A New York Court Bars Coverage for a Power Outage Caused by Superstorm Sandy

This week saw a New York court bar a policyholder’s claim for business interruption occasioned by the loss of off-site power after Superstorm Sandy.  In Johnson Gallagher Magliery, LLC v. Charter Oak Fire Ins. Co., 2014 WL 1041831 (S.D.N.Y., March 18, 2014), the federal court held that a law firm could not recover for the six-day period during which one of Consolidated Edison’s networks was out-of-service.  The network was shut down preemptively several hours before the storm, and the contract of insurance’s “acts or decisions” exclusion was held to bar coverage for that period of time.  In addition, a “water” exclusion operated to preclude coverage for the time necessary to clean, repair, and re-energize the system after the flooding where “the only relevant evidence in the record” established that the sole cause of the damage was the excluded peril of water.

The policyholder was a Manhattan law firm with offices in a building on Wall Street.  The structure received electric power from Con Edison’s Bowling Green Network, which was a network that the utility had identified as susceptible to catastrophic failure should its equipment come into contact with salt water.  As Sandy approached on October 29, 2012, Con Edison preemptively shut down that network.

shutterstock_117450418Sandy struck several hours later, causing extensive flooding in lower Manhattan.  The Bowling Green Network suffered “extensive water damage” from the flooding, and Con Edison spent the next several days pumping out the water and cleaning, testing, and – as necessary – replacing its equipment.  The network was re-energized early in the morning on November 3.

The policyholder’s building did not receive electricity again until November 11, however, and the law firm was unable to return to its space until November 16.  In addition, telephone and internet service was not restored until January 7, 2013.

The policyholder had a business interruption insurance policy issued by Charter Oak Fire Insurance Company, and it made claim for business income lost during this two month period.  Charter Oak denied, and the firm brought suit in state court in New York.  After removal to the Southern District, Charter Oak filed a narrowly-focused motion for partial summary judgment, seeking to bar coverage for the power interruption between October 29 and November 11 on the basis of two exclusions.

The Charter Oak contract of insurance contained an extension of coverage for loss of “power supply services” occasioned by direct physical loss or damage from a covered cause of loss to property “not on the described premises.”  It also had exclusions for loss caused by:

  • “Water,” including “Flood [and] surface water;” and
  • “Acts or decisions, including the failure to act or decide of any person, group, organization or government body.”

Judge Denise Cote rejected Charter Oak’s argument that the interruption in power resulted from a preemptive shutdown that did not, of and by itself, cause any physical loss or damage.  The Court noted that the record established that the Bowling Green Network suffered extensive water damage from the flooding.  The decision to preemptively shut down the network “prevented far worse damage … and shortened the duration of the outage,” but that didn’t alter the fact that Sandy clearly resulted in water damage to Con Edison’s equipment.

The judge did grant summary judgment to the insurer for the period between October 29 and November 3, however.  She held that the “acts or decisions” exclusion barred coverage for “those few hours” between the shutdown of the Bowling Green Network and Sandy’s flooding because it was undisputed that the shutdown “caused no physical damage to Con Edison’s power supply services.”

In addition, the court held that the water exclusion operated to bar coverage for the period between October 29 and November 3 because the only relevant evidence in the record concerning the cause of the outage was:

  • A January 11, 2013 Con Edison report that attributed the loss of power to “extensive water damage;” and
  • Testimony by a senior Con Edison engineer that the damage “was all due to water.”

Charter Oak’s motion was denied for the period between November 3 and November 11 because the insurer was unable to show that water damage to Con Edison’s equipment was the sole cause of the failure of the law firm’s building to receive electricity for eight days after the Bowling Green Network had been re-energized.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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