Never meet the enemy on their own terms. This memorable line from Rudolph Mate’s classic western, The Violent Men, motivates the hero, an embattled ranch owner, as he matches wits and brute force against a ruthless, greedy land baron.
The hero’s struggle reminded me of the coverage showdown in National Union Fire Ins. Co. v. TransCanada,1 where the policyholder matched wits against the insurers—and recovered $58M in coverage for property damage and business interruption losses stemming from the breakdown and temporary shutdown of a faulty power generating turbine.
On August 26, 2008, TransCanada acquired the Ravenswood Generating Station in Long Island City, New York. TransCanada is a regulated entity paid for generating electricity. The facility’s capacity to produce electricity is sold to utilities at monthly auctions. TransCanada does not receive payments for capacity sold at auction until the sale occurs.
After acquiring Ravenswood, TransCanada noticed excessive vibration in a generator known as Ravenswood Unit 30. The vibrations worsened over the next few days. Unit 30 was taken out of service on September 12, 2008. On September 16, 2008, TransCanada found a crack in the rotor. The turbine remained off-line for repairs until May 18, 2009.
The Coverage Dispute & Lawsuit
TransCanada sought coverage for damage to Unit 30 and decreased electricity capacity sales resulting from the 8-month service interruption. TransCanada claimed $7 million in property damage and $50.8 million in business interruption losses, including $48 million in capacity revenue losses.
TransCanada was insured under a combined first-party/business interruption policy issued by Arch Insurance Co., ACE INA Insurance Co., and Factory Mutual Insurance Co., in effect from August 26, 2008 to June 1, 2009. Coverage was afforded against all risks of physical loss or damage and against TransCanada’s losses of “gross earnings” arising from the interruption of business activities.
After investigating the claim, the insurers jointly sought a declaration that no coverage existed. TransCanada sued the insurers for coverage.
The Summary Judgment Ruling
TransCanada argued the breakdown was covered because: (1) the policy covered “all risks”; (2) Unit 30 was operating properly on August 26, 2008, when the facility was acquired; (3) the breakdown occurred after August 26; (4) Unit 30 was generating electricity between August 26 and September 12, the date of the breakdown; (5) the crack found in the rotor of Unit 30 on September 16, 2008, had expanded during the policy period, and caused the breakdown during the policy period; (6) the “capacity payments” policy exclusion did not apply to the loss; and (7) the “period of liability” policy provision did not limit the measurement of TransCanada’s business interruption loss to the period of restoration.
The insurers contended the claims were not covered because the loss during the policy period stemmed from a crack that formed before the policy commenced, barring coverage. They also argued that it is irrelevant whether the Unit suffered a “mechanical breakdown” during the policy period, even though the policy did not contain or define the term mechanical breakdown.
In granting TransCanada’s motion for summary judgment, the court recognized that the policy insured against “all risks of physical loss or damage” to the property occurring during the policy period, without regard to the date or time of the incident giving rise to the loss or damage.
Citing Labate v. Liberty Mutual Fire Insurance Company,2 the trial court held it did not matter whether the causative event was sustained during the policy period: “It is undisputed that TransCanada’s property sustained a physical loss or damage when the policy was in effect, and that there is no provision in the policy that excludes physical loss or damage originating before the commencement of the policy period, or any requirement that the cause of the loss or damage occur during the policy period, or even any provision linking coverage to the cause of the loss or damage.”
The trial court also rejected the insurer’s reliance on an injury in-fact test, which makes coverage dependent on when a damage event occurred. Rather, the trial court held the physical damage claim was covered because the policyholder incurred losses during the policy period; discovery of the crack was not the coverage trigger.
The trial court further held the business interruption claims were covered, rejecting the insurers’ arguments that under the policy’s period of liability provision, coverage is limited to loss of capacity sales between September 12, 2008 (date damage occurred) and May 18, 2009 (when Unit 3 operations resumed). The court observed that even though the decreased capacity was not realized until auctions held after May 18, 2009, the loss pertained to electricity it could not generate during the period of liability. The motion court also rejected the insurers’ reliance on an exclusion for capacity payments that become payable to the insured in return for attaining or exceeding certain production levels.
Appellate Division Decision
The Appellate Division backed the summary judgment ruling in a short opinion, holding that since there was no provision in the policy excluding physical loss or damage originating prior to the commencement of the policy period, the policy covered the loss.
The Appellate Division affirmed coverage for the business interruption loss, noting that because Unit 30 was not available to generate electricity from September 12, 2008 through May 18, 2009, TransCanda was unable to earn future capacity revenues that were attributable to the policy’s period of liability. Finally, the Appellate Division held that the capacity payments exclusion was inapplicable and that the insurers had not met their burden of showing that the exclusion is clear and unmistakable, is subject to no other reasonable interpretation and applies to the facts, and that their interpretation of the exclusion is the only fair reading.
Three takeaways from these cases:
- Events pre-dating the policy period do not automatically bar coverage. While the cause of TransCanada’s loss (the cracked rotor) occurred before the policy period, the policyholder suffered covered damage during the policy period.
- Business interruption losses or profits are not automatically limited to the period of restoration. The policyholder sustained losses during the policy period, but the amount of loss could not be calculated until auctions held after the policy period.
- It is the insurer’s burden to prove an exclusion unequivocally applies to the loss.
1 National Union Fire Ins. Co. of Pittsburgh, et al. v. TransCanada Energy USA Inc., et al., 52 Misc.3d 455 (Sup Ct., N.Y. Cty. 2016) and National Union Fire Ins. Co. of Pittsburgh, et al. v. TransCanada Energy USA Inc., et al., 2017 NY Slip Op 06513 (1st Dept. Sept. 16, 2017).
2 Labate v. Liberty Mutual Fire Ins. Co., 19 A.D.3d 652 (2d Dept. 2005) (since it was alleged that some of the property damage was sustained during the policy period, it is immaterial whether the causative event happened during or before the policy period).