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Utility's Pre-Sandy Power Shutdown Did Not Cause "Direct Physical Loss" to Unharmed Office, Court Rules--But It Rejects Insurer's Argument That Flood Exclusion Would Have Applied

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A federal district court in New York has rejected a law firm’s “loss of business income” claim resulting from a utility’s decision to shut down power in anticipation of Superstorm Sandy’s arrival, …

A federal district court in New York has rejected a law firm’s “loss of business income” claim resulting from a utility’s decision to shut down power in anticipation of Superstorm Sandy’s arrival, finding that because the firm’s office had not been damaged, the firm had not suffered “direct physical loss or damage.” However, the court also found, in dicta, that if there had been such a loss, coverage would not have been excluded by the policy’s flood exclusion because “flooding” and concerns of “imminent flooding damage” were not equivalent.

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  • 1. The Insurance Coverage Law Information Center The following article is from National Underwriter’s latest online resource, FC&S Legal: The Insurance Coverage Law Information Center. UTILITY’S PRE-SANDY POWER SHUTDOWN DID NOT CAUSE “DIRECT PHYSICAL LOSS” TO UNHARMED OFFICE, COURT RULES – BUT IT REJECTS INSURER’S ARGUMENT THAT FLOOD EXCLUSION WOULD HAVE APPLIED May 1, 2014 Steven A. Meyerowitz, Esq., Director, FC&S Legal A federal district court in New York has rejected a law firm’s “loss of business income” claim resulting from a utility’s decision to shut down power in anticipation of Superstorm Sandy’s arrival, finding that because the firm’s office had not been damaged, the firm had not suffered “direct physical loss or damage.” However, the court also found, in dicta, that if there had been such a loss, coverage would not have been excluded by the policy’s flood exclusion because “flooding” and concerns of “imminent flooding damage” were not equivalent. The Case On October 29, 2012, in anticipation of storm-related flooding, utility provider Consolidated Edison Co. of New York, Inc. (“Con Ed”) preemptively shut off power to certain of its service networks to preserve the integrity of the utility system. As a result, Newman Myers Kreines Gross & Harris P.C., a law firm, was without power at its lower Manhattan office for several days. Newman Myers filed a claim under its property insurance policy, issued by Great Northern Insurance Company, for loss of business income and extra expenses occasioned by its inability to access its office during the power outage. Great Northern denied the claim on the ground that Newman Myers had not suffered a covered loss under the policy. Newman Myers sued. The parties moved for summary judgment. The Policy The policy provided coverage for loss of business income and extra expenses in the event of: direct physical loss or damage by a covered peril to property. The policy’s “Ingress And Egress” provision afforded additional coverage for business income loss or extra expense due to the impairment of business operations: when existing ingress to or egress from a premises shown in the Declarations is prevented due to direct physical loss or damage by a covered peril to property at a location contiguous to such premises. The policy’s “Loss of Utilities” provision afforded additional coverage for loss of business income and extra expenses due to a business interruption that was: caused by or result[s] from direct physical loss or damage by a covered peril to: building; personal property of a utility located either inside or outside of a building; or service property necessary to provide the insured premises with: power supply. Call 1-800-543-0874 | Email customerservice@SummitProNets.com | www.fcandslegal.com
  • 2. The Court’s Decision The court granted the insurer’s motion. In its decision, it first noted that Newman Myers’ office had not sustained any structural damage as a result of Sandy. In the court’s view, the “critical policy language” in this case – “direct physical loss or damage” – unambiguously required some form of “actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.” The court said that the firm could not show any such loss or damage to its building as a result of either (1) its inability to access its office for a few days or, (2) Con Ed’s decision to shut off the power. It ruled that: The words “direct” and “physical,” which modify the phrase “loss or damage,” ordinarily connote actual, demonstra- ble harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure…. [T]he Court is unaware of authority supporting, Newman Myers’s argument that “direct physical loss or damage” should be read to include to extend to mere loss of use of a premises, where there has been no physical damage to such premises. Interestingly, the court, in dicta, rejected Great Northern’s argument that even if there were “direct physical loss or damage” to a covered premises as a result of the Sandy-related power outage, Newman Myers still could not recover because the policy expressly excluded coverage for loss or damage caused by flooding. The court explained that Con Ed had preemptively shut down the power as Sandy made its approach, before any flood damage actually was sustained. In other words, the court declared, “Con Ed’s was a precautionary measure, to maintain the integrity of the utility network in the event of future flooding. Thus, the power outage Newman Myers complains of was not directly caused by flood, as that term is commonly understood.” Indeed, the court concluded, although Great Northern argued that “flooding” and “concerns of imminent flood damage” were the reason for “the preemptive shutdown of power,” “those terms are not equivalent.” The case is Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., No. 13 Civ. 2177(PAE) (S.D.N.Y. Apr. 24, 2014). Call 1-800-543-0874 | Email customerservice@SummitProNets.com | www.fcandslegal.com
  • 3. Call 1-800-543-0874 | Email customerservice@SummitProNets.com | www.fcandslegal.com Copyright © 2014 The National Underwriter Company. All Rights Reserved. NOTE: The content posted to this account from FC&S Legal: The Insurance Coverage Law Information Center is current to the date of its initial publication. There may have been further developments of the issues discussed since the original publication. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent professional person should be sought. For more information, or to begin your free trial: • Call: 1-800-543-0874 • Email: customerservice@SummitProNets.com • Online: www.fcandslegal.com FC&S Legal guarantees you instant access to the most authoritative and comprehensive insurance coverage law information available today. This powerful, up-to-the-minute online resource enables you to stay apprised of the latest developments through your desktop, laptop, tablet, or smart phone —whenever and wherever you need it.