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TransCanada Wins $48 Million Coverage Dispute

March 11, 2016

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Earlier, we reported on <a href="">TransCanada’s assault on attorney-client privilege</a>.  Now we turn to TransCanada’s ultimate victory in the Supreme Court of New York County.
The distinction between property damage and what causes property damage can be as subtle as it is important.  As the New York Supreme Court’s recent decision in <em>National Union Fire Ins, Co. v. TransCanada Energy USA, Inc. </em>makes clear, multi-million dollar decisions can hinge on that distinction.
In that action, TransCanada’s subsidiary was the operator of a power plant which generates electricity for New York City.  On the day TransCanada acquired the facility, it obtained an all-risk property insurance policy.  A couple of weeks after acquiring the facility, one of the facility’s electricity-generating units, which generated close to 40 percent of the facility’s capacity and majority of its revenue, was taken out of service due to excessive vibrations.  While being repaired, TransCanada discovered a crack in the unit, which was then taken out of service for eight months.  As a result of being taken out of service, the insured sought coverage for lost capacity revenue in the amount of $48 million.
TransCanada’s insurer argued that there was no coverage under the policy because the loss or damage suffered during the policy period resulted from a crack which existed before the policy went into effect.  The court disagreed, and ruled the all-risks policy provided coverage.  In reaching that conclusion, the court reasoned that under New York law, it is not the cause of property damage which is relevant in determining when coverage is triggered.  According to the court, “…it is irrelevant here whether the crack existed or could have been discovered before the policy period commenced.  As the dispositive issue is not whether the event causing the loss or damage occurred during the policy period, but whether there was physical loss or damage during the policy period, the insurers fail to raise an issue of fact as to whether TransCanada’s loss is covered under the policy.”
The same approach was also fatal to the insurer’s arguments that there was no coverage due to the fact that the resulting lost capacity sales took place after the policy expired.  Again, the court focused not on the monetary consequences, but on the timing of the damage which led to those consequences: “the loss at issue here is the decreased capacity sustained during the period of liability, even though the amount of the loss was not ascertained until after the period of liability when the auctions were held.”
<em>TransCanada </em>is a useful reminder that the trigger for property damage coverage under New York law is the moment when the property is actually damaged.  Whether the dispute concerns a simple matter such as faulty workmanship on a single-family residence or property damage to equipment providing electricity to New York City, the trigger is not what ultimately causes the damage, but the damage itself. Timing is everything.
Thanks to Mike Gauvin for his contribution to this post.  For more information, please email Dennis Wade at <a href=""><u></u></a>.


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