Very early on, our firm decided not to get involved in the COVID-19 business interruption coverage wars. Our reasons were simple.
First, we knew that the insurance industry would treat these claims as a threat to their very existence (or at least would say that to judges in an effort to dodge coverage). Therefore, the claims would be very difficult to settle. To be successful, policyholders and their lawyers would need to commit substantial resources to the battle, probably for a long period of time. So, we advised our clients to file their claims, let others fight the coverage battles, and see how the trends developed.
Second, we knew that many judges, especially at the federal level, tend to be sympathetic to the insurance industry, and would engage in logical gymnastics to construe undefined terms in insurance policies (like “direct physical loss”) in favor of carriers, regardless of the way the rules of construction are supposed to work. (Note: Under the laws of every state, policyholders are supposed to get the benefit of the doubt.)
Third, many of the calls we received from potential clients were for claims that were in the low six figures. That is a substantial amount for normal human beings and small businesses, but in the meatgrinder known as our legal system, it usually doesn’t justify a protracted and potentially expensive litigation.
Sure enough, many judges faced with COVID-19 business interruption claims have (most helpfully for the insurance industry) defined the undefined terms in the policies in favor of the carriers. (For an excellent scorecard listing COVID-19 coverage cases around the country, click here.) Recently, though, a retired New Jersey Appellate Division Judge temporarily assigned to the Superior Court in Atlantic County essentially said, “Not so fast.” The Atlantic County decision is remarkable because of the Court’s actual adherence to, and enforcement of, the rules of construction, which many Courts cite and then basically ignore. (The official citation for the decision is AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Company, et al., Docket No. ATL-L-0703-21. You can access a free copy over at the Hunton Andrews Kurth insurance recovery blog here.)
Facts: The policyholder, AC Ocean Walk, LLC, owns a casino in Atlantic City. The casino was shut down because of COVID-19. The policyholder contended that the virus had actually been present on the grounds of the casino, rendering the casino unusable and satisfying the amorphous policy requirement of “direct physical loss.” The policyholder contended that, as a result, it was entitled to enforce its business interruption coverage. The carriers naturally disagreed.
The key passage from Judge Winkelstein’s opinion denying the carriers’ motion to dismiss was as follows:
“Plaintiff submits, and for purposes of this [motion to dismiss] the court accepts as true, that the primary source of the casino’s revenue was its casino floor and guest accommodations, which were eliminated and destroyed by the presence and the imminent threat of the COVID-19 [sic], in the air space and on the surfaces, rendering those parts of the property functionally useless and not fit for their intended purpose…the insurers here did not define the term ‘physical damage.’ The language is ambiguous. It can be used to support Ocean’s, as well as the carrier’s, positions as to the meaning of the insuring agreements. If there is more than one possible interpretation of the language, courts apply the meaning that supports coverage rather than the one that limits it.” [Cleaned up; citations omitted; emphasis mine.]
The Court also held that the so-called pollution exclusion did not apply to negate coverage, because it was designed to apply to traditional industrial pollution. With respect to one of the carriers, however, the Court granted the motion to dismiss, based upon a specific biological substance exclusion.
Insurance industry commentators may say that Judge Winkelstein’s decision is wrongheaded and outcome-oriented. It isn’t. It simply follows the rules of construction that Courts are supposed to follow. In fact, the world would be a better place if insurance company claims personnel were trained that “If there is more than one possible interpretation of the language,” they should “apply the meaning that supports coverage rather than the one that limits it,” to use Judge Winkelstein’s words. But they won’t be trained that way, for the economic reasons stated in Professor Jay Feinman’s excellent book, “Delay, Deny, Defend: Why Insurance Companies Deny Claims and What Your Can Do About It,” which is available on Amazon.
The AC Ocean Walk case shows that, in any disputed claim, policyholders must repeatedly and loudly emphasize the rules of construction, which are supposed to work in their favor to even the playing field with the insurance industry. (“Playing field” is probably the wrong analogy, since for many policyholders insurance is not a game, but the only thing standing between them and financial ruin.)