The Arizona Beverages v. Hanover dispute is one of those cases that looks narrow at first glance but is important for anyone involved in property insurance claims. What began as a disagreement over audit costs following a computer system failure ultimately produced a pair of decisions that clarify how restoration periods should be analyzed in a modern business environment, where data, financing, and compliance are as critical as bricks, mortar, and machinery. This is a follow-up to yesterday’s post, “Cyber Business Income Claims After a Data Breach: Are Lost Clients and Lost Trust Covered Losses?”
The trial court approached the case methodically and, in my view, realistically. Arizona Beverages suffered a power surge that damaged its computer system and permanently destroyed historical financial data. While the company was able to restore hardware and regain day-to-day operational functionality, it could not recover the data needed to complete its annual audit. That audit was not optional. It was required under a credit agreement with its lender, and failure to complete it would have triggered a default that could have forced liquidation of the company.
To work around the missing data, Arizona and its auditor undertook extensive additional procedures, incurring significant extra costs. Hanover paid the policy’s data restoration sublimit but denied coverage for the additional audit expenses, arguing that the restoration period ended when the computer system went live again. The trial court rejected that position. 1 It found that the annual audit was part of Arizona’s usual business operations because servicing debt and maintaining cash flow are essential to a company’s continued existence. The court also ruled that the restoration period did not end when some functionality returned, but rather when Arizona’s business was restored to a similar level of service. Because the lost data made it impossible to complete the audit until alternative procedures were developed and completed, the court concluded that the restoration period extended through completion of that work and that the extra audit costs were covered extra expenses.
On appeal, Hanover sharpened its arguments and focused heavily on policy definitions. Its central theme was that the restoration period should be tied to the repair or replacement of covered equipment, not to the recreation of data or the completion of an audit. Hanover emphasized that the policy separately defined covered equipment and data, provided a specific sublimit for data restoration, and limited extra expense coverage to costs incurred during the restoration period. From that perspective, once the computer system was replaced and operational, the “period of restoration” clock stopped.
Arizona Beverages countered with arguments grounded in business reality and policy language. It properly pointed out that the restoration period definition referred to damage to “property,” not just to “covered equipment.” “Property” was not narrowly defined. It also emphasized that the loss occurred when the data was destroyed and that the consequences of that loss were immediate and unavoidable. The extra expenses were incurred to prevent a catastrophic interruption of the business. Arizona also highlighted the insurer’s own claims handling record, including internal statements acknowledging that the audit expenses should be covered.
The Second Circuit affirmed the trial court in a summary order, but the reasoning is worth close attention. 2 The appellate court made a subtle but decisive doctrinal move that should not be overlooked. It held that the definition of the restoration period is tied to damage to “property,” not to the repair or replacement of “covered equipment.” This is the single most important doctrinal move in the case because it properly noted that property is broader than covered equipment. Under ordinary meaning and New York law, lost financial data qualifies as property.
This subtle shift in focus from equipment to property dismantled Hanover’s equipment-centric theory and grounded the analysis in the realities of what was lost and what had to be rebuilt for the business to resume operations at a comparable level of service. Once that step was taken, the rest of the analysis followed naturally. If the destroyed data was property, then the restoration period did not necessarily end when hardware was replaced. The appellate court agreed that the audit workaround effectively replaced the lost data for the purpose that mattered most: allowing Arizona to satisfy its financing obligations and continue operating. Even though the data could not be recovered in its original form, the alternative procedures effectively took its place. That, in the court’s view, constituted repairing or replacing property within the meaning of the policy.
The appellate court also affirmed that servicing the credit agreement and completing the audit were core business operations conducted at Arizona’s headquarters. This was not an expansion of coverage by judicial fiat. It was a straightforward application of the policy language to how businesses function. The court further noted that even if there were ambiguity in how these provisions interacted, under New York law, ambiguities are construed against the insurer, and Hanover had not shown that its interpretation was the only fair one.
For insurance and claims professionals, the lessons here are significant. Restoration is not a cosmetic or purely technical concept. Restoring a system is not the same as restoring a business. If critical data, regulatory compliance, or financing obligations remain impaired, courts may find that the restoration period continues. Extra expense coverage is designed to prevent cascading losses and preserve the business as a going concern, not merely to reimburse costs incurred before a server is turned back on. Further, by tying the restoration period to property rather than to covered equipment, the policy opened the door to a broader and more realistic analysis of what it takes to restore a modern business. Insurers who intend a narrower result must draft with that intent unmistakably clear. Commercial claims professionals who ignore these nuances risk repeating Hanover’s mistake of focusing on machines while overlooking the enterprise they are meant to serve.
It is also worth acknowledging the work of my friend and lead counsel for the policyholder, Johnathan C. Lerner. His deep experience in first-party insurance litigation and thoughtful advocacy helped clarify these important issues, which are often overlooked in business income and extra expense claims.
For those interested in better understanding “period of restoration” issues, I suggest typing those three words into our search function above. You will find dozens of articles on this important topic.
Thought For the Day
“Business is a great game – lots of competition and a minimum of rules. You keep score with money.”
— Bill Gates
1 Arizona Beverages USA v. Hanover Ins. Co., No. 20-1537, 2023 WL 4564872 (E.D. N.Y. July 17, 2023).
2 Arizona Beverages USA v. Hanover Ins. Co., No. 23-1177, 2025 WL 2502552 (2d Cir. Sept. 2, 2025). See also, brief of Hanover, and brief of Arizona Beverages.
