In the world of first-party insurance, there are two seemingly simple concepts: (1) property insurance policies cover all risks of physical loss or damage during the policy period, and (2) business interruption insurance covers the insured’s lost profits during the period of restoration. Sometimes, however, as was the case in a recent coverage dispute in New York, insurance companies try to complicate those basic concepts in an attempt to avoid coverage. Fortunately, in those cases, the trial judge stuck to basics and rejected the insurers’ attempt to avoid paying for damage to a turbine and an energy company’s lost profits that resulted from that damage. See National Union Fire Ins. Co. of Pittsburgh, PA v. TransCanada Energy USA, Inc., 2016 WL 1235115 (N.Y. Sup. Ct., N.Y. County, Mar. 2, 2016) (“TransCanada”).
Insurer’s Allegation of Damage Prior to Policy Inception Was Not a Defense to Coverage
In TransCanada, at one of TransCanada’s electric generating facilities in New York, excessive vibrations were detected in one of the turbines in August-September 2008. As a result, that turbine was taken out of service, repaired, and put back into service on May 18, 2009. TransCanada made a claim for more than $48 million for lost sales of capacity that resulted from the period of time the turbine was out of service.
TransCanada had a property insurance policy that covered all risks of physical loss or damage that occurred during the August 26, 2008 to June 1, 2009 policy period. The policy also provided business interruption coverage that covered total net sales during the “period of liability.” The “period of liability” begins with “the time of physical loss or damage” and ends with the time the building or equipment “could be: (i) repaired or replaced; and (ii) made ready for operations, under the same or equivalent physical and operating conditions that existed prior to the damage.” 2016 WL 1235115 at *2-3.
The insurance companies denied coverage on several grounds, including that the loss or damage was caused by a crack that formed before the policy period. The court rejected that argument, holding that it was irrelevant that the crack formed before the policy period when damage to the turbine occurred during the policy period. Id. at *5-7. The court noted that the breakdown of the turbine was caused by a crack that expanded and caused property damage during the policy period. Thus, the court concluded that “[i]t 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 . . . .” Id. at *5. In other words, the court focused on the basics of the policy language and the purpose of the policy.
Policy Covers Business Interruption Losses After Damaged Property Was Returned to Service
The insurers also denied coverage for TransCanada’s lost profits, because “most of TransCanada’s approximately $48 million claimed loss of capacity sales was only realized at auctions of capacity held after May 18, 2009,” when the turbine was put back into service and when the “period of liability” ended. Id. at *7. TransCanada contended that, because the state agency that conducts the auctions uses a rolling average of capacity periods in calculating the amount of capacity sales, and the capacity produced during the period of liability was not sold until after the period of liability, the lost capacity sales should be covered.
The court agreed with TransCanada. The court started with the basics–that one key “purpose of business interruption insurance is to ‘return to the insured the amount of profit that would have been earner during the period of interruption had a casualty not occurred’ . . . .” Id. at *8 (citation omitted). In this case, because the lost profits caused by the decreased capacity during the period of liability were not manifest or realized until the auctions were held after that period, and those losses resulted from the physical damage, TransCanada was entitled to be insured for those lost profits. Id. at *9. The court found the insurers’ argument untenable: “Acceptance of the insurers’ interpretation of the policy would result in a windfall to them as they would not be obligated to pay TransCanada any amount for its business interruption despite it being undisputed that TransCanada’s business was interrupted for months, simply because TransCanada did not actually receive the decreased revenue until months after the repairs were made.” Id.
Even seemingly straight-forward property insurance claims can lead to denials and turn out to be complex and difficult. Policyholders need knowledgeable and experienced assistance in navigating these claims. See Largest Property Damage and Business Interruption Claims. One key focus is to stick to the basics of what property insurance policies cover: physical loss or damage and lost profits. From that starting point, coverage can be further expanded based on applicable case law.
Miller Friel, PLLC is a specialized insurance coverage law firm with offices in New York and other major cities. See Miller Friel Opens New York City Office. The author of post has over six years working in-house for a major property insurance carrier, where he addressed legal issues pertaining to first-party property and business interruption insurance. For additional information about this post, please call 202-760-3160.