Immediately following the initial outbreak of COVID-19, several insurance companies publicly declared that policyholders are not entitled to business interruption coverage if their property policies contain a virus exclusion. As a result, many policyholders have been discouraged by a virus exclusion in their property policies. The virus exclusion, however, may not be dispositive.
In fact, for purposes of exclusions in property policies, New Jersey has adopted the efficient proximate cause doctrine. This doctrine states that the cause of a loss is either the first precipitating event or the final damage-inducing act.
Applying this doctrine, policyholders have argued that while the precipitating cause of their loss may have been the coronavirus, the final act causing loss was the governmental order that closed down their businesses. Since the government order is the efficient proximate cause of the loss, the virus exclusion should not apply.
The New Jersey Supreme Court established the efficient proximate cause doctrine in Auto Lenders Acceptance Corp. v. Gentilini Ford Inc.[1] There, an employee of the defendant had falsified credit information in connection with several automobile sales transactions. The court was tasked with determining whether a direct physical loss had occurred as result of the employee's dishonest acts. The court noted:
Where a peril specifically insured against sets other causes in motion which, in an unbroken sequence and connection between the act and final loss, produces the result for which recovery is sought, the insured peril is regarded as the proximate cause of the entire loss ... In other words, it has been held that recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.[2]
Further, in Simonetti v. Selective Insurance Co.[3] homeowners discovered mold growth in their home two months after a severe rainstorm. The insurance policy at issue contained a fungi exclusion, which, in relevant part, stated: "[w]e do not insure, however, for loss: [c]aused by ... mold."[4] The homeowner's argued that the mold was a direct physical loss to the home caused by water intrusion from the rain storm — a covered loss. The Appellate Division ultimately found there were genuine issues of material fact, and stated…..