The far-reaching effects of the coronavirus pandemic raised numerous complex legal and insurance issues. One of the most contentious areas of dispute has been the scope of business interruption insurance coverage for pandemic-related losses.
Various businesses, including casino properties, had purchased business interruption insurance policies to protect against financial losses caused by unforeseen events.
Although the gambling sector in New Jersey has surpassed pre-Covid levels in activity and revenues, operators had to file insurance claims to recoup losses due to pandemic business interruptions. However, many insurers have denied their claims related to COVID-19 interruptions, arguing that such losses aren’t covered under their policies.
A closely watched case currently making its way through the New Jersey Supreme Court could provide much-needed clarity on this issue. The case, Ocean Casino Resort v. American Guarantee and Liability Insurance Company, involves a dispute between the Atlantic City property and its insurers over whether the casino’s losses due to the COVID-19 closures are covered under its business interruption policy.
Ocean Casino filed a $20 million claim under its multi-million business interruption insurance policy, citing the mandated closure as triggering coverage. However, the insurers denied the claim on the basis that there was no “direct physical loss or damage” to the casino, a key condition of coverage.
New Jersey’s top court is anticipated to render a judgment on insurance exclusions pertaining to the impact of COVID-19.
What we cover
Background: Covid-19 Pandemic Business Interruptions
In March 2020, New Jersey Governor Phil Murphy issued an executive order mandating the closure of all non-essential businesses, including Atlantic City casinos, to curb the spread of the coronavirus.
The nine Atlantic City casinos, including Ocean Casino, were forced to shut down on March 16th and remained closed for over three months. Despite online casinos in New Jersey gaining impressive footing, closures dealt a blow to land-based properties, which reported combined losses amounting to $112 million in the second quarter of 2020.
The Facts of the Case
Ocean Casino filed a $20 million claim under its $50 million policy after being forced to close for over three months in 2020 due to the COVID-19 outbreak and state shutdown orders. Specifically, Ocean incurred a loss of $11.8 million during Q2 2020, representing a significant decline from the $1.2 million loss reported in the second quarter of 2019, according to AP News.
While the policy covered business interruptions from physical damage, the casino’s claims for compensation were rejected by its three insurers.
Together, Interstate Fire & Casualty Company, American Guarantee & Liability Insurance Co., and AIG Specialty Insurance Company denied Ocean’s claim on the grounds that the virus did not cause any direct physical loss or damage.
Ocean Casino went to court and successfully defeated the insurers’ attempt to dismiss the case. However, the casino’s victory was short-lived as an appellate court later overturned the decision.
The same issue has been witnessed in various state and federal courts. There have been instances across the nation where compensation was refused, such as in the cases of a series of California movie theaters, a real estate company in Los Angeles, a cluster of hotels in Pennsylvania, as well as a group of hotels and a law firm in New Jersey.
The Legal Issues: Ocean Casino vs. Insurers
The New Jersey Supreme Court heard oral arguments last month in a closely-watched business interruption insurance dispute between Ocean Casino Resort and its three insurers.
The central legal issue in the case is whether Ocean Casino’s losses due to the COVID-19 pandemic constitute “direct physical loss or damage” under the terms of its business interruption policy.
The insurance companies’ legal representatives contended that their policies explicitly encompassed viruses as part of the items that could be exempted from coverage. They asserted that the casino failed to specify the actions it was compelled to undertake to rectify or eliminate the virus.
Insurers’ lawyers emphasized that the closure of the casinos was solely attributed to an order issued by New Jersey Gov. Phil Murphy on March 16, 2020, which mandated their closure until July 2 of the same year.
In its court filing, Ocean Casino argues that the presence of Covid-19 in its facility did cause physical harm. The casino points to the extensive safety measures it implemented in response to the pandemic, such as installing new air filtration systems and using industrial-strength cleaning supplies.
The casino operator maintains that these measures were necessary to protect its guests and employees from the virus and that they demonstrate that the casino suffered physical damage as a result of the pandemic.
Ocean argued in court documents that resolving this generational legal dispute is crucial for providing much-needed clarity to the numerous New Jersey policyholders and their insurers impacted by the pandemic.
The insurers, on the other hand, argue that the term “direct physical loss or damage” must be interpreted narrowly to encompass only tangible, visible damage such as that caused by storm, hail, or fire. They contend that the mere presence of a virus in a building does not constitute physical damage and that Ocean Casino’s losses are therefore not covered under the policy.
The judgment on whether to revive Ocean Casino’s claim for compensation due to a prolonged closure caused by COVID-19 will be delivered by the highest court in New Jersey. The outcome could provide much-needed clarity around coverage for pandemic-related losses.
The Potential Impact of the Case
The outcome of the Ocean Casino case could have a significant impact on businesses and insurers across the country. If the New Jersey Supreme Court rules in favor of Ocean Casino, it could set a precedent that government-mandated closures due to communicable diseases do constitute physical loss or damage under business interruption policies.
This could bolster coverage for policyholders facing similar circumstances in future outbreaks. However, if the court rules in favor of the insurers, it could provide clarity that disease-related closures often fall outside traditional business interruption coverage. Insurers may then seek to explicitly exclude pandemic risk from such policies moving forward.
Conclusion
The New Jersey Supreme Court’s decision in the Ocean Casino case is eagerly awaited by both policyholders and insurers. The court’s ruling could provide much-needed clarity on the scope of business interruption insurance coverage for pandemic-related losses. It could also influence how future policies are written to better address non-physical losses from communicable diseases.
