One of the significant coverage issues that arose from Storm Sandy was whether property insurance policies provided coverage for loss of business income arising from the loss of electrical power. Insurers typically offer endorsements that provide coverage for this type of loss in limited circumstances — only where the power failure is caused by direct physical loss or damage by a covered cause of loss to certain types of equipment owned by the utility that is used to supply electricity to the insured premises. The list of equipment might include utility generating plants, switching stations, substations, transformers and transmission lines (but typically not overhead transmission lines). In applying this policy provision to the circumstances of Storm Sandy, key issues included: (1) whether the power failure was caused by direct physical loss to one of the specified types of equipment; and, (2) whether the damage to the equipment was caused by wind (typically a covered peril) or flood (typically an excluded peril). The relevant information on those issues is largely in the possession of the utility, so insurers and insureds often need to obtain information from the utility service through published reports and/or discovery from the utility.

Judge Cote of the Southern District of New York recently addressed this type of coverage issue in Johnson Gallagher Magliery, LLC v. Charter Oak Fire Ins. Co., No. 1:13-cv-00866 (DLC), slip op. (S.D.N.Y. Mar. 18, 2014). The insured is a law firm with offices in lower Manhattan, serviced by Con Edison’s Bowling Green network. Con Edison shut off the power preemptively to that network on October 29, 2012, as the flood waters from Sandy were approaching Con Edison equipment. After flood damage to Con Edison equipment was repaired, Con Edison was able to re-energize the Bowling Green network on November 3. The building housing the insured law firm, however, was not able to restore power until November 11.

The policy provided, by endorsement, the type of limited coverage for loss of business income caused by a power failure that is described above. Charter Oak (a Travelers subsidiary) sought a partial summary judgment ruling that there was no coverage for power failure-related business income losses under the endorsement. Charter Oak relied on a deposition from Con Edison regarding the preemptive shutdown and the flood damage to Con Edison equipment. The court granted partial summary judgment in favor of Charter Oak with respect to the period of time while the Bowling Green network was down. The court first held that, with respect to the initial period of hours between when Con Edison preemptively shut down the power and when the flood waters damaged Con Edison equipment, there was no coverage because that portion of the loss was not caused by direct physical loss, and was also excluded by the policy’s “Acts or Decisions” exclusion (which excludes a loss caused by an act or decision of an organization or government body).

Second, the court held that the policy’s “Water” exclusion, which excluded loss caused directly or indirectly by flood or overflow from a body of water, barred coverage for the period of time after the flood waters damaged Con Edison’s equipment until Con Edison was able to reenergize the Bowling Green network. The court rejected the insured’s argument that coverage was available under the endorsement because the flood waters contained other hazards, such as fuel, kerosene and sewage. The court explained that “[b]ecause any damage from fuel or kerosene would have been associated with flooding, it still falls under the Water exclusion, which includes both direct and indirect damage resulting from water.” Slip op. at 19. The court cited testimony from Con Edison that all of the damage to its equipment was due to water. Id. at 21. The court therefore granted partial summary judgment in favor of Charter Oak with respect to coverage under the endorsement for lost business income from October 29, 2012 (the date that Sandy struck New York) until 1:33 a.m. on November 3, 2012 (when Con Edison reenergized the Bowling Green network).

Numerous businesses in Manhattan and the surrounding areas were faced with power failures to their offices arising from Storm Sandy, and insurers were faced with making many coverage decisions on those losses post-Sandy. When these coverage decisions are litigated, each case will need to be evaluated based on its own facts, but insurers may find the Johnson Gallagher decision helpful to them in future litigation on this issue.

SPECIAL DISCLAIMER: Because the Johnson Gallagher case is one in which Robinson & Cole LLP represented the insurer, we reiterate that the intent of this blog is to serve as an informational resource for readers, not advertising for our legal services. Every case is different and the result achieved in the case described above may differ from the result in some other case, which may involve different facts, different applicable law or a different jurisdiction. Case results depend upon a variety of factors unique to each case. Case results do not guarantee or predict a similar result in any future case undertaken by the same lawyer(s). This blog does not constitute legal advice and you should always consult your own lawyer about your own case.