A federal district court in New Jersey has ruled that losses stemming from an electrical outage caused by Superstorm Sandy were not covered by the business’ insurance policy.
Losses in excess of $1.9M
As a result of Superstorm Sandy, Howard Berger Co., LCC, which develops, markets, and distributes security and builder’s hardware, plumbing products, paint applicators, and home environment products to retailers, discount stores, home centers, wholesalers, drug and food chains, catalog companies, municipalities, and hardware stores worldwide, lost electrical power at its facility in Cranbury, New Jersey, from October 29, 2012 until November 4, 2012.
Berger claimed that, as a result of the power outage, it suffered business income losses in excess of $1.9 million. It submitted a claim to its insurer, Liberty Mutual Fire Insurance Company, detailing its losses and costs associated with the damages it said it had suffered.
Claim denied: Non-covered loss of utilities
Liberty Mutual denied Berger’s claim on the basis that the electric service had been interrupted due to the failure of overhead transmission and distribution lines, which was a non-covered cause of loss of utilities under its 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. In particular, it argued that Berger’s outage had been caused by damage to the overhead distribution line that directly supplied power to Berger, or damage to the wooden pole that was part of the overhead transmission line that permitted wires to become dislocated, resulting in a fault that caused a breaker upstream to de-energize the transmission line.
Liberty Mutual argued that damages arising from either cause were not covered because Berger had not elected to purchase coverage for physical damage to “overhead transmission and distribution lines.”
In response, 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....” It provided an expert to support its position that damage to the “D82 transmission line pole” had caused its power outage.
Berger’s expert also viewed the “plant utility pole” to be “any other plant or facility responsible for providing the services.” The expert said that, in the electrical industry, the term “plant” was broad and encompassed substations, transformers, circuit breakers, structures, and supporting poles, which provided a critical function as part of the system that provided electrical power service.
The Liberty Mutual policy
The Liberty Mutual policy provided:
C. If coverage for loss of business income is provided as shown in B. Coverages of the DECLARATIONS, Form RM1000, we will pay for:
1. The actual loss of business income you incur during a period of restoration resulting from damage from a peril insured against to the type of property covered by this policy at a covered location.
* * *
8. We will not pay for:
a. Any loss during any idle period. Idle period includes, but is not limited to, any period when production, operation or service would cease or be prevented due to:
(1) physical damage not insured under this policy on or away from the covered location;
(2) planned or rescheduled shutdown or maintenance;
(3) strikes or other work stoppage; or
(4) any reason other than a covered loss
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.
If a covered loss ensues, we will pay for that loss.
INTERRUPTION OF SERVICES COVERAGE EXTENSION, modifying
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
(1) 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:
A. A satellite, regardless of cause; or
B. The operation of any breaker, switch, device or system designed to preserve or protect any property or system integrity; or
C. Any misalignment, miscalibration, tripping off-line, or any condition which can be corrected by resetting, tightening, adjusting, cleaning, or the performance of maintenance.
'Not entitled to indemnification of its losses'
The district court granted summary judgment in favor of Liberty Mutual.
In its decision, the district court said that it accepted for the purposes of Liberty Mutual’s motion that the cause of Berger’s power outage was the damaged D82 transmission line pole, as Berger’s expert had determined. The district court said that it also 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.
The district court then ruled that, even accepting these views as true, 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 reasoned that an “overhead” electric power line of a certain length required support to ensure that the line remained overhead. The wooden pole supporting the D82 transmission line served as that support, it noted. The district court then said that, even accepting that the pole functioned as more than simply a support girder and provided a “critical part of the system” that provided electrical power, it could “not be considered a ‘plant’ under the parties’ insurance policy.”
If the pole were considered to be a plant, the district court said, then “all overhead transmission lines supported by similar poles” would subsume the insurance policy’s specific carve-out of coverage for “overhead transmission and distribution lines.”
Business could have chosen applicable coverage
The district court observed that Berger could have chosen coverage for “[o]verhead transmission and distribution lines” but had not.
Accordingly, the district court concluded, Berger was not entitled to indemnification of its losses under the Liberty Mutual contract.
Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at firstname.lastname@example.org.