For coverage to be afforded under insurance policies there is a requirement that the insured property suffer a direct physical loss from a covered cause of loss. This often leads to disputes and litigation concerning whether property suffered a physical loss. Insurance carriers argue that a physical change in the insured property must occur before coverage attaches. Policyholders, however, often have damaged property and business interruption without a physical change to the insured property. When is coverage provided in such circumstances?

In typical attorney fashion, I will say it depends. Different jurisdictions handle these sorts of situations differently. Recently, U.S. District Judge William H. Walls took a huge step forward for policyholders in Gregory Packaging Inc. v. Travelers Property Casualty Company of America.1 In Gregory Packaging, the insured suffered an ammonia release in 2010 that prompted them to temporarily shutdown their operations and remain closed down for several days to clean. Gregory Packaging made a claim to their insurer which was denied as the carrier argued that the ammonia release did not physically alter any of the insured property.

In the subsequent lawsuit, Gregory Packaging filed a motion for partial summary judgment. In ruling in favor of the policyholder, Judge Walls concentrated on the facility being rendered unfit for human occupancy for several days.

The court finds that the ammonia discharge inflicted ‘direct physical loss of or damage to’ Gregory Packaging’s facility, as that phrase would be construed under New Jersey law by the New Jersey Supreme Court, because the ammonia physically rendered the facility unusable for a period of time.

While an isolated case, this ruling could have broad reaching implications for policyholders and provide coverage where carriers would ordinarily deny the claim.

A factory filled with ammonia, can you imagine that smell?


1 Gregory Packaging Inc. v. Travelers Property Casualty Co. of America, 2:12-cv-04418 (D.N.J. Nov. 25, 2014).