New Jersey District Court Holds Policy Term “Direct Physical Loss” Does Not Require Structural Alteration

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The United States District Court for the Northern District of New Jersey recently held that the complete shutdown of a facility due to a gas leak amounts to direct physical loss of or damage to the Property sufficient to trigger coverage under a property policy.  Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America, C.A. No. 2:12-CV-004418, 2014 WL 6675934 (D.N.J. Nov. 25, 2014).       

Plaintiff Gregory Packaging, Inc. (“Gregory Packaging”), a juice cup manufacturer, was installing a refrigeration system in its new building when the refrigerant, anhydrous ammonia, was released into the facility, severely burning an employee. The facility was evacuated due to unsafe levels of ammonia and a remediation company was hired to remediate the ammonia. Thereafter, Travelers Property Casualty Company of America (“Travelers”) denied General Packaging’s claim for loss of property and business interruption under the subject property insurance policy because Gregory Packaging did not suffer physical loss or damage to property and because the loss was otherwise excluded under the policy.      

Gregory Packaging filed a declaratory judgment action and sought partial summary judgment on the sole issue of whether it incurred a direct physical loss of or damage to property.  Applying New Jersey law, the court found that there is no genuine dispute that the ammonia release physically transformed the air within the facility so that it was unsafe and unfit for occupancy, and that this constituted a physical loss to the facility under the terms of the policy. 

The court’s decision did not reach the other coverage defenses raised by Travelers, such as that the claimed damages were not caused by a covered loss and that certain policy exclusions apply to bar coverage.