columbia have dismissed several Covid-19 lawsuits. Their summary judgments against plaintiffs have often found that coverage is not owed unless there is some tangible physical damage to properties.
Prior to the Optical case ruling, U.S. District Judge Stephen R. Bough in Kansas City, Mo. was the only judge to rule against a motion to dismiss a lawsuit filed against a Covid-19 business-interruption claimant. Judge Bough ruled in Studio 417 v. Cincinnati Insurance that because the plaintiff alleged that coronavirus was physically present on the property, the case should proceed.
Optical, however, did not claim that it was forced to shut down because a coronavirus was present on its property. The company argued that the civil authority order which forced the business to close amounted to a covered physical loss of the property.
A virus exclusion slipped into many business interruption policies after the SARS “outbreak” of 2003 read that businesses would not be covered for losses in the event that a virus could be blamed for the losses. Like many policies, Optical’s also excluded damages caused by virus contamination. However, both the insurer and the plaintiff in this case agreed that the virus exclusion does not apply.
One attorney who wrote of the ruling thought the insurance company erred in not claiming the virus exclusion applied to Optical’s policy. Judges in several other cases had ruled that virus exclusions barred lawsuits that sought coverage for income lost due to virus-related business closure orders.
Judge Beukas said Optical Services USA makes an “interesting argument” and a “novel theory of insurance coverage” which warrants discussion. His ruling took note of related cases in which New Jersey courts have ruled in favor of plaintiffs who sought coverage for lost income caused by an ammonia leak and a power outage.
Attorney David Matthews – whose law firm handles business interruption cases due to Covid-related shutdowns – said New Jersey case law supports Judge Beaukas’ finding that even an intangible loss is covered by commercial property policies.
Physical Loss or Damage to Property
Physical loss or damage to property has been the operative language hurdle many businesses face in seeking coverage for Covid-shutdown-related losses. Mr. Matthews said that New Jersey law is not unique in that regard, and that other courts in New Jersey have not required tangible alteration to property as a condition to finding physical loss or damage to property. He also said similar decisions have been handed down in other state courts across the USA.
Covid-19 Litigation Tracker Update
A Covid-19 litigation tracker posted by the University of Pennsylvania Carey Law School shows that 891 business interruption lawsuits have been filed over Covid. Many, like Optical, seek coverage for income lost because of civil authority orders. In addition, 1,033 lawsuits have been filed in an effort to seek reimbursement for lost business income due to Covid-19 closures ordered by state or local government figures. Another 913 lawsuits seek coverage for extra expenses caused by the suspected virus.
“We are in for a long war over coverage for Covid-19 business interruption losses,” said Mr. Matthews. “Business owners would be wise to review their policies as soon as they can, then consult with insurance professionals before deciding their next move. Anyone who has ever read an insurance policy knows just how complicated determining coverage can be.”
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