In Gregory Packaging, Inc. v. Travelers Property Casualty Company of America, 2014 WL 6675934 (D.N.J. Nov. 25, 2014), the United States District Court for the District of New Jersey considered an insurance coverage dispute arising out of a property insurance policy issued by Travelers to Gregory Packaging. Subject to certain limitations and exclusions, the policy covered “direct physical loss of or damage to” Gregory Packaging’s property. During the installation of a refrigeration system at Gregory Packaging’s plant, ammonia was released into the facility. Although there was no physical change or alteration to Gregory Packaging’s property, the ammonia rendered the plan uninhabitable, and Gregory Packaging was forced to shut down its facility for a period of time. Gregory Packaging’s motion for partial summary judgment on the issue of whether it incurred “direct physical loss of or damage to” property from the ammonia release was granted by the Court.
Gregory Packaging, a company that makes and sells juice cups, purchased a building in Georgia for the purpose of constructing a new juice packaging facility. The insurance policy issued by Travelers stated that Travelers “will pay for direct physical loss of or damage to Covered Property caused by or resulting from a Covered Cause of Loss.” The policy defined “Covered Property” to include “designated buildings or structures at the premises described in the Declarations, including . . . (2) Fixtures . . . [and] (3) Machinery and equipment permanently attached to the building . . . .”
Before it could begin production at the Georgia plant, Gregory Packaging had to install a refrigeration system. During the start-up process, ammonia was released from the refrigeration system into the facility, severely burning one of the contractors hired to install the system and rendering the plant unfit for normal human occupancy and continued use. Gregory Packaging hired a remediation company, Rhino Services, LLC, to dissipate the ammonia from the building, a process which took five to seven days. Although the parties disputed the amount of time it took Rhino to rid the building of ammonia, both parties acknowledged that an unsafe amount of ammonia was released into the building and that it remained present in the building for some amount of time. Travelers denied Gregory Packaging’s insurance claim on the basis that Gregory Packaging did not suffer physical loss or damage to covered property and because the loss was subject to a specific exclusion under the policy’s terms.
The sole issue for the Court’s consideration on the motion for partial summary judgment was whether Gregory Packaging incurred “direct physical loss of or damage to” property. According to Travelers, the inability to use the plan as Gregory Packaging had hoped or expected did not constitute direct physical loss or damage. Travelers also argued that there were genuine disputes of material fact on this issue.
In order to answer the question of whether ammonia-induced incapacitation constituted “direct physical loss of or damage to” the facility, the Court first had to determine which state’s substantive law applied—New Jersey law (where Gregory Packaging is headquartered), or Georgia (where the ammonia release occurred). Applying the New Jersey choice of law rules, the Court found that a “false conflict” existed. In other words, under both New Jersey law and Georgia law the result was the same—the ammonia discharge inflicted “direct physical loss of or damage to” Gregory Packaging’s facility. Applying New Jersey law, the Court found that there was “direct physical loss of or damage to” property because the ammonia rendered the facility unusable for a period of time. Likewise, under Georgia law, Gregory Packaging was entitled to partial summary judgment because there was no genuine dispute that the ammonia release physically changed the facility’s condition to an unsatisfactory state needing repair. Thus, the Court did not need to resolve the choice of law question and applied New Jersey law. Further, the Court held that partial summary judgment was appropriate as there was not genuine dispute of material fact that the ammonia discharge caused the physical incapacitation of the facility.
Certainly, the Gregory Packaging opinion sets forth a broad definition of “direct physical loss of or damage to” property, one that is not limited to physical damage to property that would require repair or replacement, but that also includes incapacitation or inability to use the property. This is good news for insureds who suffer losses when their facilities are rendered unusable in ways that involve less literal damage to or loss of property.
Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or firstname.lastname@example.org.
Kristen M. Chatterton