1401 Ocean LLC 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NOT FOR PUBLICATION WITHOUT THE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-0402-21

1401 OCEAN LLC,
ASTOR HOTEL, 465 LLC,
MARCEL 201 LLC,
PLAZA EAST HOTEL LLC,
JENNAS LLC, ALI BABA
HOTEL CORP.,
63 WEST REALTY CORP.
and 63 WEST LLC,

Plaintiffs-Appellants,

v.

ZURICH AMERICAN
INSURANCE COMPANY,

Defendant-Respondent.
_________________________

Argued January 25, 2023 – Decided February 12, 2024

Before Judges Accurso, Vernoia and Natali.

On appeal from the Superior Court of New Jersey, Law
Division, Monmouth County, Docket No. L-3315-20.

Scott P. DeVries of the New York bar, admitted pro hac
vice, argued the cause for appellants (Hunton Andrews
Kurth, LLP, attorneys; Walter J. Andrews, of the New
 York bar, Kevin Vincent Small and Scott P. DeVries,
on the briefs).

David R. Roth (Wiggin and Dana, LLP) of the
Connecticut bar, admitted pro hac vice, argued the
cause for respondent (Wiggin and Dana, LLP,
attorneys; Michael Menapace, of the Connecticut bar,
admitted pro hac vice, and Susan Marie Kennedy, on
the brief).

The opinion of the court was delivered by

VERNOIA, J.A.D.

In this breach of contract and declaratory judgment 1 action against

defendant Zurich American Insurance Company (defendant), plaintiffs 1401

Ocean LLC, Astor Hotel 465 LLC, Marcel 201 LLC, Plaza East Hotel LLC,

Jennas LLC, Ali Baba Hotel Corporation, 63 West Realty Corporation, and 63

West LLC (collectively, "plaintiffs"), seek coverage for losses allegedly

incurred as the result of the presence of COVID-19 at their insured premises and

1
Plaintiffs invoke 28 U.S.C. § 2201 in their complaint, rather than the New
Jersey Declaratory Judgment Act, N.J.S.A. 2A:16-50 to
-62, in requesting the court issue a "declaration of the parties' rights and
duties[.]" The "general rule that state and federal courts share concurrent
jurisdiction over cases arising from federal statutes unless Congress determines
otherwise" applies here because we find 28 U.S.C. § 2201 does not
"'affirmatively divest State courts of their presumptively concurrent
jurisdiction.'" J.H.R. v. Bd. of Educ. of Twp. of E. Brunswick, 308 N.J. Super.
100, 115-16 (App. Div. 1998) (quoting Yellow Freight Sys., Inc. v. Donnelly,
494 U.S. 820, 823 (1990)).

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related Executive Orders (EOs) 2 issued in response to the COVID-19 pandemic.

Plaintiffs appeal from an August 23, 2021 order dismissing their first amended

complaint with prejudice for failure to state a claim for coverage under their

commercial insurance policy (the policy) with defendant. Plaintiffs argue the

court erred by dismissing their complaint because they sufficiently pled

allegations of direct physical loss of or damage to their insured properties,

resulting from COVID-19 and the related EOs, under several policy provisions.

Unpersuaded by plaintiffs' arguments, we affirm.

I.

Plaintiffs are a group of eight corporations and LLCs operating residential

rental properties and hotels under the umbrella of Amsterdam Hospitality Group,

which is the named insured under plaintiffs' "all-risk" insurance policy. Seven

of the corporate entities operate properties in New York and one operates a hotel

in New Jersey.

2
In their first amended complaint, plaintiffs cite to the following EOs that
were issued in response to the COVID-19 pandemic: a March 16, 2020 EO
issued by New York City Mayor Bill DeBlasio which plaintiffs assert required
residents to "shelter in place or remain in their homes unless performing
'essential' activities"; New York Governor Andrew Cuomo's EO 205 which
"severely restrict[ed] travel to the State of New York"; and New Jersey Governor
Phil Murphy's EO 107 "temporarily closing non-essential businesses."
A-0402-21
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 Plaintiffs' policy with defendant had an effective date of October 28, 2019 ,

and provided up to $150 million in coverage, subject to certain limits, in

exchange for a nearly $600,000 premium payment. The policy insures "against

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

Property, at an Insured Location . . . subject to the terms, conditions[,] and

exclusions stated in th[e] [p]olicy." The policy defines "Covered Cause of Loss"

as "[a]ll risks of direct physical loss of or damage from any cause unless

excluded."

Plaintiffs allege they are entitled to business interruption coverage under

the policy's Time Element and Special Coverages options. The Time Element

coverage option insures business interruption losses sustained as a result of a

"necessary [s]uspension . . . due to direct physical loss of or damage to

[p]roperty." The Special Coverages option's Civil or Military Authority

provision extends business interruption coverage to losses resulting from the

necessary suspension of plaintiffs' business activities at an insured location if

the suspension is caused by an order of civil or military authority that prohibits

access to the location. To qualify for coverage under the Civil or Military

Authority provision, the 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

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not owned, occupied, leased or rented by the Insured . . . and located within"

one mile of insured property.

The Special Coverages provision also includes a Contingent Time

Element option that covers losses, including business income losses, incurred

during a "[p]eriod of [l]iability" that "directly result[s] from the necessary

[s]uspension of the Insured's business activities at an Insured Location if the

[s]uspension results from direct physical loss or damage caused by a Covered

Cause of Loss to [p]roperty." The Contingent Time Element coverage option

differs from the Time Element option in that the predicate suspension under the

former must "result from direct physical loss of or damage caused by a Covered

Cause of Loss to Property . . . at Direct Dependent Time Element Locations,

Indirect Time Element Locations, and Attraction Properties. . . ."

Under the policy, "Direct Dependent Time Element Locations" are

locations of direct suppliers, customers, or service providers. "Indirect

Dependent Time Element Locations" are locations of suppliers, customers, or

service providers of Direct Dependent Time Element Locations. And

"Attraction Properties" are "propert[ies] within [one mile] of an Insured

Location that attract[] customers to the Insured's business." The policy also

includes an Ingress/Egress coverage option that applies when there is an

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interruption of business activities because ingress or egress at the insured

property "is prevented by physical obstruction due to direct physical loss or

damage caused by a Covered Cause of Loss" to a third-party's property within

one mile of plaintiffs' insured properties.

The policy also includes exclusions. In pertinent part, the policy excludes

coverage for "[c]ontamination, and any cost due to [c]ontamination including

the inability to use or occupy property or any cost of making property safe or

suitable for use or occupancy . . . ." The policy defines contamination as "[a]ny

condition of property due to the actual presence of any foreign substance,

impurity, pollutant, hazardous material, poison, toxin, pathogen or patho genic

organism, bacteria, virus, disease causing or illness causing agent, [f]ungus,

mold[,] or mildew."

The policy additionally excludes from coverage risks related to the

possible loss of use of covered property. For example, the policy excludes

"[l]oss or damage arising from the enforcement of any law, ordinance,

regulation[,] or rule regulating or restricting the . . . occupancy, operation[,] or

other use . . . of any property." The policy also excludes "[l]oss or damage

arising from delay, loss of market, or loss of use" and "[l]oss or damage resulting

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from the Insured's suspension of business activities, except to the extent

provided by th[e] [p]olicy[.]"

The policy includes a series of endorsements, some of which are state

specific. Each endorsement provides that, except for specific provisions stating

otherwise, that "[a]ll other terms, conditions[,] and limitations of th[e] [p]olicy

remain unchanged." One such endorsement, which is specific to Louisiana,

replaces the policy's definition of contamination with another definition that

excludes "pathogen or pathogenic organism, bacteria, virus, [and] disease

causing or illness causing agent" from its definition.

In their first amended complaint, plaintiffs allege the presence of COVID-

19 at their insured premises caused business losses for which they are entitled

to coverage under the policy. Plaintiffs allege it was "statistically indisputable

that COVID-19 is present and/or was present at [their] locations" and nearby

locations given "the prevalence of COVID-19 cases in the New York and New

Jersey region[s.]" Plaintiffs allege that they closed their locations in response

to the EOs that were issued following the start of the COVID-19 pandemic.

They also assert that the presence of COVID-19 at properties they did not own

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or occupy, that are located within five miles of the insured premises, led to

issuance of the EOs that caused their business losses. 3

Following argument on defendant's motion to dismiss, the motion court

found plaintiffs failed to allege sufficient facts supporting a finding of coverage

under the policy. The court explained the alleged presence of COVID-19 at the

insured premises did not constitute a direct physical loss of or damage to the

insured property such that plaintiffs are entitled to coverage under any of the

policy's various provisions. The court also determined the EOs did not prohibit

access to the insured property and that any limit on access to the property

resulting from the EOs did not result from a direct physical loss of or damage to

the insured premises within the policy's plain terms. The court further found no

coverage under the Civil or Military Authority provisions based on the EOs,

again finding the presence of COVID-19 at locations within one mile of an

insured premises did not constitute direct physical loss of or damage to those

3
Although plaintiffs' complaint alleges they suffered losses due to the presence
of COVID-19 at properties located within five miles of their various insured
premises, as we explain, certain policy provisions afford coverage based on
direct physical loss of or damage to uninsured properties located within one mile
of plaintiffs' insured properties. In other words, there is no relevant provision
of the policy that provides coverage for losses suffered as the result of alleged
direct physical loss or damage to uninsured properties located within five miles
of plaintiffs' insured properties.
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locations such as to require coverage. The motion court also determined the

policy's Contamination Exclusion barred coverage for any losses incurred

attributable to contamination due to the presence of a virus—COVID-19—that

rendered the property unsafe for use or occupancy.

The court entered an order dismissing plaintiffs' complaint with prejudice.

This appeal followed.

II.

As a threshold matter, we address defendant's argument that New York

law should govern the determination of the issues on appeal to the extent it

differs from applicable New Jersey law. The argument is founded on the

contention that New Jersey's only connection to the issues in dispute is the

presence of one plaintiff and its insured property in New Jersey and that New

York has a greater interest in the matter because the remaining plaintiffs and

their insured properties are in New York.

In making the argument, defendant acknowledges there is no actual

conflict between the applicable laws of the respective states such that a choice

of law analysis is required. See Cont'l Ins. Co. v. Honeywell Int'l, Inc., 234 N.J.

23, 46 (2018) (explaining where there is no "actual conflict between the laws of

the states with interests in the litigation" "then the choice-of-law question is

A-0402-21
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inconsequential, and the forum state applies its own law to resolve the disputed

issue" (citations omitted)). Plaintiffs do not disagree. And, based on our

consideration of the applicable legal principles, and finding no actual conflict

between New York and New Jersey law pertinent to a disposition of the issues

present on appeal, we apply the law of the forum state, New Jersey. Ibid.

We review the motion court's dismissal decision de novo.

Dimitrakopoulos v. Borrus, Goldin, Foley, Vignuolo, Hyman & Stahl, P.C., 237

N.J. 91, 108 (2019). Our review is plenary, Bacon v. N.J. State Dep't of Educ.,

443 N.J. Super. 24, 33 (App. Div. 2015), meaning we owe no deference to the

motion court's legal or factual conclusions supporting the dismissal order,

Rezem Fam. Assocs., LP v. Borough of Millstone, 423 N.J. Super. 103, 114

(App. Div. 2011).

A claim for relief must "contain a statement of facts on which the claim is

based" which must "show[] that the pleader is entitled to relief[.]" R. 4:5-2. "In

deciding whether to grant dismissal, the complaint's allegations are accepted as

true and with all favorable inferences accorded to plaintiff." MAC Prop. Grp.

LLC v. Selective Fire & Cas. Ins. Co., 473 N.J. Super. 1,16 (App. Div. 2022)

(citing Watson v. N.J. Dep't of Treasury, 453 N.J. Super. 42, 47 (App. Div.

2017)). Therefore, to survive dismissal under Rule 4:6-2(e), the complaint must

A-0402-21
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allege facts sufficient to support a claim upon which relief can be granted. See

R. 4:6-2(e). If a complaint sets forth conclusory allegations, and, in doing so,

fails to present the essential facts required by the claimed cause of action, the

complaint will not survive a motion to dismiss. See Neuwirth v. State, 476 N.J.

Super. 377, 390 (App. Div. 2023).

We limit our inquiry "to examining the legal sufficiency of the facts

alleged on the face of the complaint[,]" Green v. Morgan Props., 215 N.J. 431,

451 (2013) (citation omitted), and whether the allegations, if proven, "would

constitute a valid cause of action[,]" Leon v. Rite Aid Corp., 340 N.J. Super.

462, 472 (App. Div. 2001). Thus, dismissal is warranted where the complaint's

allegations are "palpably insufficient to support a claim upon which relief can

be granted[,]" Rieder v. State Dep't of Transp., 221 N.J. Super. 547, 552 (App.

Div. 1987), or if "discovery will not give rise to such a claim," Dimitrakopoulos,

237 N.J. at 107. That is the case here.

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 (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

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

omitted).

We nevertheless recognize that insurance policies are generally

"contract[s] of adhesion between parties who are not equally situated." Oxford

Realty Grp. Cedar v. Travelers Excess & Surplus Lines Co., 229 N.J. 196, 215

(2017) (quoting Nav-Its, Inc. v. Selective Ins. Co. of Am., 183 N.J. 110, 118

(2005) (alteration in original)). Thus, where an insurance policy is ambiguous,

courts construe the terms in favor of the insured. MAC Prop. Grp. LLC, 473

N.J. Super. at 18 (citation omitted). A genuine ambiguity arises when "'the

phrasing of the policy is so confusing that the average policyholder cannot make

out the boundaries of coverage.'" Birmingham v. Travelers N.J. Ins. Co., 475

N.J. Super. 246, 256 (App. Div. 2023) (quoting Weedo v. Stone-E-Brick, Inc.,

81 N.J. 233, 247 (1979)). Or, "when 'the text appears overly technical or

contains hidden pitfalls, cannot be understood without employing subtle or

legalistic distinction, is obscured by fine print, or requires strenuous study to

comprehend[,]'" ibid. (quoting Zacarias, 168 N.J. at 601).

"[E]xclusions 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 Prop. Grp. LLC, 473 N.J. Super. at 35 (quoting Princeton

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Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997)). "'[T]he basic notion [is] that

the premium paid by the insured does not buy coverage for all . . . damage but

only for that type of damage provided for in the policy.'" Id. at 19 (quoting

Weedo, 81 N.J. at 237). Limitations on coverage "designed 'to restrict and shape

the coverage otherwise afforded'" are therefore permissible. Ibid. (quoting

Hardy ex rel. Dowdell v. Abdul-Matin, 198 N.J. 95, 102 (2009)).

Plaintiffs argue they are entitled to coverage under various coverage

options of their policy—all of which are contingent on a finding plaintiffs'

losses were caused by, or otherwise attributable to, direct physical loss of or

damage to either covered property, another's property within one mile of covered

property, or property at or within 1,000 feet of covered property, which plaintiffs

allege occurred in part due to the physical presence of COVID-19 at their

properties and the EOs.

Plaintiffs assert "COVID-19 was physically present in the air and on the

walls, floors, and every other surface exposed to human contact at each and

every one of its locations." Plaintiffs allege in the complaint that "[a]ccording

to a study documented in the New England Journal of Medicine, COVID-19 was

detectable for up to three hours in aerosols, up to twenty-four hours on

cardboard, and up to seventy-two hours on plastic and stainless steel[,]" meaning

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"individuals can become infected with COVID-19 through indirect contact with

surfaces or objects used by an infected person, whether they are symptomatic or

not." Plaintiffs further allege "[t]here may be instances where COVID-19 was

present onsite at an insured location including with respect to a customer, but

the individual was pre-symptomatic, such that [plaintiffs] w[ere] not aware of

the presence of the virus."

In other words, plaintiffs' claims for coverage are founded on the presence

of COVID-19 on their insured premises. And, in recognition of the plain

language of the various policy provisions—including the "Attraction

Properties," "Direct Dependent Time Element Locations," and "Indirect

Dependent Time Element Locations" provisions—under which they claim

coverage, plaintiffs further allege that the presence of COVID-19 caused direct

physical loss of and damage to the properties, resulting in the "necessary

slowdown" or cessation of plaintiffs' business activities.

In MAC Property Group LLC, we rejected virtually identical arguments—

regarding virtually identical policy provisions—as those asserted by plaintiffs

here. 473 N.J. Super at 19-27. We considered an insurance policy that provided

business income loss coverage where the plaintiff had alleged it suffered losses

due to "direct physical loss of or damage to" covered property resulting in a

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period of suspension of business operations during the period of restoration of

the property.4 Id. at 19-20. We held that business losses suffered as the result

of EOs barring or curtailing the plaintiff's operations in response to the COVID-

19 pandemic did not constitute "direct physical loss of or damage to" the insured

property such as to permit or require coverage. Id. at 10. We explained the

phrase "direct physical loss of or damage to" property under the policy was

neither ambiguous nor "so confusing that average policyholders . . . could not

understand that coverage extended only to instances where the insured property

has suffered a detrimental physical altercation of some kind, or there was a

physical loss of the insured property." Id. at 21-22.

We also explained in MAC Property Group LLC that "scores of federal

and state appellate-level courts . . . have addressed" claims for coverage for

losses due to EOs limiting or curtailing business operations due to COVID-19

under insurance policies providing coverage for "direct physical loss of or

damage" to insured property, and the "overwhelming majority of them have"

dismissed the complaints "because the losses were not due to physical loss or

4
Time Element coverage is frequently referred to as, and considered
interchangeable with, "Business Interruption" coverage. See e.g., AC Ocean
Walk, LLC v. Am. Guar. & Liab. Ins. Co., ___ N.J. ___, ___ (2024) (slip op. at
29-30) (collecting cases).
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damage to their insured premises." Id. at 26-27; see also Verveine Corp. v.

Strathmore Ins. Co, 489 Mass. 534, 542 (2022) (noting that "[e]very appellate

court that has been asked to review COVID-19 insurance claims has agreed" that

"'direct physical loss of or damage to' property requires some 'distinct,

demonstrable, physical alteration of the property'"); see, e.g., Wilson v. USI Ins.

Serv. LLC, 57 F.4th 131, 142-43 (3d Cir. 2023) (applying New Jersey Law and

finding COVID-19 executive orders limiting or curtailing operation of an

insured's business did not result in a "direct physical loss of or damage" to th e

insured's property because the orders were not issued in response to physical

damage to the property and "[t]he propert[y] could certainly be used and

inhabited, just not in the way the business[] would have liked").

Applying what we determined was the plain and ordinary meaning of the

phrase "direct physical loss of or damage to property," we also explained that

because New Jersey has "adopted a broad notion of the term 'physical[,]'" when

the word is paired with another word, e.g. "'physical injury,'" "the resulting term

means a 'detrimental alteration[],' or 'damage or harm to the physical condition

of a thing.'" MAC Prop. Grp. LLC, 473 N.J. Super. at 20. We concluded the

plaintiffs' claimed losses allegedly resulting from the presence of COVID-19 at

the insured premises were not covered losses arising from a direct physical loss

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of or damage to their property within the plain and unambiguous meaning of the

policy. Id. at 23. More recently, in AC Ocean Walk, LLC v. American

Guarantee and Liability Insurance Company, our Supreme Court affirmed the

dismissal of a complaint under Rule 4:6-2(e) based on its determination that

business losses claimed as the result of the presence of COVID-19 are not

covered under an insurance policy that provides coverage for "direct physical

loss or damage to" the insured's property. AC Ocean Walk, LLC, slip op. at 25-

29.

Thus, for there to be coverage under the policy, plaintiffs' alleged losses

"must be a 'direct physical' loss, clearly requiring a direct, physical deprivation

of possession," and a curtailment of the use of a premises "'without any physical

alteration [to the premises] to accompany it'" does not amount to such. MAC

Prop. Grp. LLC, 473 N.J. Super. at 26 (alteration in original) (quoting Verveine

Corp, 489 Mass. at 545); see also Wilson, 57 F.4th at 142-43. Accordingly,

plaintiffs' allegation that COVID-19's presence on its properties, and other

properties located within one mile of insured premises, caused "physical

alteration of the integrity of the [properties]" and physical loss and damage by

"impairing the value, usefulness, [and] normal function of the [properties][,]" is

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insufficient to support their claimed entitlement to coverage under the policy.

AC Ocean Walk, LLC, slip op. at 25-29.

Simply put, the facts as alleged by plaintiffs do not support a claim that

they suffered physical damage to equipment or a physical alteration or damage

to an insured property such that plaintiffs suffered a direct physical loss of or

damage to the insured properties under the plain language of the policy. See

ibid.; Verveine Corp., 489 Mass. at 544 ("Evanescent presence of a harmful

airborne substance [like COVID-19] that will quickly dissipate on its own, or

surface-level contamination, that can be removed by simple cleaning, does not

physically alter or affect property"). Thus, plaintiffs' complaint does not allege

facts that if proven, "would constitute a valid cause of action" for coverage under

the policy. Leon, 340 N.J. Super. at 472.

Additionally, in plaintiffs' complaint they do not allege—nor could they—

that the EOs complained of "selectively closed" their premises "due to damage

to nearby property" as required for the Special Coverages, Time Ingress/Egress,

and Civil or Military Authority provisions to apply. Coverage under those

provisions requires a direct physical loss of or damage to properties and, again,

plaintiffs allege only the presence of COVID-19 as the basis for their coverage

claims. The presence of COVID-19 does not result in the requisite direct

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physical loss of or damage to property for coverage under the policy's plain

language. See AC Ocean Walk, LLC, slip op. at 25-29.

Moreover, the policy plainly excludes coverage for suspensions of use of

the premises resulting from "enforcement of any law, ordinance, regulation[,] or

rule regulating or restricting the . . . occupancy, operation[,] or other use . . . of

any property." The policy also excludes "[l]oss or damage arising from delay,

loss of market, or loss of use" and "[l]oss or damage resulting from the

[i]nsured's suspension of business activities, except to the extent provided by

th[e] [p]olicy" which, as we have explained, otherwise does not provide

coverage for losses attributable to the effect of the EOs.

Such exclusions are presumptively valid. See MAC Prop. Grp. LLC, 473

N.J. Super. at 35. Thus, on plaintiffs' claims for coverage for losses they

attribute to the suspension of business operations effected by EOs issued to curb

COVID-19's spread, we affirm the motion court's dismissal of the first amended

complaint seeking coverage under the Time Element, Civil Authority or Military

Authority, Contingent Time Element, and Ingress/Egress coverage options.

We acknowledge plaintiffs additionally argue the policy's Contamination

Exclusion does not apply to COVID-19 and is therefore unenforceable under the

facts as they allege them. We find it unnecessary to address the claim, because

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plaintiffs otherwise failed to sufficiently allege an entitlement to coverage under

the policy provisions under which they sought coverage. Stated differently, we

need not address the applicability or the validity of the Contamination Exclusion

because plaintiffs failed to allege facts showing an entitlement to coverage in

the first instance.

To the extent we have not expressly addressed any of plaintiffs' remaining

arguments, we find they are without sufficient merit to warrant written

discussion in this opinion. R. 2:11-3(e)(1)(E).

Affirmed.

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