NJ Federal Court Finds Ammonia Release A Direct Physical Loss
A New Jersey federal court, applying New Jersey law, found that the discharge of ammonia at a manufacturing facility constituted “direct physical loss of or damage to” property. The court reasoned that although there was no actual physical change or alteration to the property, the presence of ammonia caused the facility to be physically unusable, and therefore constituted “direct physical loss of or damage to” property which triggered coverage under the property policy.
Travelers Property Casualty Company of America (“Travelers”) issued to Gregory Packaging, Inc. (“Gregory Packaging”) a property insurance policy which covered “direct physical loss of or damage to” Gregory Packaging’s property. In July 2010, ammonia was released inside one of Gregory Packaging’s facilities. After the ammonia was released the facility was evaluated and various governmental agencies arrived on the scene. Gregory Packaging then hired a remediation company to dissipate the ammonia from the building. Gregory Packaging sought coverage for the damage from the ammonia release from Travelers. Travelers denied coverage, arguing that the insured did not suffer physical loss or damage to covered property. The sole issue before the court was whether the release of ammonia constituted “direct physical loss of or damage to” property as required by the policy.
Gregory Packaging argued that “the explosion made the ammonia refrigeration system inoperable and rendered the Georgia Plant uninhabitable,” thus inflicting direct physical loss of and damage to its property. Travelers disagreed arguing that, “physical loss or damage” necessarily involves “a physical change or alteration to insured property requiring its repair or replacement.” Travelers emphasized that the insured’s inability to use its plant as it expected did not constitute a physical loss or damage. The court disagreed. It found that it was not disputed that an unsafe amount of ammonia was released into the building, that it remained present in the building for some amount of time, and that it was remediated. The court held that, as a matter of law, the ammonia-induced incapacitation constituted “direct physical loss of or damage to” the facility because the ammonia physically rendered the facility unusable for a period of time.
The phrase “direct physical loss of or damage to” was not defined by the policy and therefore the court based its ruling on case law from New Jersey. The court noted that under New Jersey precedent, structural damage to property was not always required and that courts had found that “physical damage” occurred when there was the loss of the function of a property as a whole and when the physical contamination of a building rendering it useless. Gregory Packaging, Inc. v. Travelers Property Cas. Co. of Am., Civ. No. 2:12-cv-04418 (D. N.J. Nov. 15, 2014).