By Hailey Konnath

Law360 (March 25, 2021, 10:20 PM EDT) -- Zurich American Insurance Co. on Thursday prevailed in a COVID-19 coverage spat with a New Jersey Ford dealership, with a Garden State federal judge ruling that a virus exclusion in the policy directly applies to claims stemming from the pandemic.

Downs Ford Inc. in Toms River had alleged that it lost business as a result of New Jersey's shutdown orders, and that Zurich is obligated to cover those losses. Meanwhile, Zurich argued that certain exclusion provisions in its insurance policy allow it to dodge covering those losses.

On Thursday, U.S. District Judge Brian R. Martinotti sided with Zurich, finding that a "civil authority" provision in Zurich's policy was not triggered by the state's shutdown orders. That provision is only triggered when a covered cause of loss causes damage to property "other than" and within one mile of the insured premises, the judge said.

Judge Martinotti rejected Downs Ford's contention that damage also occurred to neighboring and adjacent commercial buildings, offices and retail establishments. That may be, he said, but COVID-19 cannot be a covered cause of loss because the policy also contains a virus exclusion.

"[F]or the civil authority provision to apply, a covered cause of loss must have resulted in an action of civil authority like the executive orders," Judge Martinotti said. But here, the executive orders were issued as a result of the pandemic, which isn't a covered cause of loss, he said.

On top of that, Zurich's virus exclusion doesn't specify that a virus must be present at the insured property for the exclusion to apply, the judge said. And he said he agreed with Zurich that Downs Ford has provided "no valid argument that its claimed expectation of the scope of the virus exclusion is objectively reasonable."

"Notwithstanding the clear language of the virus exclusion, the court finds Downs Ford alleges no factual basis for its claimed reasonable expectations," Judge Martinotti said.

According to Downs Ford's March 2020 suit, Zurich's insurance policy provides coverage for losses, including business income losses, from September 2019 to September 2020.

In March 2020, New Jersey Gov. Phil Murphy declared a state of emergency and a public health emergency. The governor also issued executive orders requiring brick-and-mortar premises of nonessential retail businesses, including dealerships, to close to the public, according to the suit.

Since then, Downs Ford hasn't been able to operate its dealership at full capacity, it said.

Gary Ahladianakis, counsel for the dealership, told Law360 on Friday that Zurich's commercial business policy issued to his client "clearly provides coverage for business income losses suffered as a result of official actions taken by civil authorities, in this case, the aforementioned shutdown orders issued by Gov. Murphy."

"However, the court's ruling in this and other similar matters, regrettably, ignores the reasonable expectations of the insured business owners," he said.

And the order came despite the fact that "under New Jersey law, a court should interpret the policy to comport with the reasonable expectations of the insured when it is subject to two reasonable interpretations, as insurance policies must be construed liberally in an insured's favor and coverage afforded to the full extent that any fair interpretation of the policy language will allow," Ahladianakis said. 

He added, "Our firm will continue to assess all legal actions, remedies and options available in our efforts to limit the insurance companies' systematic denial of valid insurance claims, not only on behalf of the State's business owners, but also for New Jersey workers."

Counsel for Zurich declined to comment Thursday.

Insurers are facing a deluge of litigation over denying coverage of COVID-19 claims in the last year. As of Thursday, 1,539 such cases have been filed since the beginning of the pandemic, according to data from the University of Connecticut's Insurance Law Center.

Zurich has fielded more than 100 suits from its policyholders, including a pair filed Thursday by a slew of New Jersey hospitals. RWJBarnabas Health Inc. and Valley Health System Inc. alleged Zurich refused to honor its obligations under their respective $2.5 billion and $550 million "Zurich Edge Healthcare" policies, which the insurer has marketed as providing "higher limits, broader coverage and greater flexibility" to policyholders.

Thus far, courts have largely sided with insurers in the disputes. However, a notable exception came Thursday when a Pennsylvania state judge gave her blessing to claims from a Pittsburgh-area dental practice aimed at holding a CNA Financial Corp. unit liable for financial losses suffered by a class of businesses after the pandemic forced them to shut their doors last year.

In her order, Judge Christine Ward in the Allegheny County Court of Common Pleas granted Smile Savers Dentistry PC's motion for summary judgment, ruling that its "loss of use of its property was both 'direct' and 'physical.'"

"The spread of COVID-19, and a desired limitation of the same, had a close logical, causal [and] consequential relationship to the ways in which plaintiff materially used its property and physical space," the judge held.

Downs Ford is represented by Gary Ahladianakis of Carluccio Leone Dimon Doyle & Sacks LLC.

Zurich is represented by Philip C. Silverberg and William D. Wilson of Mound Cotton Wollan & Greengrass LLP.

The case is Downs Ford Inc. v. Zurich American Insurance Co., case number 3:20-cv-08595, in the U.S. District Court for the District of New Jersey.

--Additional reporting by Matt Fair, Shawn Rice, Jeff Sistrunk and Daphne Zhang. Editing by Bruce Goldman.

Update: This story has been updated to include comment from counsel for Downs Ford.

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