Wade Clark Mulcahy LLP

Insurance coverage for commercial retail stores is an essential safeguard against potential risks and unforeseen circumstances. However, within these policies, exclusions can significantly impact the extent of coverage, especially when it comes to clauses pertaining to 'contamination.'

In the case of Tory Burch, LLC v. Zurich American Insurance Company in the Superior Court of New Jersey, Appellate Division, Plaintiff Tory Burch sought to appeal an order granting defendant Zurich American Insurance Company’s motion to dismiss because coverage was not afforded under the policy.

Tory Burch is an American women’s fashion brand with over 300 stores globally, with three located in New Jersey. Tory Burch purchased an all-risk insurance policy from Zurich for the policy period from December 31, 2019 to December 31, 2020, and renewed for the period from December 31, 2020 to December 31, 2021. The policy insures against “direct physical loss of or damage to” Tory Burch’s property. The policy also contains an exclusion barring coverage for “contamination”, meaning “the actual presence of any foreign substance… bacteria, virus, disease causing or illness causing agent…”, including the inability to use or occupy property.

As we all know, in response to the global COVID-19 pandemic, Governor Phil Murphy of New Jersey declared a state of emergency and issued executive orders to suspend all non-essential business operations, including retail stores such as Tory Burch. As a result, Tory Burch was forced to close its business to the public from March to May 2020. Tory Burch alleges it suffered substantial losses of business and income due to the executive orders.

Defendant Zurich denied Tory Burch’s claim, stating that there was no coverage for COVID-19 losses and that the contamination exclusion barred coverage. Tory Burch then sued Zurich in New Jersey’s Union Superior Court in March 2021 for breach of contract. In response, Zurich filed a motion to dismiss which was granted by the trial court. Tory Burch appealed, arguing that the executive orders constituted physical loss or damage to the business, and that the contamination exclusion did not bar coverage. Tory Burch argued that it was the executive order that closed the business, not COVID-19. As such, Tory Burch argued that the contamination exclusion should not apply. The Appellate Court rejected this argument and upheld the trial court’s order.

The Appellate Court reasoned that the governor’s orders prevented Tory Burch from operating its business, but it did not “physically deprive the company from possessing it” so there was no direct or physical loss. The Appellate Court also found that the contamination exclusion applied because COVID-19 was the cause of the governor’s orders, and therefore coverage was barred.

Plaintiff further argued that the Policies’ Contamination Exclusion violated the doctrine of regulatory estoppel, and the trial court should have barred defendant from invoking the Exclusion. The basis of Plaintiff’s argument was that the insurance industry misrepresented the scope of the Exclusion language as it sought approval of the Virus Exclusion from regulators by claiming the Exclusion would not result in a reduction of coverage. However, the appellate court affirmed the trial court’s findings that the doctrine of regulatory estoppel cannot serve to estop the exclusion based on what defendant represented to another sovereign. The appellate court held that the record was devoid of any evidence of a false statement or misrepresentation to a regulatory body regarding the scope of the virus exclusion and rejected Plaintiff’s argument.

The holding in this case directly follows the reasoning of a previous New Jersey case, Mac Property Group LLC v. Selective Fire & Casualty Insurance Co., 278 A.3d 272 (N.J. Super. Ct., App. Div. 2022). COVID-19 has impacted various commercial businesses. Case law is now emerging that provides some insight for how the courts will handle the pending insurance claims related to various aspects of COVID-19.