Pillsbury Winthrop Shaw Pittman

Superstorm Sandy and Con Edison’s power shutdown: lessons from Johnson Gallagher

By Joseph D Jean and Amanda H Freyre

In the wake of Superstorm Sandy, property insurers have repeatedly denied coverage for business owners in lower Manhattan — arguing that ConEd intentionally cut off power to its networks and that flooding damaged ConEd’s facilities. A recent Southern District of New York decision — Johnson Gallagher Magliery LLC v Charter Oak Fire Ins Co, No. 13 CIV. 866, 2014 WL 1041831, at *1 (SDNY 18 March 2014) — considered coverage for a policyholder’s losses caused by ConEd’s Bowling Green Network outage. The court partially denied the insurer’s summary judgment motion because the insurer did not demonstrate that the service interruption during ConEd’s post-restoration period was excluded by the policy.

Johnson Gallagher is an important decision because it is the first to examine the circumstances of the Bowling Green Network shutdown and the implications that sequence of events may have on insurance coverage for policyholder business interruption losses arising from that network. The court considered: (1) the pre-emptive shutdown just prior to the storm; (2) the period of restoration resulting from physical damage to electrical systems caused by the storm; and (3) the delays in reopening the plaintiff’s building as a result of New York City building authority orders and the testing of systems by the building owners. Based on a very limited record, the SDNY concluded there was no coverage for the pre-emptive shutdown period due to lack of physical damage and that a broadly worded flood exclusion precluded coverage for the restoration period following Sandy’s damage to the Bowling Green Network’s electrical systems. But, importantly, the SDNY held that the water exclusion did not preclude coverage for the losses suffered during ConEd’s post-restoration period, because the loss during that period was not caused by water damage or the pre-emptive shutdown. Also significant is that the court did not consider damage to other ConEd networks (for example the widely reported fires and explosions at ConEd’s 13th Street facility) or whether other aspects of the policy such as sewer back-up coverage might apply. Presentation and consideration of these facts, as well as the particular circumstances of each policyholder’s loss, could expand the possibility of insurance coverage for Sandy-related losses…

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