AMMONIA
RELEASE CONSTITUTES “DIRECT PHYSICAL LOSS” UNDER POLICY
Why it matters
A New York federal court recently
ruled that the discharge of ammonia at a manufacturing plant – causing a
facility shutdown for several days – constituted “direct physical loss”
pursuant to the insured’s policy and required payment from the insurer. In
addition to seriously injuring one employee, the release of ammonia required
the plant to close for several days and be cleaned by a remediation company
before operations could resume. The insurer refused to pay for the
policyholder’s damages, arguing that no “direct physical loss of or damage to”
as required under the policy, had occurred at the facility. Although there was
no actual physical change or alteration to the property, the court reasoned
that the presence of ammonia rendered the facility physically unusable, so the
discharge inflicted the necessary “direct physical loss of or damage to”
property to trigger coverage under the policy.
Detailed Discussion
Gregory Packaging, Inc., makes and
sells juice cups. While preparing a new factory for production of its product,
a refrigeration system malfunctioned, releasing ammonia gas into the facility.
The release and continued presence of the gas rendered the facility “physically
unfit for normal human occupancy and continued use until the ammonia was
sufficiently dissipated.” A third party was engaged to remediate the
contamination.
Gregory Packaging sought coverage
under a policy issued by Travelers Property Casualty Company. The policy
provided that the insurer “will pay for direct physical loss of or damage to
Covered Property,” defined to include the new facility.
Travelers denied coverage on
multiple grounds, including that “physical loss or damage” necessarily involves
“a physical change or alteration to insured property, requiring its repair or
replacement.”
The court disagreed with Travelers,
finding that the presence of ammonia gas in the facility, which rendered the
facility uninhabitable and inoperable for seven days, constituted “direct
physical loss of or damage to Covered Property.” The court based its ruling on
case law from New Jersey state and federal courts, as well as the law of other
jurisdictions. (The court found no conflict between the law of New Jersey, the
corporation’s home state, and that of Georgia, the location of the damaged
property.)
The phrase “direct physical loss of
or damage to” was not defined by the policy, but the court found that the
ammonia discharge satisfied the term under either New Jersey or Georgia law.
The court explained: “In the present
case, there is no genuine dispute that the ammonia release physically
transformed the air within Gregory Packaging’s facility so that it contained an
unsafe amount of ammonia or that the heightened ammonia levels rendered the
facility unfit for occupancy until the ammonia could be dissipated.”
While Travelers argued that genuine
disputes of material fact precluded a grant of summary judgment to Gregory
Packaging, the court found that none of those disputes — as to whether the
ammonia leak caused an explosion and whether the facility was rendered
inoperable and required repair — were material to the question of whether “the
ammonia-induced incapacitation” constituted ‘direct physical loss of or damage
to’ Gregory’s packaging facility.