Capri Holdings Limited v. Zurich American Insurance Company

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3551-20

CAPRI HOLDINGS LIMITED,
a British Virgin Islands
Corporation,

Plaintiff-Appellant,

v.

ZURICH AMERICAN
INSURANCE COMPANY,
a New York Corporation,
XL INSURANCE AMERICA,
INC., a Delaware Corporation,
MITSUI SUMITOMO
INSURANCE COMPANY OF
AMERICA, a New York
Corporation, LIBERTY
MUTUAL FIRE INSURANCE
COMPANY, a Wisconsin
Corporation, ALLIANZ
GLOBAL CORPORATE AND
SPECIALTY SE, a German
Corporation, and AIG
SPECIALTY INSURANCE
COMPANY, an Illinois
Corporation,

Defendants-Respondents.
______________________________
Argued February 15, 2023 – Decided December 18, 2023

Before Judges Accurso, Vernoia, and Firko.

On appeal from the Superior Court of New Jersey, Law
Division, Bergen County, Docket No. L-2322-21.

Joseph D. Jean (Pillsbury Winthrop Shaw Pittman,
LLP) argued the cause for appellant (Joseph D. Jeann,
Janine M. Stanisz (Pillsbury Winthrop Shaw Pittman,
LLP), and Scott D. Greenspan (Pillsbury Winthrop
Shaw Pittman, LLP) of the New York and District of
Columbia bars, admitted pro hac vice, attorneys; Joseph
D. Jean, Scott D. Greenspan, and Janine M. Stanisz, on
the briefs).

Charles A. Booth (Ford Marrin Esposito Witmeyer &
Gleser, LLP) argued the cause for respondent Zurich
American Insurance Company (Charles A. Booth, John
A. Mattoon, Jr., Michael L. Anania (Ford Marrin
Esposito Witmeyer & Gleser, LLP) of the New York
bar, admitted pro hac vice, and Squire Patton Boggs
(US) LLP, attorneys; Charles A. Booth, Michael L.
Anania, John A. Mattoon, Jr., and Lauren S. Kuley
(Squire Patton Boggs (US) LLP) of the New York and
Ohio bars, admitted pro hac vice, on the briefs).

Clyde & Co US LLP, Finazzo Cossolini O'Leary Meola
& Hager LLC, Dentons US LLP, Alexander Cogbill
(Zelle LLP), and Dan Millea (Zelle LLP) of the
Minnesota bar, admitted pro hac vice, attorneys for
respondents Allianz Global Corporate & Specialty, SE,
XL Insurance America, Inc., Liberty Mutual Fire
Insurance Company, and AIG Specialty Insurance
Company join in the brief of respondent Zurich
American Insurance Company.

A-3551-20
2
 Michael J. Quirk (Motley Rice LLC) of the
Pennsylvania, District of Columbia, and New York
bars, admitted pro hac vice, argued the cause for amicus
curiae New Jersey Association for Justice (Motley Rice
LLC, attorneys; Esther Berezofsky, on the brief).

Reed Smith, LLP, Kevin V. Small (Hunton Andrews
Kurth, LLP), and Lorelie S. Masters (Hunton Andrews
Kurth, LLP) of the District of Columbia bar, admitted
pro hac vice, attorneys for amicus curiae United
Policyholders (Lorelie S. Masters and Kevin V. Small,
on the brief).

Daniel E. Bryer (Robinson & Cole, LLP), attorney for
amicus curiae Insurance Council of New Jersey and
American Property Casualty Insurance Association.

The opinion of the court was delivered by

FIRKO, J.A.D.

In this insurance coverage dispute based on claims arising out of the

COVID-19 pandemic and the Executive Orders (EO or EOs) issued in response

to the pandemic, plaintiff Capri Holdings Limited (Capri) appeals from five

orders entered on June 25, 2021, dismissing its 104-page third amended

complaint for declaratory relief with prejudice against defendants Zurich

American Insurance Company (Zurich), XL Insurance America, Inc. (XL),

Liberty Mutual Fire Insurance Company (Liberty), Allianz Global Corporate

and Specialty SE (Allianz), and AIG Specialty Insurance Company (AIG)

(collectively defendants).

A-3551-20
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 Capri sought a declaration that defendants should pay the lost business

income and extra expenses it incurred while its stores were closed and later

reopened with restrictions on use, contending defendants breached their policies

by denying coverage.

Capri argued it suffered a direct physical loss of damage to its properties,

triggering coverage under the Property Damage, Time Element, and Special

Coverages & Described Causes of Loss (the "Civil or Military," "Contingent

Time Element," and "Protection and Preservation of Property" provisions)

sections of its policies. Capri also contended the Contamination Exclusion

provisions in its Policies do not apply and are violative of New Jersey public

policy. After the trial court rejected those arguments, we considered and

rejected the same arguments as applied to almost identical insurance policies.

See Mac Prop. Grp., LLC v. Selective Fire & Cas. Ins. Co., 473 N.J. Super. 1

(App. Div.) cert. denied, 252 N.J. 258 (2022).

We granted leave to United Policyholders and the New Jersey Association

for Justice to file amici curiae briefs, which support Capri's contentions. We

also granted leave to the Insurance Council of New Jersey and American

Property Casualty Insurance Association to file amici curiae briefs, which

support defendants' contentions. Because our holdings and reasonings in Mac

A-3551-20
4
Property apply to Capri's policies, we affirm the order dismissing Capri's third

amended complaint with prejudice.

I.

We glean the facts from the third amended complaint. Capri is a luxury

fashion retailer and owner of Versace, Jimmy Choo, and Michael Kors. Capri

is a corporation formed under the laws of the British Virgin Islands having

principal executive offices in the United Kingdom. As of March 2020, Capri

operated 1,271 stores located in thirty-five countries. Capri maintains a

corporate office, three warehouses, and operates eighteen stores in New Jersey.

It employs approximately 587 individuals in this state and 17,000 individuals

worldwide.

Capri purchased a high-end All Risk Commercial Insurance Policy with

defendant Zurich for the policy period March 14, 2019, to March 14, 2020. The

following year, Zurich sold Capri the same All Risk Commercial Insurance

Policy, but this time issued the policy as part of a quota share program. 1 The

1
A "quota share program" is a type of reinsurance where the reinsurer and
ceding insurer enter a contract to share a prearranged proportionate percentage
of any loss sustained on the insured property. See 7 Daniel W. Gerber et al.,
New Appleman on Insurance Law Library Edition § 71.02[4][a] (2023 ed.);
Cent. Nat'l Inc. Co. v. Devonshire Coverage Corp., 426 F. Supp. 7, 11 n.5 (D.
Neb. 1976).

A-3551-20
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Policy covering the period from March 14, 2020, to March 14, 2021, with a

$250,000,000 dollar limit, is shared by and among Zurich, XL, Liberty Allianz,

and AIG.2

The two policies are identical in certain material respects. Under the

provision entitled "Insuring Agreement," both policies insure "against direct

physical loss of or damage caused by a Covered Cause of Loss 3 to Covered

Property, at an Insured Location," unless the loss was excluded or limited under

the policies. The Covered Property provisions in each Policy provides for the

cost or repair of covered "buildings (or structures) including new construction,

additions, alterations, and repairs that the Insured owns, occupies, leases, or

rents." The Property Damage coverage pertains to Capri's interest in buildings,

personal property, and property of others in Capri's custody and control.

Among the exclusions in the Policies is one for contamination. The

Contamination Exclusion denies coverage for contamination and costs due to

2
Defendant Mitsui Sumitomo Insurance Company of America (Mitsui) also
shared in the remaining limits under the 2020/2021 policy. On August 30, 2021,
Capri and Mitsui entered into a stipulation of dismissal. Capri and Mitsui agreed
to suspend and toll for two years any applicable statutes of limitations, statutes
of repose, and time-bar defenses that they may have against the other party
relative to this litigation.
3
Emphasis in bold is in the original.
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contamination, "including the inability to use or occupy property or any cost of

making property safe or suitable for use or occupancy." The policies define

"contamination" as "any condition of property due to the actual presence of any

foreign substance, impurity, pollutant, hazardous material, poison, toxin,

pathogen or pathogenic organism, bacteria, virus, disease causing or illness

causing agent, Fungus, mold or mildew."

Central to this appeal are Capri's coverage claims for lost income. The

"Time Element" coverage provision provides that defendants will pay for losses

resulting from the necessary suspension of Capri's business activities at an

insured location. But the Time Element loss "must be due to direct physical loss

of or damage to Property . . . caused by a Covered Cause of Loss at the

Location." "Period of Liability" applies to all Time Element Coverages , which

"start[s] from the time of physical loss or damage of the type insured against and

ending when with due diligence and dispatch the building and equipment could

be repaired or replaced, and made ready for operations under the same or

equivalent physical and operating conditions that existed prior to the damage."

The Time Element coverage provision applies to property leased to Capri

if the building becomes "untenantable or unusable" in whole or in part or the

lessor cancels the lease. In addition, the Time Element coverage includes an

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"Extra Expense" provision for additional amounts spent by Capri to resume and

continue business activities "over and above" its normal expenses due to direct

physical loss of or damage to the property.

In relevant part, three "Special Coverages" in the subject Policies apply to

lost income. First, Special Coverage exists based on "Civil or Military

Authority" when:

the necessary Suspension of the Insured's business
activities at an Insured Location if the Suspension is
caused by order of civil or military authority that
prohibits access to the Location. That order must result
from a civil authority's response to direct physical loss
of or damage caused by a Covered Cause of Loss to
property not owned, occupied, leased or rented by the
Insured or insured under this Policy and located within
the distance of the Insured's Location as stated in the
Declarations.

Second, there is a "Contingent Time Element" provision, which states the

policies cover losses resulting from "the necessary Suspension of the Insured's

business activities at an Insured Location if the Suspension results from direct

physical loss of or damage caused by a Covered Cause of Loss to Property (of

the type insurable under this Policy)."

And lastly, Special Coverage extends to the "Protection and Preservation

of Property," constituting "[t]he reasonable and necessary costs incurred for

actions to temporarily protect or preserve Covered Property; provided such

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actions are necessary due to actual or imminent physical loss or damage due to

a Covered Cause of Loss to such Covered Property." The policies also cover

"[t]he Gross Earnings loss or Gross Profit loss sustained by the Insured . . . after

the Insured first t[ook] reasonable action for the temporary protection and

preservation of Covered Property."

Beginning in early March 2020, Governor Murphy issued a series of EOs

to address the COVID-19 pandemic. EO 103, issued on March 9, 2020, declared

a public health emergency and state of emergency in New Jersey. Exec. Order

No. 103 (Mar. 9, 2020), 52 N.J.R. 549(a) (April 6, 2020). EO 104, issued on

March 16, 2020, among other things, limited the scope and hours of operation

for non-essential business operations, including retail. Exec. Order No. 104

(Mar. 16, 2020), 52 N.J.R. 550(a) (Apr. 6, 2020). EO 107, which became

effective March 21, 2020, implemented "social mitigation strategies" requiring

"every effort to reduce the rate of community spread of the disease." Exec.

Order No. 107 (Mar. 21, 2020) 52 N.J.R. 554(a) (Apr. 6, 2020).

The third amended complaint alleges that as a result of the COVID-19

pandemic, Capri was forced to close its stores across New Jersey and around the

world. Capri alleges it suffered a substantial loss of income and business—over

one billion dollars globally—when the EOs were in effect. According to Capri's

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third amended complaint, over 900 of its employees tested positive for COVID-

19, demonstrating the compelling presence of COVID-19 in its stores, in the air,

and on surfaces, indicating the transmission of the virus on its physical

properties. Capri alleged in its third amended complaint that a combination of

the foot traffic in its stores and positivity rates in the area of the "three operating

stores" proves it is "statistically certain" or "near certain" that customers and

individuals who visited its stores carried the Coronavirus.

Capri alleged the "risk of Coronavirus transmission" could not "be

completely removed with routine surface cleaning" because "no amount of

routine surface cleaning could remove the aerosolized Coronavirus suspended

in the air" in its stores. Thus, Capri alleged "the presence of the Coronavirus in

and on its properties, including in indoor air, on surfaces, and on objects, caused

direct physical loss of or damage to property by causing physical harm to and

altering property and otherwise making it incapable of being used for its

intended purpose." Capri also alleged its argument is supported by EO 157,

which permitted stores to re-open in a limited fashion and addressed COVID-

19's impact upon property, such as by mandating sanitization and cleaning

procedures.

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 However, defendants declined coverage because they alleged the policies

did not cover the COVID-19 related losses. In addition, defendants alleged

coverage was barred by the policies' Contamination Exclusions.

In response, Capri brought a lawsuit against defendants in the Chancery

Division, including nine counts for declaratory judgment and two counts for

breach of contract. Zurich moved to transfer the action to the Law Division,

which was granted. Capri filed a third amended complaint, which is the subject

of the orders under review, alleging the presence of COVID-19 rendered its

stores unusable and uninhabitable for several months.

Defendants moved to dismiss under Rule 4:6-2(e), arguing the plain

language of the policies do not provide coverage for the losses at issue. Capri

opposed defendants' motions, arguing that by alleging the temporary loss of its

stores due to "physical contamination" it asserted legally cognizable claims for

coverage under the policies such that it satisfied the pleading standard.

Following argument, the trial court granted the motions in an oral opinion and

dismissed Capri's third amended complaint with prejudice, finding Capri did not

plead claims upon which relief may be granted because there was no direct

physical loss of or damage to Capri's property entitling it to coverage under the

A-3551-20
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policies, and the virus exclusion otherwise excluded coverage for its claimed

losses.

The court found physical damage, as defined by case law, can only exist

as a result of contamination when the contamination rendered the premises

"useless or [un]inhabitable." Even accepting the allegations of the third

amended complaint as true, the court determined Capri did not allege "structural

alteration" to property or "physical contamination so severe as to render the

property totally inhabitable or unusable" as required by the terms of the subject

policies. The court emphasized the third amended complaint "does not allege

structural alteration or any need for repair of the physical premises."

The court found Capri's stores were "usable" with "proper cleaning

protocols and mask wearing." The court noted it was "undisputed there were

proper safety precautions, and the property was functional and useful." In

addition, the court held Capri did not allege that "any physical force had . . .

altered the physical condition of the property" and did not allege there existed

"severe physical contamination as to render the property unusable." The court

found there were no ambiguities in the policies, and Capri failed to allege the

Coronavirus "caused a direct physical loss or damage, which is a prerequisite to

coverage in this matter."

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 II.

Our review of a Rule 4:6-2(e) motion to dismiss for failure to state a claim

upon which relief can be granted is de novo. Baskin v. P.C. Richard & Son,

LLC, 246 N.J. 157, 171 (2021) (citing Dimitrakopoulos v. Borrus, Goldin,

Foley, Vignuolo, Hyman & Stahl, P.C., 237 N.J. 91, 108 (2019)). We "must

examine 'the legal sufficiency of the facts alleged on the face of the complaint,'

giving the plaintiff the benefit of 'every reasonable inference of fact.'" Ibid.

(quoting Dimitrakopoulos, 237 N.J. at 107). To determine the adequacy of a

pleading, we must decide "whether a cause of action is 'suggested' by the facts."

Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989)

(quoting Velantzas v. Colgate-Palmolive Co., 109 N.J. 189, 192 (1988)).

When "interpreting insurance contracts, we first examine the plain

language of the policy and, if the terms are clear, they 'are to be given their plain,

ordinary meaning.'" Pizzullo v. N.J. Mfrs. Ins. Co., 196 N.J. 251, 270 (2008)

(quoting Zacarias v. Allstate Ins. Co., 168 N.J. 590, 595 (2001)). The policy

must "be enforced as written when its terms are clear" so the "expectations of

the parties will be fulfilled." Flomerfelt v. Cardiello, 202 N.J. 432, 441 (2010)

(citations omitted).

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 If an insurance policy is ambiguous, courts will construe the terms in favor

of the insured. Mac Prop. Grp. LLC v. Selective Fire & Cas. Ins. Co., 473 N.J.

Super. at 18 (citation omitted). This doctrine only applies if there is a genuine

ambiguity in the contract, and "the phrasing of the policy is so confusing that

the average policyholder cannot make out the boundaries of coverage." Templo

Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189,

200 (2016) (quoting Progressive Cas. Ins. Co. v. Hurley, 166 N.J. 260, 274

(2001)).

"Exclusions in insurance contracts 'are presumptively valid and will be

given effect if [they are] "specific, plain, clear, prominent, and not contrary to

public policy."'" Mac Property, 473 N.J. Super. at 35 (quoting Princeton Ins.

Co. v. Chunmuang, 151 N.J. 80, 95 (1997)). Further, exclusionary provisions

"containing 'an anti-concurrent or anti-sequential clause' ha[ve] been interpreted

to unambiguously bar coverage for losses resulting in any manner from an

excluded cause." Id. at 37 (quoting Wear v. Selective Ins. Co., 455 N.J. Super.

440, 454-55 (App. Div. 2018)). "Thus, coverage is excluded for a loss

attributable to a given cause 'regardless of whether any other cause, event,

material or product contributed concurrently or in any sequence' to that loss."

Ibid. (quoting Wear, 455 N.J. Super. at 454).

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 III.

Capri argues it suffered a covered loss or damage because of the

Governor's EOs mandating business closures during the COVID-19 pandemic.

Capri contends the limitations imposed by the EOs resulted in physical loss or

damage to its properties. Capri argues the phrase "physical loss of or damage

to" found in the policies is ambiguous and should be interpreted in favor of

coverage under our jurisprudence. We are not persuaded.

Capri's arguments are virtually identical to those of the claimants in Mac

Property. In Mac Property, several plaintiffs sought declaratory judgments

enforcing Business Income and Civil Authority provisions to cover los ses they

incurred during the COVID-19 pandemic after being forced to shut down or

restrict their operations. 473 N.J. Super. at 9-10. We rejected their claim,

holding the term "direct physical loss of or damage to" was "not so confusing

that average policyholders . . . could not understand that coverage extended only

to instances where the insured property has suffered a detrimental physical

alteration . . . or there was a physical loss of the insured property." Id. at 21-22.

We concluded the motion courts appropriately dismissed the plaintiffs'

complaints with prejudice under Rule 4:6-2(e). Id. at 40.

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 In reaching that determination, we noted there were "scores of federal and

state appellate-level courts that . . . addressed" the issues raised by the plaintiffs

and [t]he overwhelming majority of them . . . granted defendant insurers'

motions to dismiss complaints seeking insurance coverage for business losses

due to government orders barring or curtailing [the insureds'] operations . . . to

curb the . . . pandemic because the losses were not due to physical loss or damage

to their insured premises. [Id. at 26-27.]

While New Jersey has "adopted a broad notion of the term 'physical'"

when the word is paired with another term, such as "physical injury," the

resulting phrase means "'detrimental alteration,' or 'damage or harm to the

physical condition of a thing.'" Id. at 20 (alteration in original) (quoting Phibro

Animal Health Corp. v. Nat'l Union of Fire Ins. Co., 446 N.J. Super. 419, 437-

38 (App. Div. 2016)). In Mac Property, we found it significant there was no

damage to any of the equipment or property of the businesses. Id. at 23.

Specifically, none of the plaintiffs alleged COVID-19 was present on their

properties, rendering them uninhabitable. Ibid. Instead, their losses were due

to "reductions imposed by [EOs] to curb the COVID-19 pandemic." Id. at 41.

Citing Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266, 1277

(Mass. 2022), we noted the distinction between "loss" and "damage" argued by

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the claimants in that case was "irrelevant . . . because the contention 'ignored'

the fact that the relevant coverage provisions provided that the 'loss itself must

be a 'direct physical' loss, clearly requiring a direct, physical deprivation of

possession.'" Mac Property, 473 N.J. Super. at 26 (alteration in original). We

adopt the same rationale here.

Like the plaintiffs in Mac Property, Capri did not allege facts establishing

it lost its physical capacity to operate or that its properties required any repairs,

rebuilding, or replacement due to damage. Further, Capri does not allege there

was physical alteration of the properties making them dangerous to enter. Capri

does not allege its premises were contaminated by COVID-19. As we noted in

Mac Property, the policy's definition of restoration period as the time required

to rebuild, repair, or replace the property would be meaningless if the insured

were permitted to recover for purely economic losses under this provision. 473

N.J. Super. at 23. Therefore, defendants were not required to provide coverage

under the Property Damage, Time Element, and Extra Expense provisions of the

policies as there was no "directly physical loss or damage."

While we did not specifically address the language in the plaintiffs' Extra

Expense provision in Mac Property, 473 N.J. Super. at 22, the coverage is

inapplicable here for two reasons. First, the Extra Expense provision also

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requires a "direct physical loss of or damage to property," which as noted did

not occur here, and includes the same reference to coverage during restoration

periods that we found pertinent in Mac Property, 473 N.J. Super. at 23. Second,

our analysis in Mac Property relied, in part, on a Massachusetts Supreme Court

case, which examined similar Business Income and Extra Expense provisions

and determined that coverage was not triggered because there was no physical

loss or damage to the plaintiffs' properties. Id. at 25-27.

For the reasons described above, Capri has not alleged, and cannot allege,

physical loss or damage to its property based on the EOs or the COVID-19 virus

such that it is entitled to coverage under the policies. We conclude Mac

Property's analysis is controlling, and thus coverage was not properly extended

under the Extra Expense provision. Therefore, Capri cannot recover under the

Property Damage and Extra Expense provisions of defendants' policies.

We also considered the Civil Authority provision in Mac Property in light

of Governor Murphy's EOs. Id. at 27-30. In Mac Property, plaintiffs' policies

provided the defendants would "pay for the actual loss of Business Income"

sustained by the plaintiffs "caused by action of civil authority that prohibit[ed]

access to" its premises. Id. at 27. In order for the Civil Authority coverage to

be triggered, plaintiffs were required to show:

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 (1) damage . . . done to other property within a certain
distance of the insured premises; (2) this damage
resulted from a "Covered Cause of Loss"; (3) the civil
authority prohibited access to the insured premises
because of the damage; and (4) the civil authority's
action was taken in response to dangerous physical
conditions resulting from the damage or the
continuation of the covered cause of loss or to ensure
civil authority's unimpeded access to the damaged area.

[Ibid.]

We considered the plain and unambiguous language contained in this

provision—and decisions from sister states—and determined the trial courts

correctly concluded that the provision did not extend coverage because the EOs

did not prohibit access to the premises or limit the owners from accessing their

properties. Ibid. Rather, the EOs only "restricted [the plaintiffs'] business

activities." Ibid. We also reasoned the Civil Authority provision did not extend

coverage because the plaintiffs' businesses were all closed to the public; and

none were selectively closed due to damage from a nearby property. Ibid.

Here, Capri fails to present any argument to justify a deviation from our

conclusion in Mac Property. Capri's policies contain language identical to the

provisions at issue in Mac Property, requiring that "the civil authority prohibited

access to the insured premises." Ibid. (emphasis added). The EOs did not

prohibit access to Capri's properties, and Capri does not allege that they did.

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Capri does not allege the quantum of COVID-19 in any of its stores was elevated

to the point it prevented human occupancy. And, the EOs affected all businesses

statewide, and did not specifically target any of Capri's properties.

Moreover, the Contamination Exclusion provisions in defendants' policies

are unambiguous and preclude the coverage that Capri is seeking. As we

explained in Mac Property, "it is unequivocal that the virus was the sole reason

the [EOs] were issued." Id. at 40. The policies, like some of those in Mac

Property, contained a Contamination Exclusion, which contains a virus

exclusion provision "that included anti-concurrent and anti-sequential causation

language, undoubtedly barring coverage" because the COVID-19 virus allegedly

contributed to plaintiffs' business losses. See ibid.

We conclude Capri's remaining arguments—to the extent we have not

addressed them—lack sufficient merit to warrant any further discussion in a

written opinion. R. 2:11-3(e)(1)(E).

Affirmed.

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