Wade Clark Mulcahy LLP

The New Jersey Superior Court Appellate Division recently affirmed a lower court order finding that a familiar favorite, Wawa Inc. was not owed coverage for its loss of business due to COVID-19 shut down orders because the convenience store could not show it suffered a “direct physical loss or damage” to its property. WAWA, INC., Plaintiff-Appellant, v. STARR SURPLUS LINES INSURANCE COMPANY et al., Defendants-Respondents., No. A-3820-21, 2024 WL 64216, at 7 (N.J. Super. Ct. App. Div. Jan. 5, 2024).

In its original complaint, Wawa sought a declaration that the defendants should pay the lost business income and extra expenses for losses suffered due to the global COVID-19 pandemic and related emergency shut down orders. Id at 1. Specifically, Wawa claimed it suffered a substantial loss of business when the emergency orders were in effect because its stores were rendered “nonfunctional” and “unusable” for the intended purpose, to serve on the go food. Id. at 5.

Wawa argued it suffered a direct physical loss of damages to its properties, triggering coverage under the Real and Personal Property, Business Interruption, Extra Expense, Expenses to Reduce Loss, and Contingent Business Interruption for Attraction Properties provisions of its insurance policies. Id. at 1. Wawa also claimed that the Contamination Exclusion and Mold, Mildew, and Fungus Clause/Microorganism Exclusion do not apply and are violative of New Jersey Public Policy. Id. Similar to the court’s reasoning in TORY BURCH, LLC, Plaintiff-Appellant, v ZURICH AMERICAN INSURANCE COMPANY, Defendant-Respondent., A-1566-21, 2023 WL 8450915 [NJ Super Ct App Div Dec. 6, 2023] which we previously commented on, the New Jersey appellate panel found that coverage depended on a “detrimental alteration” or “damage or harm to the physical condition of a thing,” as established in Mac Property Group LLC v. Selective Fire & Casualty Insurance Co., 278 A.3d 272 (N.J. Super. Ct. App. Div. 2022). Id. at 7. The court reasoned that because Wawa failed to allege facts establishing that it lost its “physical capacity to operate” or that its properties necessitated “any repairs, rebuilding, or replacement due to damage,” it did not suffer a “direct physical loss” and therefore coverage was not owed under its insurance policies. Id.

Furthermore, the court found that the Microorganism Exclusion was not ambiguous, and bar’s Wawa’s claims because COVID-19 is clearly a microorganism which possess a potential threat to human health. Id at 10. The New Jersey Superior Court Appellate Division has clearly set a precedent that losses due to COVID-19 emergency shut down orders are not “direct physical losses” under most insurance policies, and such losses are otherwise excluded under common Microorganism Exclusions.