This coverage action arises from the widespread power outages that occurred in and around New York City during and after Hurricane Sandy. On October 29, 2012, in anticipation of storm-related flooding, utility provider Consolidated Edison Co. of New York, Inc. preemptively shut off power to certain of its service networks to preserve the integrity of the utility system. As a result, the plaintiff, a law firm, was without power at its lower Manhattan office for several days. The firm filed a claim under its property insurance policy for loss of business income and extra expenses due to its inability to access its office during the power outage. The insurer denied the claim on the ground that the firm did not suffer a covered loss under the policy. The firm brought suit against Great Northern alleging breach of the parties’ insurance contract.
The subject policy provided coverage, under specified circumstances, for loss of business income and extra expenses occasioned by “direct physical loss or damage.” This coverage was subject to several exclusions, including for loss or damage caused by flood. By a letter dated December 26, 2012, Great Northern advised the firm of its denial because, the firm had not suffered a covered loss.
In evaluating the claims, the court noted that the threshold question was whether the firm carried its burden of showing the policy provided coverage for its claimed losses under New York law, and as such, whether the insured premises experienced “direct physical loss or damage by a covered peril to property.” Specifically, the firm claimed coverage under two business loss provisions: the “Ingress And Egress” provision and the “Loss of Utilities” provision, each of which required a “direct physical loss or damage” as a condition precedent to the Firm’s recovery.
In holding for the insurer, the court discredited the firm’s arguments that the preemptive closure of its building constituted a direct physical loss, as well as its reliance on several out-of-state decisions where the property was rendered unusable or unsatisfactory for its intended purpose. The court noted that in each case, there was some compromise to the physical integrity of the workplace, including noxious fumes, and water contamination. Rather, the court held that New York case law favors the insurer here, specifically citing Roundabout Theatre Co., Inc. v. Continental Cas. Co
., 302 A.D.2d 1 (1st
Dept. 2002). There, the Appellate Division concluded that the business interruption coverage is limited to losses involving physical damage to the insured property and reasoned that the meaning of “direct” and “physical” necessarily narrows the scope of the coverage.
Based on the Roundabout Theatre
holding the district court held that “direct physical loss or damage” unambiguously, requires some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.
Consequently, the court held that the firm did not meet is burden of showing that the policy covered the claimed losses, granting summary judgement to the insurer.
Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co.
(United States District Court, S.D.N.Y., April 24, 2014)