In a recent decision, the Appellate Division of the Supreme Court of New York held that coverage under an “all risks” policy extended to losses resulting from damage to a power-generating turbine and a subsequent outage, notwithstanding that the precipitating cause occurred prior to the policy period.  Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 28 N.Y.S.3d 800, 804 (Sup. Ct. 2016), aff’dNational Union Fire Insurance Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc.2017 NY Slip Op 06513(App. Div. Sept. 19, 2017).  There, the property at issue was a power-generating turbine at TransCanada Energy USA Inc.’s (“TransCanada”) Ravenswood Generating Station in New York.  On September 12, 2008, Unit 30 was taken out of operation due to excessive vibrations.  A nine-inch crack in the rotor was discovered as the cause of the vibrations, though it appeared to have formed well-before that date.  Between September 12, 2008 and May 18, 2009, the turbine required repair and was not available to generate electricity.  As a result, TransCanada experienced significant property damage in excess of $7 million and business interruption losses for lost sales of capacity in excess of $48 million.

TransCanada had in place a combined first-party property and business interruption insurance policy, by which its property was insured against all risks of physical loss or damage, as well as against losses of “gross earnings” arising from the interruption of business activities, including mechanical breakdown.  TransCanada sought coverage for the incident and subsequent outage under that policy, which the insurers denied, and litigation resulted.

Although the incident giving rise to the damage or loss (i.e., the crack) may have occurred prior to the policy period, the trial court held that the property damage loss was covered because “there is no provision in the policy that excludes physical loss or damage originating before the commencement of the policy period, or any requirement that the cause of the loss or damage occur during the policy period, or even any provision linking coverage to the cause of the loss or damage.”

The trial court further held that the “period of liability” provision did not limit TransCanada’s business interruption loss to May 18, 2009, the date Unit 30 returned to service.  In the policy, “period of liability” was defined as the period beginning from the time of physical loss or damage until the time of repair or replacement.  It was undisputed that the majority of TransCanada’s claimed lost sales of capacity were not realized until capacity auctions held after Unit 30 has been returned to service.  TransCanada explained, however, that because capacity revenues are calculated and paid at later auctions, its loss includes decreased capacity revenues sustained and earned during the “period of liability,” even if not calculated and paid until the later auction.  The trial court again agreed, noting that that the lost sales of capacity were “neither speculative nor incapable of being linked directly to the period of liability at issue.”  

The appellate court later affirmed the trial court’s decision on both points.  This case underscores that the specific wording of the terms and provisions of an insurance policy can be outcome-determinative as applied to the facts and circumstances of the loss and a policyholder’s ability to obtain insurance coverage.