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In GK Trading LLC v. Chubb Group of Insurance Cos. et al., the Superior
Court of New Jersey dismissed an apparel company’s suit seeking to have a Chubb
unit cover its losses arising from the coronavirus outbreak. Specifically, Plaintiff
alleged that COVID-19 microbial matter attached to the surfaces within its Covered
Locations and thereby caused direct physical loss and damage constituting a business
interruption loss. Superior Court Judge Rachelle Lea Harz disagreed, holding the
alleged presence of COVID-19 at its locations did not constitute the “direct physical
loss or damage” to property needed to trigger coverage.
Plaintiff GK Trading, LLC d/b/a Apparel Solutions filed a Complaint
asserting three causes of action: (1) declaratory judgment; (2) bad faith; and (3)
breach of contract. Each cause of action was based on Plaintiff’s allegations that it
had sufficiently established that it was entitled to coverage under the Policy and
turned on the determination of whether Federal met its obligations under the Policy.
According to Plaintiff, “…COVID-19 microbial matter attached to surfaces within
properties, causing the spread of the virus and rendering the property physically
damaged.” The lawsuit alleged the business lost at least $3 million after government
orders forced it to close a warehouse and shipping facility in the Garden State and a
Manhattan showroom. Federal denied coverage for Plaintiff’s insurance claim on the
grounds that Plaintiff’s alleged loss was not due to “direct physical loss or damage”
to insured property and “there was no prohibition of access” to the Covered
In an oral decision, Superior Court Judge Rachelle Lea Harz granted Federal
Insurance Co.’s motion to dismiss the suit, stating that Plaintiff’s claims “are
insufficient to create a factual or legal basis which establishes coverage under the
Federal policy because such allegations do not constitute” direct physical loss or
damage to the company’s locations. Judge Harz cited opinions handed down last year
by her fellow Bergen County judges in Highgate Hotels LP et al. v. Liberty Mutual
Fire Insurance Co. et al. and Capri Holdings Ltd. v. Zurich American Insurance Co.
et al. Both of those rulings nixed pandemic-related coverage suits due to the lack of
property damage. In Highgate Hotels, for example, Superior Court Judge Robert C.
Wilson ruled that the alleged presence of COVID-19 at that company’s properties
2 A-0716-19 across the country did not constitute “direct physical loss or damage” to trigger
pandemic-related insurance coverage under a $600 million program from a Liberty
Mutual unit and other insurers. Based on those two decisions, according to Judge
Harz, GK Trading’s allegation about COVID-19 at its locations “do not constitute
‘direct physical loss or damage’ to property because COVID-19 can be removed by
routine cleaning practices.”
Judge Harz similarly rejected GK Trading’s so-called “loss of use” theory.
“New Jersey state and federal courts have found that, in the COVID-19 context, an
insured’s inability to use its properties for its intended purpose and continue its
business operations does not constitute ‘direct physical loss or damage’ when there
is no actual physical alteration to the insured’s property in connection with the
ceasing of operations,” Judge Harz said.
This decision is consistent with previous New Jersey decisions, holding that
direct physical loss or damage requires an insured to show a distinct, demonstrable,
and physical alteration of a structure in order to trigger coverage.