Superstorm Sandy left over 1 million Con Ed customers without power for days, and in some cases weeks, due to the shut down of the power network.1 An area particularly hard hit was Lower Manhattan where many businesses where affected. As a consequence, many businesses suffered losses of business income giving rise to Business Interruption claims which often involved coverage issues.
In a recent decision, a federal district judge partially denied and partially granted a motion for summary judgment on the issue of coverage for lost business income resulting from a power outage caused by Superstorm Sandy.2 The outage lasted from October 29, 2012 through November 11, 2012.
A “water exclusion” in the policy was the primary basis of the courts partial denial of coverage for the period of October 29, 2012 through November 3, 2012.
To a much lesser extent coverage was denied for a couple of hours on October 29, 2012 based on a policy endorsement involving “direct physical loss” and an “acts or decisions” exclusion. This was a de minimis denial and essentially a non-issue given that business interruption coverage is often subject to a waiting period deductible. In addition, the court ruled that the exclusion and pre-condition did not apply once Sandy hit and water damage was incurred.
Expert testimony indicated that Con Ed had preemptively shut the power down on October 29, 2012, at 6:42 p.m. – two hours prior to Superstorm Sandy’s arrival. The storm caused severe flooding which was deemed the primary cause of the shutdown for the first week.
Based on these facts the court found the “direct physical loss or damage” policy condition and “acts or decisions” exclusion applied only for the time between the preemptive shutdown and the arrival of Sandy and its invading flood tide.3 Once Sandy hit they no longer applied, and the loss would be covered if there were no other exclusions or conditions in the policy.
An endorsement to the policy required that in order for coverage to apply the loss had to be caused by “direct physical loss or damage.” The court reasoned that this condition was only applicable for the 2 hour period the network did not suffer any direct physical loss or damage, after which it incurred extensive water damage. This water damage was characterized by the court as direct physical damage caused by the storm nullifying the condition as a basis for denial of coverage.4
In addition, the court found the decision by Con Ed to shut down the network was an “act or decision” made by a government body or organization as specified under the policy exclusion. This however did not apply to the period following the arrival of the flood waters and was only applicable for the preceding two hour period.5
Finally, the court opined that damage caused directly or indirectly by water was an excluded loss under the policy but only for the period of October 29, 2014 through 1:33 a.m. on November 3, 2012. The court denied the Carrier’s request for partial summary judgment from November 3, 2012 through November 11, 2012 citing that it had not demonstrated that Con Ed’s failure to provide power after November 3rd was the result of water damage.
This case helps to clarify the factors and legal criterion that will come into play when dealing with business interruption losses caused by power outages that occurred during Superstorm Sandy and other extreme weather events. A detailed understanding of the policy and its related exclusions and conditions is critical to these types of claims as is a clear determination of the causes that led to the outage and loss.
1 Con Edison Report, January 11, 2013.
2 Johnson Gallagher Magliery, LLC v. Charter Oak Fire Ins. Co., No. 13-866, 2014 WL 1041831 (E.D. NY March 18, 2014).
4 Id. at 6.
5 Id. at 7,9.