17 F. Supp. 3d 323
S.D.N.Y.2014Background
- Newman Myers is a law firm whose Manhattan office at 40 Wall Street lost power and elevator service when Con Edison preemptively shut off electricity to the Bowling Green network during Hurricane Sandy (Oct. 29–Nov. 3, 2012). The firm treated the building as closed and resumed normal operations Nov. 5.
- Newman Myers submitted a claim to its commercial insurer, Great Northern, for business income loss and extra expenses under a Policy providing such coverage "for direct physical loss or damage."
- Great Northern denied the claim, asserting the Policy does not cover losses absent "direct physical loss or damage" and pointing to a flood exclusion as an alternative defense.
- Newman Myers sued for breach of contract in New York State court; Great Northern removed to federal court based on diversity. The parties filed cross-motions for summary judgment; facts were undisputed.
- The sole legal question was whether the Policy covers Newman Myers’s claimed losses (i.e., whether the outage constituted "direct physical loss or damage") and, alternatively, whether a flood exclusion would bar coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the power outage at 40 Wall Street (and Con Ed’s shutdown at Bowling Green) constituted “direct physical loss or damage” under the Policy | "Direct physical loss or damage" need not be structural; loss of use or a change from a satisfactory to unsatisfactory state (e.g., loss of power rendering the premises inaccessible) suffices | The phrase requires actual physical harm to the insured premises; forced closure caused by an off-site utility shutdown is not physical damage to the building | Held for Great Northern: "direct physical loss or damage" unambiguously requires actual physical damage to the insured property; no coverage |
| Whether a policy flood exclusion bars coverage if losses stem from Con Ed’s preemptive shutdown due to anticipated flooding | Flood exclusion should not apply because the loss was caused by Con Ed’s shutdown, not by actual flooding | Flood exclusion would preclude recovery if the loss is caused by flood or flood-related events | Court did not decide as to dispositive ruling on coverage; observed Great Northern had not carried its burden to show the flood exclusion clearly applied and construed exclusions narrowly in favor of the insured |
Key Cases Cited
- Morgan Stanley Grp. Inc. v. New England Ins. Co., 225 F.3d 270 (2d Cir. 2000) (contract interpretation and ambiguity principles)
- White v. Cont’l Cas. Co., 9 N.Y.3d 264 (N.Y. 2007) (definition of contract ambiguity under New York law)
- Roundabout Theatre Co. v. Continental Cas. Co., 302 A.D.2d 1 (N.Y. App. Div. 2002) (business-interruption coverage limited to losses involving physical damage)
- TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010) (cases finding noxious conditions may constitute physical loss where premises rendered unusable)
- Murray v. State Farm Fire & Cas. Co., 203 W. Va. 477 (W. Va. 1998) (physical loss may exist without structural damage when property rendered uninhabitable)
- United Airlines, Inc. v. Ins. Co. of State of Pa., 385 F. Supp. 2d 343 (S.D.N.Y. 2005) ("physical" modifier requires physical damage for business-interruption coverage)