ARIZONA BEVERAGES USA, LLC, Plaintiff-Appellee, v. HANOVER INSURANCE COMPANY, Defendant-Appellant.
No. 23-1177
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
September 2, 2025
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 2nd day of September, two thousand twenty-five.
PRESENT: DENNY CHIN, SUSAN L. CARNEY, RICHARD J. SULLIVAN, Circuit Judges.
For Defendant-Appellant: JEREMIAH L. O‘LEARY (Robert M. Wolf, on the brief), Finazzo Cossolini O‘Leary Meola & Hager, LLC, New York, NY.
For Plaintiff-Appellee: AMANDA PETERSON (Johnathan C. Lerner, on the brief), Lerner, Arnold & Winston, LLP, New York, NY.
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the August 30, 2023 judgment of the district court is AFFIRMED.
Hanover Insurance Company (“Hanover“) appeals from a grant of summary judgment in favor of Arizona Beverages USA, LLC (“Arizona“) as to Arizona‘s sole claim for breach of contract. On appeal, Hanover argues that the district court incorrectly interpreted various terms in Arizona‘s insurance policy to expand the policy‘s coverage to include audit expenses that Arizona incurred after a power surge caused a breakdown in its computer systems. We assume the parties’ familiarity with the underlying fаcts, procedural history, and issues on appeal, to which we refer only as necessary in order to resolve this appeal.
Hanover issued an insurance policy to Arizona for a coverage period spanning May 31, 2017 to Mаy 31, 2018. The “Equipment Breakdown Coverage Part” of the policy includes an “Extra Expense” provision, which states that Hanover will “cover only the extra expenses that are necessary during the ‘restoration period’ that [Arizona] would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from an ‘accident’ or ‘electronic circuitry impairment’ to ‘covered equipment.‘” J. App‘x at 213. The policy elsewhere definеs “restoration period” as “[t]he time it should reasonably take to resume [Arizona‘s] ‘business’ to a similar level of service starting from the date of a physical loss of or damage to property at a ‘covered location’ that is cаused by a covered peril” and “ending on the date . . . the property should be rebuilt, repaired, or replaced” or “business is resumed at a new permanent location.” Id. at 160. Separately, the policy provides for a maximum coverage amount of $250,000 for “Data Restoration,” id. at 119, i.e., the “necessary cost to research, replace[,] and restore lost ‘data,‘” id. at 211-12, which in turn is defined as “information or instructions stored in digital code capable of being procеssed by machinery,” id. at 210.
Days after the power surge, Arizona‘s independent auditor, Deloitte & Touche LLP (“Deloitte“), reached out tо Arizona to begin its annual audit for the 2017 year, which was due by May 31, 2018. But as a result of the power surge and loss of financial data for that year, Arizona could not provide Deloitte with the information it typically used to complete an annual audit. Tо make up for the lack of information, Deloitte had to change its normal auditing procedures, resulting in an additional 2,200 hours of work above what Deloitte originally had quoted Arizona, and costing Arizona an extra $450,000. Arizona also incurred $86,455 worth of overtime pay for its employees to assist Deloitte with the audit. And because Deloitte was unable to complete the audit by the May 31 deadline,
Arizona submitted a claim for the cost of the additional work performed by Deloitte, the overtime paid to Arizona employees, and the cost of the extensions, which totaled $552,573.25 (the “Audit Expenses“). Hanover, however, refusеd to reimburse Arizona for these expenses. Instead, it reimbursed Arizona the policy‘s stated maximum $250,000 amount for “data restoration” in connection with other expenses that Arizona incurred in attempting to recover its lost data.
On October 28, 2019, Arizona filed this suit for breach of contract, seeking to recover the Audit Expenses under the policy‘s Extra Expense provision. The district court granted summary judgment in favor of Arizona, concluding that the Audit Expenses were covered under the policy‘s Extrа Expense provision because they were incurred during the “restoration period,” when Arizona‘s “usual business operations” were interrupted as a result of the power surge. Sp. App‘x at 7-8, 11-12. The district court determined that the restoration pеriod began on the date of the power surge (October 29, 2017) and extended to the date that Deloitte completed its audit (October 24, 2018). Hanover timely appealed.
When a federal court hears a state-law claim while sitting in diversity, the federal court is bound by the law of the state in which it sits. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-80 (1938). Under New York law, an insurance contract must be interpreted “to give effect to the intent of the parties as expressed in the clear language of the contract.” Ment Bros. Iron Works Co. v. Interstate Fire & Cas. Co., 702 F.3d 118, 122 (2d Cir. 2012) (internal quotаtion marks omitted). In determining the meaning of the contract, courts will consider extrinsic evidence only if the relevant contractual provisions are ambiguous. See Primavera v. Rose & Kiernan, Inc., 670 N.Y.S.2d 223, 224 (App. Div. 3d Dep‘t 1998). However, if the terms of the policy remain ambiguous even after considеring extrinsic evidence, courts construe the ambiguous terms in favor of coverage and against the insurer who drafted the policy. See id. at 224-25. Therefore, “[i]n order for the insurer to prevail, it must demonstrate not only that its interpretation is reasonable but that it is the only fair interpretation.” Id. at 225.
III. Discussion
We review de novo a district court‘s grant of summary judgment, construing “all the evidence in the light most favorable to the non-movant” and drawing “all
First, Hanover asserts that the “restoration period” should have ended on January 8, 2018, when Arizona‘s “covered equipment” was “repair[ed], replace[d], or rebuil[t],” i.e., when Arizona replaced its damaged computer hardware and regained software functionality. Hanover Br. at 6-7. But the plain language of the Extra Expense provision does not tie the end of the restoration period to the repair, replacement, or rebuilding of “covered equipment.” Instead, the policy defines the “restoration period” as “[t]he time it should reasonably take to resume . . . ‘business’ to a similar level of service starting from the date of a physical loss of or damage to property and ending on the date: 1) the property should be rebuilt, repaired, or replaced; or 2) business is resumed at a new permanent location.” J. App‘x at 160 (emphases added). While “covered equipmеnt” is a defined term in the policy that would likely exclude Arizona‘s financial data, the standalone term “property” is not. See id. at 209-21. Hanover‘s argument that “[r]epair or replacement of ‘covered equipment,’ not ‘data,’ was the terminus dаte
Critically, Hanover does not dispute that the lost financial data constituted Arizona‘s “property” under the ordinary meaning of that term. Sеe, e.g., Property, Black‘s Law Dictionary (11th ed. 2019) (“Collectively, the rights in a valued resource such as land, chattel, or an intangible.“); cf. Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 292-93 (2007) (holding that “electronic records that [are] stored on a computer and [are] indistinguishable from printed documents” are “subject to a claim of conversion“). Nor does Hanover supply any convincing reason to question the district court‘s conclusion that Deloitte‘s “enhanced Audit procedures constituted a reasonable form of ‘repairing, reрlacing, or rebuilding’ the lost data.” Sp. App‘x at 11. That process involved “analyz[ing] additional types and forms of data” to “create[] a functional simulacrum of the lost data” sufficient to allow Deloitte to complete its audit, id. at 11-12, which was necessary for Arizona to “resume . . . ‘business’ to a similar level of service,” J. App‘x at 160.1
Although Arizona‘s financial data could not be recovered in its original form, Deloitte‘s enhanced procedures effectively recreated, through resort to alternative sources, the constellation of information necessary to complete its audit - thereby “replacing” the lost data for purposes of the audit. See Replace, New Oxford American Dictionary (3d ed. 2010) (to “take the place of” or to “provide or find a substitute for“).
Hanover insists that the policy‘s inclusion of bespoke provisions covering data loss demonstrates that the restoration period cannot be tied to Deloitte‘s efforts to recreate Arizonа‘s lost financial data. But nothing in the plain language of the policy provides that the Data Restoration provision is the exclusive vehicle for policyholders to seek recovery for damages associated with lost data. And to the extent that the policy‘s inclusion of specific terms addressing data loss introduces ambiguity into whether the Extra Expense provision covers the cost of replacing Arizona‘s 2017 financial data, New York law requires us to interpret “any ambiguities . . . аgainst the insurer and in favor of the insured.” J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 37 N.Y.3d 552, 561 (2021) (internal quotation marks omitted). Since Hanover has failed to demonstrate that the standalone term
Having concluded that Arizona incurred the Audit Expenses during the policy‘s restoration period, we agree with the district court that those expenses are covered under the Extra Expense provision. Under that provision, Hanover was required to cover “extra expenses that are necessary during the ‘restoration period’ that . . . would not have [been] incurred if there had been no direct physical loss or damage to property caused by . . . ‘electronic circuitry impairment’ to ‘covered equipment.‘” J. App‘x at 213. Arizona incurred the costs of Deloitte‘s enhanced audit and paid overtime to employees assisting Deloitte with its audit only because of the power surge that resulted in the failure of Arizona‘s account operating system and the loss of its 2017 financial data. And without such data, Deloitte was unable to complete its annual audit by the May 31, 2018 deadlinе, which in turn required Arizona to pay to extend that deadline to avoid defaulting on its credit agreement with Chase. Avoiding default clearly makes these expenses “necessary,” and they undoubtedly were only incurred because of the damage сaused by the power surge. We thus agree with the district court that
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We have considered Hanover‘s remaining arguments and find them to be without merit. Accordingly, we AFFIRM the judgmеnt of the district court.
FOR THE COURT:
Catherine O‘Hagan Wolfe, Clerk of Court