Property insurers face millions of dollars of utility service interruption claims for losses associated with power outages caused by Superstorm Sandy. Many of these claims will arise in New York and New Jersey. So how does the service interruption claim case law compare – or differ – in New York and New Jersey? It is a tale of two cases.
New York’s and New Jersey’s highest courts have not written decisions interpreting service interruption coverage, but in each state the lower courts did issue decisions interpreting property insurance coverage for power outages during the August 2003 blackout. Both the New York and New Jersey decisions involved extensive spoilage claims by supermarket chains. Despite similar factual premises, the legal approaches of the two states to interpreting service interruption coverage were very different.
In a 2010 decision, Fruit and Vegetable Supreme v. Hartford Steam Boiler Insp. & Ins. Co., the Supreme Court of Kings County, New York denied a service interruption claim made under an equipment breakdown policy. The court found that there had not been an “accident” causing “physical damage to covered equipment.” The court also held that an exclusion in the service interruption coverage for equipment “tripping offline” applied.
In Fruit and Vegetable Supreme, the court flatly rejected the insured’s ambiguity arguments, allowing only for the possibility of coverage for power surge damage to the supermarket’s equipment before the general power outage. Of particular note, in Fruit and Vegetable Supreme the court showed no interest in diluting the requirement that for service interruption coverage to apply, there must be “physical damage” to equipment.
In a 2009 case, Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co., a New Jersey court took a very different approach. Wakefern involved an all risk policy and almost identical facts – a large spoilage claim by a supermarket whose power was lost because its utility’s relays tripped, putting the power grid offline during the blackout.
In Wakefern, the New Jersey Superior Court Appellate Division found coverage on the theory that the “physical damage” requirement of the policy’s off-premises service interruption coverage was ambiguous. The court reasoned that the electrical grid was arguably “physically damaged” because “the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity.” In other words, the court suggested that the failure of the transmission equipment to operate during the blackout could arguably be equated to “physical damage.”
The Wakefern court stretched the service interruption coverage to fit the “reasonable expectations” of the insured, saying that “from the perspective of the millions of customers deprived of electric power for several days, the system certainly suffered physical damage because it was incapable of providing electricity.”
The Wakefern case in New Jersey is controversial because of its disregard for the commonly accepted meaning of “physical damage.” The Fruit and Vegetables Supreme decision in New York represents a more traditional, contract-based view of service interruption coverage. In these two neighboring states both impacted by Superstorm Sandy, it is a tale of two cases – two very different cases -- on the same issue.
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