New Jersey Court Greenlights Covid-19 Business Interruption Insurance Coverage Suit

A New Jersey state court has now ruled on insurance coverage for Covid-19 business interruption, and its decision is favorable for policyholders.  In Optical Services v. Franklin Mutual Insurance Company, the policyholder sought coverage for its Covid-19 business interruption loss.   The insurance company moved to dismiss, arguing that there was no ‘direct physical loss or damage’ alleged in the complaint.  The policyholder countered the insurance company’s motion by arguing that pursuant to New Jersey law, and particularly the Wakefern decision, ‘direct physical loss or damage’ does not require a tangible change to property but just the loss of functionality.  The court found the policyholder’s argument ‘compelling’ in the context of a motion to dismiss, and denied the motion.

This decision follows the policyholder-favorable decision by the federal court for the Western District of Missouri in Studio 417, Inc. v. Cincinnati Insurance Co.  There, too, the insurance company moved to dismiss, arguing “direct physical loss requires actual, tangible, permanent, physical alteration of property.”  The court disagreed.  It found the policyholders’ complaint alleged a direct physical loss because it alleged “a causal relationship between COVID-19 and their alleged losses.”

Undeniably, several courts around the country have granted insurance companies’ motions to dismiss Covid-19 business interruption complaints.  However, such cases are distinguishable for at least two reasons.

First, courts dismissed many of these complaints because they failed to actually allege, or even attempt to allege, any physical loss or damage.  These complaints were brought, by and large, by attorneys unfamiliar with insurance coverage litigation and simply failed to meet the pleading requirement.  To avoid dismissal, it is essential that every complaint allege in detail the physical impact of Covid-19.....