Why New Jersey Companies May Have First-Party Property Insurance Coverage for Coronavirus Business Interruption and Disruption

Many commentators are analyzing whether insurance coverag will exist for business interruption and supply chain disruption caused by the coronavirus crisis. Most conclude that the physical injury requirement under a property policy will be a major roadblock to coverage. However, two New Jersey cases indicate courts can interpret “physical injury” broadly to find coverage for business closures and loss of functionality resulting from events that don’t involve physical alteration to tangible property.

Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co.1 involved the power blackout of 2003. Wakefern, a retailer-owned cooperative group of supermarkets, purchased insurance coverage for damage caused by an interruption of electric power. The policy stated that the interruption had to be the result of physical damage, which the policy did not define. Liberty Mutual argued that the blackout did not result from physical damage, but from “the deenergizing of transmission lines by the proper operation of protective relay devices.”2 The trial court agreed, and the New Jersey Appellate Division reversed.

The Appellate Division found that “based on the highly technical analysis” in the utility’s report, “one could certainly argue that the system was not physically damaged.”3 The court found that from the point of view of the consumers, however, “the system certainly suffered physical damage, because it was incapable of providing electricity.”4 The court held that the term “physical damage” was ambiguous and had to be construed in favor of coverage. The court discussed several cases from other jurisdictions inwhich courts construed physical damage broadly as loss of functionality.