By Bill Wichert

Law360 (June 22, 2021, 7:30 PM EDT) -- A New Jersey state judge on Tuesday said an insurance policy's virus exclusion barred a medical practice and related entities from obtaining coverage from the Hanover Insurance Group for losses arising from government restrictions imposed in the Garden State and Pennsylvania to curb the spread of COVID-19.

In a ruling echoing numerous decisions in insurers' favor, Superior Court Judge Joseph W. Oxley granted a bid from Hanover and subsidiary Massachusetts Bay Insurance Co. to toss claims against them from The Plastic Surgery Center PA and other plaintiffs with respect to state orders banning elective medical and surgical procedures.

The judge concluded during a phone hearing that the plaintiffs weren't entitled to coverage for the financial impact of those orders because they hadn't suffered "'direct physical loss of or damage'" to property, as required under the policy in question. Even if they had, coverage still was not available because of the policy's virus exclusion, the judge said.

That exclusion prohibits coverage for "loss or damage caused directly or indirectly by ... any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease," according to court documents.

"This language is unambiguous and to be interpreted according to its ordinary meaning," said Judge Oxley, referring to the exclusion and later adding that "COVID-19 is the cause of the governmental action in this case."

The Plastic Surgery Center, which had 37 locations between New Jersey and Pennsylvania covered by the policy, launched its initial suit in June 2020 and an amended complaint the following month, along with an ambulatory surgical center and a management services organization.

Hanover and Massachusetts Bay were named as the original defendants, and the amended complaint added claims against the plaintiffs' insurance broker, NorthEast Insurance Services.

The plaintiffs sought a declaratory judgment that they were entitled to coverage under the policy for their losses related to orders issued in March 2020 by New Jersey Gov. Phil Murphy and Pennsylvania Gov. Tom Wolf, both of which prohibited elective procedures at such facilities. Those restrictions have since been lifted.

In seeking summary judgment on the claims against them, Hanover and Massachusetts Bay cited the virus exclusion and, among other arguments, claimed that the plaintiffs had not sustained "'direct physical loss of or damage to'" property. That policy requirement was not met since the plaintiffs' locations weren't physically altered, the companies argued in a brief.

To back up that position, the companies pointed to the state Appellate Division's 2009 opinion in Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co. , which reversed an insurer's win in a coverage dispute over a power outage. That insurer found and a trial court agreed that "off-premises grids were not physically damaged but were rather intentionally shut off as a preemptive safety measure," according to the brief.

The appellate panel concluded that "the electrical grid was arguably physically damaged because the grid and components 'were physically incapable of performing their essential function of providing electricity,'" the brief said.

The Plastic Surgery Center and other plaintiffs countered in a brief that their "loss of use and loss of functionality of its business constitutes a 'physical loss' under the policy and triggers coverage." Wakefern "broadly interpreted the term 'physical damage' to include loss of use and functionality," the plaintiffs claimed.

In siding with Hanover and Massachusetts Bay, Judge Oxley on Tuesday noted that, pursuant to Murphy's executive orders, plaintiffs were still open for business except for the elective procedures. The plaintiffs "were still seeing patients and operating their business, just at a decreased capacity," the judge said.

"This court finds the present case does not meet the standard of 'physical loss or damage,' as described in Wakefern," Judge Oxley added.

Counsel for the parties did not immediately respond to requests for comment Tuesday.

The plaintiffs are represented by James A. Maggs, Michael M. DiCicco, Stephanie L. Deluca and Kyle R. Tognan of Maggs McDermott & DiCicco LLC.

Hanover and Massachusetts Bay are represented by Jeremiah L. O'Leary and Jonathan M. Zagha of Finazzo Cossolini O'Leary Meola & Hager LLC.

The case is The Plastic Surgery Center PA et al. v. The Hanover Insurance Group Inc. et al., case number L-1874-20, in the Superior Court of New Jersey, County of Monmouth.

--Editing by Amy Rowe.

For a reprint of this article, please contact reprints@law360.com.