New Jersey courts continue to expand traditional notions of physical loss or damage in a recent decision of the New Jersey Federal District Court, Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of America, Civ. No. 2:12–cv–04418 WHW, 2014 WL 6675934 (D.N.J. Nov. 25, 2014) (J. Walls). The Court held that a building suffered physical loss or damage after an ammonia release, even though there was no structural change or alteration to the property that required some degree of repair or replacement.
The Gregory Packaging, Inc. case arose out of the accidental release of ammonia during the installation of a refrigeration system in a manufacturing and packaging plant in Newnan, Georgia. The ammonia burned a refrigerator installer upon release, but there were no tangible alterations or changes to any of the insured’s property. The plant was evacuated after the release, and government authorities arrived and evacuated the area for a one-mile radius. The responding fire department would not allow anyone in the building on the date of the release and the following day. Gregory Packaging hired a remediation company to dissipate the ammonia. It took approximately five (5) days for the ammonia to be dissipated to a safe level.
The insurer denied coverage, in part, because Gregory Packaging did not suffer the “direct physical loss of or damage” to the property required to trigger coverage. In granting partial summary judgment in favor of Gregory Packaging, the district court found that under both New Jersey and Georgia law substantial evidence had been presented that the ammonia discharge “rendered Gregory Packaging’s facility physically unfit for normal human occupancy and continued use until the ammonia was sufficiently dissipated.”
The district court relied on the holdings in Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724, 727 (N.J. Super Ct. App. Div. 2009) and Port Authority of N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (applying New Jersey law) that property can be physically damaged, without undergoing structural alteration requiring repair or replacement, when it “loses its essential functionality.” The opinion also cited to cases in other jurisdictions that found buildings rendered uninhabitable by dangerous gases or by bacteria in the water supply experienced direct physical loss or damage.
However, the district court did not stop its analysis by stating that a building being rendered unsafe for occupancy constitutes direct physical loss or damage. The court also concluded – as an alternate ground for finding that coverage was triggered – that the ammonia release “physically transformed the air” within the plant such that it contained an unsafe amount of ammonia. The opinion did not elaborate further on whether a change in the content of the air constituted “direct physical loss of or damage to” property, or whether air constituted property of the type insured by the insurance policy.
In granting partial summary judgment on the issue of “physical loss of or damage to” property, the opinion cautioned that the insured still had to prove that the damage was caused by or resulted from a “Covered Cause of Loss.” The question of whether the ammonia release qualifies is currently under review by the district court, after having been briefed by the parties.
This decision poses several questions that warrant further scrutiny. For example, what degree of danger needs to be present for a building to be rendered unfit for occupancy? In addition, who makes the determination as to whether a building is rendered unfit for use? In Gregory Packaging, a fire department prohibited entry into the building on the day of the ammonia release and the following day. Would a court reach a different determination if a government authority had not been involved? All these questions will be considered by courts as the scope of “direct physical loss of or damage to” property continues to be evaluated by courts in a wide variety of changing circumstances.