As Hurricane Florence, now a Category 3 hurricane, with winds in excess of 120 mph, approaches the Carolinas, it is almost certain that there will be widespread and prolonged power outages throughout both states. This will inevitably lead to commercial insureds seeking coverage for business interruption losses arising from the disruption of power to their businesses. Whether these losses are covered will depend on the policy wording used and the specific facts of each loss. Nevertheless, in anticipation of these types of claims, it is prudent to become familiar with the outcomes of prior litigation arising out of service interruption coverage disputes. While there is a dearth of case law on this issue coming out of the courts of North Carolina and South Carolina, several decisions are instructive in evaluating claims arising from Hurricane Florence.
Typically,
policies exclude losses arising out of the disruption of power caused by property
damage that occurs away from the insured premises. For instance, coverage would
not be afforded where high winds topple a tree that strikes a transformer that
is located down the road and off of the insured property which in turn causes a
power outage. However, in order to
address the impact of power outages of this nature, many commercial property insurers
offer a coverage extension or endorsement that provides limited coverage for
off-premises service interruption. Generally speaking, coverage for
off-premises service interruption responds to a loss when there is:
- A covered peril or cause of loss;
- Resulting physical damage to off-premises utility property that interrupts the utility service;
- Physical damage to the covered property on the insured’s premises OR a necessary interruption of the insured’s business operations because of the lack of utility services; and
- With respect to business interruption, an actual financial loss.
While the foregoing are general
guidelines with respect to the application of off-premises service interruption
coverage, the specific policy language at issue is paramount and often outcome
determinative. For instance, a North Carolina appellate court found coverage despite
the absence of a covered cause of loss in Great
American Insurance Co. v. Mesh Case, Inc. 185 N.C. App. 312, 580 S.E.2d 431
(2003) In that case, the power loss was caused by flooding from Hurricane
Floyd. Although flooding was not a covered cause of loss, the Court of Appeals
of North Carolina held that the extension of coverage for interruption of
service provided coverage. Id. The policy provided that the “interruption
must result from direct physical loss or damage by a Covered Cause of Loss…” Id. The court concluded that this language was
ambiguous and subject to two reasonable interpretations. Id. The first would have “Covered Cause of Loss” modify both direct
physical loss or damage. Id. The other interpretation would have
“direct physical loss” as an alternative to “damage by a Covered Cause of
Loss.” Id. Under the later definition, the court found
that direct physical loss caused by flood would be covered. Id.
In situations where the extension of coverage
specifically excludes losses caused by flood, courts may reach a different
conclusion. In Protection Mutual. Insurance
Co. v. Mitsubishi Silicon America Corp., 164 Or.App. 385, 992 P.2d 479
(1999) the Court of Appeals of Oregon held that there was no coverage where the
endorsement adding coverage for service interruption explicitly excluded loss
or damage from flood. Id. at 483-84.
In another case applying North
Carolina law, Bagelman’s Best, Inc. v.
Nationwide Mutual. Insurance Co., 167 N.C.App. 370, 605 S.E.2d 266 (2004),
the Court of Appeals for North Carolina held there was no coverage under an
extension of coverage for off premises service interruption when the interruption
was not caused by an “accident” as defined in the coverage. Id. “Accident” under the policy was defined
as the “sudden and accidental breakdown” of covered equipment. Id. In Bagelman’s, a decision was made to discontinue power service in the
face of rising flood waters from a series of hurricanes that struck North
Carolina in September of 1999. Id. The
court noted that the decision to cease power transmission was not the result of
any damage, but rather prompted by the threat of damage. Id. Accordingly, the court
determined that the interruption in power did not result from an “accident.” Accord Lyle Enterprises, Inc. v. Hartford
Steam Boiler Inspection and Ins. Co., 399 F. Supp. 2d 821 (W.D. Mich.
2005)(blackout in 2003 was not caused by direct physical damage to Detroit
Edison’s equipment); Contra Wakefern Food
Corp v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 968 A.2d 724
(2009)(court analyzing same 2003 blackout concluded it was caused by direct
physical damage and found coverage).
South Carolina’s judicial opinions dealing
with coverage for service interruption are scant, and primarily address
spoilage claims. In Brooklyn Bridge, Inc.
v. South Carolina Insurance Co., 309 S.C. 141, 420 S.E.2d 511 (1992), the
court held that an exclusion for power failure was not applicable to a spoilage
claim arising from the loss of power. In Brooklyn
Bridge, Inc. v. South Carolina Insurance Co., 309 S.C. 141, 420 S.E.2d 511
(1992), spoilage occurred when Hurricane Hugo caused power outages. Id. at 512. The policy in question
provided the following specific exclusionary language:
B. Exclusions
1. We will not
pay for loss or damage caused directly or indirectly by any of the following.
Such loss or damage is excluded regardless of any other causes or event that
contributes concurrently or in any sequence to the loss.
e. Power Failure
The failure of power or other utility service supplied
to the described premises, however caused, if the failure occurs away from the
described premises.
But if loss or damage by a Covered Cause of Loss
results, we will pay for that resulting loss or damage.
Id.
The trial court found that the “resulting loss” language in B.1.e provided
coverage because the loss was caused by Hurricane Hugo, which was a covered
cause of loss. Id. On appeal, the
insurer argued that the resulting loss language only provided coverage if the
loss of power itself resulted in a separate covered cause of loss. Id. The appellate court rejected that argument and
found the language was ambiguous because it was susceptible to more than one
reasonable interpretation. Id. The court noted that had the insurer could
have simply written “but if loss or damage by a Covered Cause of Loss results
from a power failure” to remedy the ambiguity. Id. While the court’s
interpretation of that language may have been strained, it is important to note
that courts will often go to great lengths to find coverage. This is
particularly true after a CAT like Hurricane Florence promises to be.
Notwithstanding the minimal precedent to guide courts in
North and South Carolina on the issue of service interruption, general
principles of coverage still apply. Important factors analyzed by the courts include the particular policy
language that is used, including the usage and placement of punctuation, and
the particular facts of each loss. These
factors are going to be critical in the analysis of any claim for service
interruption arising from Hurricane Florence.
Posted by Jonathan R. MacBride and Anaysa Gallardo Stutzman