What constitutes "direct physical loss or damage" under a property insurance policy?
Granting partial summary judgment to Newark, NJ-based Gregory Packaging in an insurance coverage dispute with Travelers, a U.S. District Court in the District of New Jersey has found that a discharge of ammonia that led to a shutdown and remediation of one of Gregory's packaging facilities did in fact constitute "'direct physical loss of or damage...as that phrase would be construed under New Jersey law." Gregory Packaging, Inc. v. Travelers Property Casualty Company of America, Case 2:12-cv-04418-WHW-CLW (Nov. 25, 2014).
Gregory, a manufacturer of juice cups, suffered an ammonia spill when starting the refrigeration system in a newly built packaging facility in Newman, Georgia in 2010. The ammonia severely burned a contract worker and led to an evacuation, shutdown and remediation of the facility. Travelers denied coverage on multiple grounds, including that "physical loss or damage" necessarily involves "a physical change of alteration to insured property, requiring its repair or replacement." Travelers further claimed that Gregory's "inability to use the plant...as it might have hoped or expected" does not constitute direct physical loss or damage.
The court disagreed. Citing New Jersey law as determined in the Third Circuit (in Port Authority of N.Y. and N.J. v. Affiliated FM Ins. Co.) and in the New Jersey Appellate Division (in Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co.), as well as rulings in other states, Senior District Judge Walls wrote:
In the present case, there is no genuine dispute that the ammonia release physically transformed the air within Gregory Packaging’s facility so that it contained an unsafe amount of ammonia or that the heightened ammonia levels rendered the facility unfit for occupancy until the ammonia could be dissipated. The Court finds that the ammonia discharge inflicted "direct physical loss of or damage to" Gregory Packaging’s facility, as that phrase would be construed under New Jersey law by the New Jersey Supreme Court, because the ammonia physically rendered the facility unusable for a period of time" (p. 11).
While Travelers argued that genuine disputes of material fact precluded a grant of summary judgment to Gregory, Judge Walls found that none of those disputes -- as to whether the ammonia leak caused an explosion, and whether the facility was rendered inoperable and required repair -- were material to the question of whether "the ammonia-induced incapacitation constituted 'direct physical loss of or damage to' Gregory's packaging facility (p. 14). Judge Walls also ruled that there was no conflict in the choice of law, as Gregory Packaging would also be entitled to partial summary judgment under Georgia law.
Anderson Kill shareholder Robert D. Chesler, counsel to Gregory Packaging, commented, "The court recognized that when a key policy term such as "direct physical loss or damage" is not defined, the ambiguity must be construed in favor of the policyholder -- and that an accident that renders a building unfit for occupancy and in need of remediation constitutes physical loss by any reasonable understanding of the term. That's good news for policyholders."
Gregory Packaging is represented by Robert Chesler and Janine Stanisz of Anderson Kill.
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