23-1177
2d Cir.Sep 2, 2025Background
- Hanover issued Arizona an insurance policy (May 31, 2017–May 31, 2018) with an Equipment Breakdown Coverage Part that included an “Extra Expense” provision covering extra expenses "during the ‘restoration period’" necessary to resume business after physical loss or electronic circuitry impairment.
- The policy separately capped Data Restoration coverage at $250,000 for the necessary cost to research, replace, and restore lost data.
- On Oct. 29, 2017, a power surge damaged Arizona’s disc drives and accounting system, destroying 2016–2017 financial data and preventing normal access to accounts and records.
- Deloitte had to change audit procedures, performing ~2,200 extra hours ($450,000), Arizona paid $86,455 overtime to staff, and $16,188.25 to extend an audit deadline to avoid default—total Audit Expenses = $552,573.25. Hanover paid only $250,000 under the Data Restoration limit and denied the remainder.
- Arizona sued for breach of contract; the district court granted summary judgment for Arizona, finding the Audit Expenses were incurred during the restoration period (Oct. 29, 2017 to Oct. 24, 2018) and covered by Extra Expense. The Second Circuit affirmed.
Issues
| Issue | Arizona's Argument | Hanover's Argument | Held |
|---|---|---|---|
| Did the Audit Expenses fall within the policy's "restoration period"? | Restoration period began at the surge and extended until Deloitte completed the audit; Deloitte's work was part of restoring lost data needed to resume business. | Restoration period ended when covered equipment was repaired/replaced (Jan 8, 2018); subsequent audit costs fall outside restoration period. | Restored data (or a functional substitute) is "property" and the restoration period can extend until business is reasonably resumed — here until audit completion. |
| Are the Audit Expenses covered under the Extra Expense provision or limited to the Data Restoration cap? | Extra Expense covers necessary costs to resume business caused by the equipment failure; Data Restoration cap is not the exclusive remedy for all data-related losses. | Inclusion of a Data Restoration limit shows parties intended a separate, exclusive remedy for data loss, capping recovery at $250,000. | Extra Expense covers these necessary audit-related costs; the Data Restoration provision is not an exclusive limit precluding Extra Expense coverage; ambiguities construed against insurer. |
| Is conducting the annual audit part of Arizona’s "business" such that audit costs are "necessary" extra expenses? | Audit (to service the Chase credit agreement) is a core business function performed at headquarters; Deloitte's work and related extensions were necessary to avoid default. | District court erred to treat the audit as part of "business." | Court agreed with district court: audit obligations are a component of Arizona’s usual business operations and related costs were necessary. |
Key Cases Cited
- Erie R.R. Co. v. Tompkins, 304 U.S. 64 (establishes Erie doctrine; federal courts applying state law in diversity)
- Ment Bros. Iron Works Co. v. Interstate Fire & Cas. Co., 702 F.3d 118 (2d Cir. 2012) (insurance contracts interpreted to give effect to parties' intent; clear language controls)
- Primavera v. Rose & Kiernan, Inc., 670 N.Y.S.2d 223 (App. Div. 1998) (extrinsic evidence considered only if contract terms are ambiguous)
- J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 37 N.Y.3d 552 (2021) (ambiguities in insurance policies construed against the insurer)
- McBride v. BIC Consumer Prods. Mfg. Co., 583 F.3d 92 (2d Cir. 2009) (standard of review for summary judgment)
- Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283 (2007) (electronic records can constitute property for purposes of conversion and related claims)