New Jersey Federal Court Upholds Exclusion Language Related to COVID-19 Claims

by Greg J. Guido, Esq.

The COVID-19 pandemic has taken a considerable toll upon large and small businesses alike. From governmental lockdowns of non-essential businesses in 2020 to supply chain shortages, the pandemic has had a devastating effect on businesses since it arrived on United States soil.  Many business owners maintain all-risk insurance policies, insuring a variety of risks a business may face. One of the insurance coverages available to businesses within these polices is for loss of business which is designed to cover the actual loss of income due to the suspension of business operation. Just as hurricanes, fire and flood are business operation risks, the pandemic has challenged businesses to stay open.

Courts in New Jersey have been faced with an influx of litigation related to business income losses related to the pandemic. Specifically, this occurs where businesses seek such coverage after their insurance carriers deny their claims.

The United States District Court of New Jersey has recently addressed the interplay of business income coverage and exclusions to coverage related to viral activity. In Cedar Run Orthodontics, P.A. v. Sentinel Insurance Company, Civil No. 20-08156 (RBK/SAK) (November 1, 2021), Judge Robert Kugler of the District Court of New Jersey weighed the viability of coverage for lost business income where the all-risk policy contained an exclusion for “viral activity.” The plaintiff in Cedar Run, a dental practice, was compelled to cease operations due to Governor Phil Murphy’s executive order on March 9, 2020, declaring a state of emergency due to the spread of COVID-19. This triggered a claim for the loss of income incurred as a direct result. Plaintiff’s all-risk insurance carrier denied coverage arguing that the plaintiff’s loss of business income was a result of viral activity, namely COVID-19. 

The Court held that this exclusion was unambiguous and that coverage was properly denied as plaintiff’s loss of income was caused by the COVID-19 pandemic. The court concluded that this exclusion did not violate New Jersey public policy. This ruling now appears to be the new standard for insurance coverage in New Jersey where a business suffers a loss of income from the pandemic. If this decision is appealed to the Third Circuit of the Federal Court, we will follow it closely. What can you do to protect yourself with this information in hand? First, you should have your business policies reviewed by your insurance agent and broker or experienced insurance attorneys to advise you about your rights if you suffer business income loss from COVID-19.