At the end of April, the U.S. District Court for the Southern District of New York (S.D.N.Y.) held that an insured who suffered business interruption losses as a result of a Superstorm Sandy related power outage, were not covered as there was no “direct physical loss.”
The case, Newman Myers Kreines Gross Harris P.C. v. Great Northern Insurance Company,1 was filed shortly after Superstorm Sandy in New York state court, and the basic facts reveal:
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, plaintiff Newman Myers Kreines Gross & Harris P.C. (“Newman Myers”), a law firm, was without power at its lower Manhattan office for several days.2
Following the storm and subsequent restoration of power, Newman Myers filed a claim with its insurer, Great Northern Insurance Company (“Great Northern”), “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 suffered no covered loss under the Policy.”3 Newman Myers then filed the instant lawsuit:
Newman Myers’s Complaint allege[d], inter alia, that Great Northern breached the insurance contract by refusing to pay for covered losses under the Policy, to wit, loss of business income and extra expenses resulting from Newman Myers’s inability to access its office between October 29 and November 3, 2012.4
Great Northern removed the action to federal court based upon diversity jurisdiction and the parties crossed-moved for summary judgment. The major issue which the court needed to determine was, “whether the insured premises experienced ‘direct physical loss or damage’.”5 Newman Myers’ policy had a “’Business Income With Extra Expense Insurance For Law Firms’ section [which] provide[d] the insured coverage for loss of business income and extra expenses in the event of ‘direct physical loss or damage by a covered peril to property’.”6
Newman Myers conceded that its offices suffered no damage because of Superstorm Sandy, but argued:
[T]hat both its office at 40 Wall Street and the Con Ed facility at Bowling Green suffered ‘direct physical loss or damage’ within the meaning of the Policy. It contend[ed] that the phrase ‘direct physical loss or damage,’ construed in line with the reasonable expectations of the insured, [did] not require actual structural damage to the covered premises. Instead, it argue[d], there need only have been ‘an initial satisfactory state that was changed by some external event into an unsatisfactory state.’7
In making the determination, the trial court stated that the “critical policy language here—‘direct physical loss or damage’—similarly, and unambiguously, requires some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.”8
The court denied Newman Myers motion, granted Great Northern’s, and ultimately held, “there was no ‘direct physical loss or damage’ and thus no covered loss under the Policy.”9
However, the court also held that
[I]n the event the Court’s coverage ruling were overturned, the Court’s judgment would be that Newman Myers would prevail in this lawsuit.
Both parties have filed notices of appeal to the 2nd Circuit Court of Appeal. We will keep you posted as the case moves through the appeal process.
The results of this decision will undoubtedly affect many pending claims in New York.
As always, here is a (mildly) related tune, The Boss (Bruce Springsteen) with Dancing in the Dark:
1 Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., No. 13-2177 at 1 (S.D.N.Y. 2014).
2 Newman Myers at 1.
4 Id. at 2.
5 Id. at 4.
7 Id. at 5.
8 Id. at 7
9 Id. at 8.