The Importance of Having a Professional Review Your Insurance Policy

A recent federal district court decision in New Jersey once again highlights why policyholders need to review their insurance policies with professional insurance brokers to ensure the insurance obtained satisfies their needs. Often, insurance policies contain “additional” or “optional” coverages that, for a small amount of money, can extend insurance coverage to circumstances that would otherwise not be covered. It is imperative that policyholders review these options with insurance brokers to make sure there are no unwanted gaps in coverage.

In Howard Berger Co., LLC v. Liberty Mutual Fire Insurance,¹ the insured’s business facility was shut down from October 29 through November 4, 2012, due to a power outage caused by Superstorm Sandy. Specifically, the storm damaged the overhead electrical distribution line that supplied power to Berger’s facility.

Berger claimed that, as a result of the power outage, it suffered business income losses in excess of $1.9 million.

Berger submitted an insurance claim to its insurer, Liberty Mutual, detailing its losses and costs associated with the damages it claimed to have incurred.

Liberty Mutual denied Berger’s claim because the electric service had been interrupted due to the failure of the overhead transmission and distribution lines, which it claimed was a non-covered cause of loss under the insurance policy.

Berger sued Liberty Mutual for breach of contract, claiming that its damages were covered losses under the policy.

Liberty Mutual moved for summary judgment on the grounds that damage to the overhead transmission/power lines were not covered because Berger had not elected to purchase coverage for physical damage to “overhead transmission and distribution lines.”

The Liberty Mutual policy provided:

A. GROUP A EXCLUSIONS

We will not pay for loss or damage caused by or resulting from any of the following, regardless of any other cause or event, including a peril insured against, that contributes to the loss at the same time or in any other sequence:

* * *

9. Interference with or interruption of any public or private utility or any entity providing electrical, heating, air conditioning, refrigeration, telecommunication, steam, water, sewer or fuel service or any other service, if the failure occurs away from the covered location.

EXTENSIONS OF COVERAGE, Form RM1002 EXCLUSIONS, Form RM1003

1. We will pay for physical loss or damage to covered property, loss of business income and extra expense resulting from an interruption of the electrical, heating, air conditioning, refrigeration, telecommunication, steam, water, sewer or fuel service to a location shown on the Schedule of this endorsement, but only if the interruption of service results:

A. From physical damage by a peril insured against;

B. Away from a location shown on the Schedule of this endorsement;

C. To the following, if marked with an “X”, that directly supply service to the location shown on the Schedule of this endorsement and are either owned, managed or controlled by a company with a contract to supply these services to that location, or are located within one mile of that location:

(1) (X) Any electrical generating plant, substation, power switching station, transformer, gas compressor station, telephone switching facility, water or sewer treatment plant or any other plant or facility responsible for providing services specified in 1. above;

(2) (X) Transmission and distribution lines, connections or supply pipes which furnish electricity, steam, gas, refrigeration, telecommunication, water or sewer (other than overhead transmission and distribution lines);

(3) ( ) Overhead transmission and distribution lines.

2. We will not pay for any physical loss or damage to covered property, loss of business income or extra expense due to any interruption of service from:

* * *

B. The operation of any breaker, switch, device or system designed to preserve or protect any property or system integrity. . . .

In its opposition to Liberty Mutual’s summary judgment motion, Berger argued that damage to the pole supporting the transmission line had caused the power outage, and that the pole could be considered a “plant,” which was covered under the provision of the insurance policy that stated, “(1) (X) Any electrical generating plant … or any other plant or facility responsible for providing the services….” Berger also provided an expert’s opinion to support its position that damage to the “transmission line pole” should be considered “any other plant or facility responsible for providing the services.” The expert opined that, in the electrical industry, the term “plant” was broad and included substations, transformers, circuit breakers, structures, and supporting poles, which provided a critical function as part of the system that provided electrical power service.

Although the trial court accepted Berger’s expert’s view that the term “plant” was used broadly in the industry and could encompass many components of the electric supply system, it determined that Berger’s argument that the utility pole supporting the transmission line constituted an “electrical generating plant … or any other plant” “strain[ed] the policy beyond its plain and ordinary meaning.”

The district court further determined that:

The supporting structure – the wooden pole – is part of a line that transmits electricity from a generating plant to a substation or switching station. It would not make any sense to interpret the definition of “transmission line” to read that a “plant” transmits electricity from a plant. The same interpretation holds true for the terms in the insurance policy.

Plaintiff argues that an insured would not understand the technical definitions provided by the N.J. Administrative Code when reading the insurance policy, and, consequently, such definitions should not be considered in interpreting the policy language. In that same vein, however, an insured would also not understand that a wooden pole can also constitute a “plant” as articulated by Plaintiff’s expert.

Returning to the plain language of the policy, it is clear that the insured had three options for covering its loss of business income and extra expenses resulting from an interruption of the electrical service: physical damage to (1) “Any electrical generating plant, substation, power switching station, transformer … or any other plant or facility responsible for providing services …”; (2) “Transmission and distribution lines, connections or supply pipes which furnish electricity … other than overhead transmission and distribution lines”; and (3) “Overhead transmission and distribution lines.” Plaintiff chose the first two options. Plaintiff’s damages were caused by the third option it did not select.

The court granted Liberty Mutual’s motion for summary judgment.

From an objective perspective, it seems that the failure to request the optional additional coverage for “overhead transmission and distribution lines” must have been a mistake. If these additional coverages required the payment of additional premium, it begs the question of why would the insured purchase the first two, but not the third? It would be interesting to review the underwriting file and see exactly how much premium was charged for each of these optional coverages. My guess is that the cost for each optional coverage was small in relation to the general cost for the policy, and that the decision to forgo option three was not the insured’s intentional choice. Depending on who procured the policy for the insured, the issue will now turn to whether the negligence of an insurance professional contributed to the uncovered loss.

Had the insured carefully reviewed the policy with an insurance professional when the policy was procured, this outcome likely could have been avoided.
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¹ Howard Berger Co., LLC v. Liberty Mut. Fire Ins., No. 1:14-cv-06592 (D.N.J. May 23, 2017).