A version of this article was originally published on Law360.com on April 24, 2014.
In the wake of Superstorm Sandy, property insurers have repeatedly denied coverage for business owners in lower Manhattan who suffered losses due to power outages, arguing that the outages occurred when Consolidated Edison Co. of New York Inc. intentionally cut off power to its networks to protect ConEd’s facilities.
A recent decision from the Southern District of New York in Johnson Gallagher Magliery LLC v. Charter Oak Fire Insurance Co. considered coverage for a policyholder’s losses caused by ConEd’s Bowling Green Network outage. The court partially denied the insurer’s summary judgment motion because the insurer did not demonstrate that the service interruption during ConEd’s post- restoration period was excluded by the policy.
Johnson Gallagher is an important decision because it is the first to examine the circumstances of the Bowling Green Network shutdown and the implications that sequence of events may have on insurance coverage for policyholder business interruption losses arising from that Network.
The court broke down the insured’s losses into three periods: (1) the preemptive shutdown just prior to the storm; (2) the period of restoration resulting from physical damage to ConEd’s electrical systems caused by the storm; and (3) the further delays in reopening the plaintiff ’s building as a result of New York City building authority orders, and the testing of systems by the building owners.
Based on a very limited record, the district court concluded there was no coverage for the preemptive shutdown period due to lack of physical damage and that a broadly worded flood exclusion precluded coverage for the restoration period following Superstorm Sandy’s damage to the Bowling Green Network’s electrical systems.
But, importantly, the district court held that the water exclusion did not preclude coverage for the losses suffered during the post-restoration period because the loss during that period was not caused by water damage or the preemptive shutdown. Also significant is that the court did not consider damage to other ConEd networks (e.g., the widely reported fires and explosions at ConEd’s 13th Street facility) or whether other aspects of the policy, such as sewer backup coverage, might apply. Presentation and consideration of these facts, as well as the particular circumstances of each policyholder’s loss, could expand the possibility of insurance coverage for Superstorm Sandy-related losses.
The Johnson Gallagher decision is important for several reasons, most notably because it shows that insurers should not be able to avoid extended business interruption claims by asserting “flood” or other exclusions that relate to the period of loss and the time of restoration, but not to the extended period of indemnity that applies after the property is repaired or restored.
Policyholders should be careful to consider all aspects of their insurance coverage, as the facts and circumstances surrounding Superstorm Sandy demonstrated how catastrophic events have the potential to trigger various additional coverages, from extended period of indemnity to civil authority.
For instance, the court did not consider whether the ensuing loss provisions of the water exclusion applied following the widely reported fires and explosions that ensued after the water struck ConEd’s facility. Thus, whenever there is a loss, every policyholder should carefully review their policies and all aspects of coverage—and retain experienced claims assistance—before submitting a claim, and most certainly after an insurer denies coverage.