The Superior Court of New Jersey, Appellate Division recently held that the term “physical damage,” as used in a policy covering damage due to the loss of electric power, was ambiguous in the context of the Northeast Blackout of 2003 involving a loss of power that was not caused by permanent “physical damage” to the electrical plant and equipment. The Appellate Division reversed the trial court’s summary judgment ruling in favor of the insurer, and ordered that summary judgment be entered in favor of the plaintiffs on the issue of coverage. Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co., 406 N.J.Super. 524 (2009).
On August 14, 2003, problems with the interconnected North American electrical grid resulted in a four-day electrical blackout over much of the northeastern United States and eastern Canada. Plaintiffs, a group of supermarkets, suffered losses due to food spoilage and business interruption. Plaintiffs requested coverage from their insurer under a supplemental policy covering damage due to the loss of electric power (the “Extension”). The insurer denied coverage, contending that coverage under the Extension was only triggered in case of “physical damage” to off-premises electrical plant and equipment and that, despite the blackout, the electrical grid suffered no “physical damage” and therefore no coverage existed.
The parties brought their dispute concerning the meaning of the term “physical damage” before the New Jersey Superior Court, Law Division, which granted summary judgment in favor of the insurer, holding that the grid was not physically damaged because it could be returned to service after the interruption. Plaintiffs appealed.
On appeal, the Appellate Division held that the undefined term “physical damage” was ambiguous and that the trial court construed the term too narrowly, in a manner favoring the insurer and inconsistent with the reasonable expectations of the insured. The court reasoned that one reasonable construction of the term was that the electrical grid was “physically damaged” because it was (temporarily) physically incapable of performing its essential function of providing electricity.