In an unpublished opinion, the Appellate Division of the New Jersey Superior Court addressed yet another case in which an insured business owner sought coverage for losses allegedly suffered due to the presence of COVID-19 and Governor Murphy’s Executive Orders (“EOs”). In Fleming Ruvoldt PLLC v. Sentinel Insurance Company, Ltd. et. al., the plaintiff business owner filed multiple claims against the insurer, the insurer’s parent company, and the plaintiff’s insurance broker.  As set forth more fully below, the Court affirmed the trial court’s dismissal of the coverage claims against the insurers and professional negligence claims against the broker. The Court did, however, remand plaintiff’s claims for violation of the New Jersey Consumer Fraud Act and common law fraud to allow plaintiff the opportunity to amend the complaint to adequately plead its fraud claims against the insurers. Accordingly, plaintiff’s fraud claims survive for the time being, but are dependent on filing a complaint with more specific fraud allegations. 

Plaintiff obtained an “all-risk” commercial insurance policy from Sentinel that included coverage under a Special Property Coverage Form, including a business income provision, an extra expenses provision, and a civil authority provision. The policy also included a Virus Exclusion. Under the language of the policy, the available coverage provisions required that the insured suffer a “direct physical loss of or damage to property” at the “scheduled premises.”

 In April of 2020, plaintiff filed a claim with Sentinel for losses it suffered due to the closure of its law firm due to Covid-19 restrictions. Sentinel denied the claim on the basis that plaintiff did not suffer direct physical loss of or damage to covered property by COVID-19 within the meaning of its policy. Plaintiff then brought suit against Sentinel, Hartford (Sentinel’s parent company), and Owens Group Ltd., Inc., plaintiff’s insurance broker. Plaintiff brought causes of action against Sentinel and Hartford for declaratory judgment, breach of contract, breach of implied covenant of good faith, violation of the New Jersey Consumer Fraud Act (“CFA”) and common law fraud. Under the CFA/fraud claims, plaintiff asserted that Hartford and Sentinel violated the CFA and committed common law fraud when Sentinel “expressly promised to pay for losses of business income and extra expenses suffered by plaintiff because of acts of civil authority” but “denied plaintiff’s claim on the basis that plaintiff’s loss and/or damage is not a ‘covered loss under the policy,” and excluded from coverage under the policy. 

With respect to Owens, plaintiff brought causes of action for professional negligence for failure to exercise reasonable care based on the following allegations: failure to obtain a “Gold Standard” business income, extra expense, and civil authority comprehensive coverages; failure to inform plaintiff that it did not have coverage for losses due to public health emergencies, including viruses and civil authority orders; negligently supplying incorrect and incomplete information to plaintiff regarding the applicability of the business income, extra expense, and civil authority coverage under the policy; making negligent misrepresentations concerning coverage under the policy and negligently failing to inform plaintiff concerning the policy exclusions and that insurers would disclaim coverage for losses. 

The trial court granted defendants’ motions to dismiss for failure to state a claim upon which relief could be granted. The court found that plaintiff did not allege facts sufficient to establish the direct physical loss of or damage to its covered property due to COVID-19 or the stay-at-home Executive Orders such that there was coverage under the policy. With respect to the professional negligence claims against the broker, the court held that plaintiff’s failure to timely file the required Affidavit of Merit (“AOM”) was fatal to its claims. In the absence of an AOM, the court found that plaintiff failed to show that the broker deviated from the applicable professional standard of care and dismissed plaintiff’s claims. 

On appeal, plaintiff argued that the trial court erred in dismissing all of its causes of actions. Relying on its decision in MAC Prop. Grp. LLC & The Cake Boutique LLC v. Selective Fire & Cas. Ins. Co., 473 N.J. Super. 1, 23, 278 A.3d 272 (App. Div. 2022), in which the Court addressed an identical “physical-loss-of-or-damage-to-property” condition for coverage, the Court affirmed the dismissal of claims for breach of contract.  The Court in MAC determined that the coverage “extend[s] only to instances where the insured property has suffered a detrimental physical alteration of some kind, or there was a physical loss of the insured property.” The Court also noted that the “overwhelming majority” of courts have “granted defendant insurers’ motions to dismiss complaints seeking coverage for business losses due to government orders barring or curtailing their operations in an effort to curb the COVID-19 pandemic because the losses were not due to direct physical loss or damage to their insured premises.” Accordingly, the Court held that because plaintiff’s Special Property Coverage, business income, and extra expenses coverage required that it first suffer direct physical loss of or damage to covered property, plaintiff’s failure to allege it suffered such a qualifying loss or damage to covered property resulted in claims for which relief could not be granted.

 The Court also cited MAC in determining there was no coverage under the civil authority provision of the policy because the EOs “neither prohibited access to [the] plaintiffs’ premises nor prevent plaintiff owners from being on their premises, but merely restricted their business activities,” and the “plaintiffs’ premises were not selectively closed by the [EOs] due to damage to nearby property.” The Court noted that under MAC as well, plaintiff was not entitled to coverage under the plain language of the virus endorsement. 

The Court then turned to plaintiff’s argument that the trial court erred by dismissing with prejudice plaintiff’s CFA/fraud count against Hartford and Sentinel. The Court noted that the trial court found plaintiff did not sufficiently allege a fraud claim under the CFA or the common law, finding “[p]laintiff’s allegations stem from its disagreement with the basis for denying [its] claim,” as opposed to any “unlawful conduct on the part of Sentinel or Hartford.” The trial judge also found “[t]here is no allegation that Sentinel or Hartford made any material misrepresentation to [p]laintiff on which plaintiff relied[,]” and, on that basis, the court dismissed the claims with prejudice. 

While the Court agreed that the allegations of those claims lacked the specificity required to adequately plead fraud against Hartford and Sentinel, the Court found that the express incorporation of all the complaint’s factual allegations in the complaint, supported plaintiff’s assertion of CFA and fraud claims against Hartford and Sentinel. It held that the trial court should have afforded plaintiff an opportunity to amend the complaint to more specifically allege its CFA and common law fraud claims against Hartford and Sentinel. The Court then vacated the dismissal with prejudice of plaintiff’s fraud-based claims remanded with instructions that the trial court permit plaintiff an opportunity to amend its complaint to adequately plead its fraud claims against Hartford and Sentinel. 

Next, the Court addressed plaintiff’s argument that the trial court erred by dismissing its professional negligence causes of action against Owens because it failed to timely file an AOM in support of its claims. While Plaintiff had eventually filed an AOM, it was well past the deadline to do so. Plaintiff argued its late filing of the AOM did not require dismissal of its claims against Owens because there were “extraordinary circumstances” for the untimely filing and/or an AOM was not required under the common knowledge doctrine. In response to the “extraordinary circumstances” argument, the Court held that the lack of sufficient facts and competent evidence establishing extraordinary circumstances required a rejection of plaintiff’s claim. The Court also dismissed plaintiff’s argument that the common knowledge doctrine exception to the filing of an AOM applied in this case. Relying on prior case law, the Court held that the standard of care of professional insurance brokers is not a matter of common knowledge, and it therefore requires expert testimony and timely service of an AOM, which plaintiff failed to do. 

Finally, the Court turned to plaintiff’s argument that Sentinel and Hartford breached the covenant of good faith and fair dealing. As to Sentinel, the Court held that based on the allegations in the complaint, plaintiff was not entitled to coverage under the policy in the first instance and thus had no support for its claim. As for the claim against Hartford, Sentinel’s parent company, the Court found that there was no privity of contract between plaintiff and Hartford that could support such a claim. 

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