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Water Water Everywhere – Court Holds Off-Premises Flood Is Still A Flood, and Policy’s Flood Exclusion Controls (NY)

April 6, 2016

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In <em><a href="" rel="">Northern Spy Food Co., LLC v. Tower National Insurance</a></em>, Justice Carol Edmead of New York County Supreme Court recently granted an insurer summary judgment, dismissing a Manhattan restaurant’s cause of action arising from the carrier’s coverage denial for damages resulting from a flood-related power failure.
After Hurricane Sandy, Northern Spy Food Co., LLC submitted a claim to Tower National Insurance for “power outage/food spoilage” that resulted when a restaurant owned by Northern (“Premises”) lost power for several days. Tower’s investigation of Northern’s claim revealed that the “loss of business income and food spoilage claims resulted from an off premises power failure . . .  due to flood.” Like many other properties in Manhattan, the Premises lost power from October 29, 2012 to November 2, 2012 when ConEd’s East 13<sup>th</sup> Street Substation was shut down due to severe flooding. Because the loss was caused by flooding, which was expressly excluded from coverage under the Policy’s flood damage exclusion, Tower denied the claim.
Northern went to New York Supreme Court to contest Tower’s denial. Northern argued that the cause of loss was not a flood, but an “off premises power failure” that resulted in two types of covered losses: 1) loss of business income and 2) property damage (in the form of food spoilage). First, Northern contended that the Policy’s flood damage exclusion was inapplicable to their claim, as there was never any flood on the Premises; the only flooding occurred at the ConEd Substation, a location that Northern did not own, operate, occupy, possess, or control. Secondly, the Policy expressly identified “Covered Property” as “Stock,” which included the food that sustained damaged because of the power failure. According to Northern, this kind of property damage was not excluded by the Policy. Lastly, Northern felt that to the extent there were any ambiguities in the Policy, those ambiguities should be construed against Tower.
Tower moved for summary judgment, arguing that Northern’s loss resulted from a flood, which was not a “Covered Cause of Loss” within the clear language of the Policy. Therefore, both aspects of Northern’s claim should fail. First, in opposition to Northern’s claim for loss of business income, Tower explained that the Policy did not provide business income coverage because there was no direct physical loss or damage to Premises. To support this assertion, Tower noted that a ConEd engineer attested that the power loss at the Premises was due to the failure at the 13<sup>th</sup> Street Substation, which in turn was due to flooding. Secondly, Tower claimed that Northern’s claim for food spoilage was not covered under the Policy because the Policy’s Commercial Property Deluxe Restaurant Enhancement Endorsement provided coverage only where the spoliation resulted from a covered cause, which did not include flooding. In essence, Tower argued the undisputed facts demonstrated that Northern’s loss was caused entirely by a flood, and that Northern was trying to create ambiguity where none existed.
Justice Edmead agreed with Tower, noting that she was guided by the principals of contract interpretation. As with any other case of contract interpretation, unambiguous language in an insurance agreement must be given its plain and ordinary meaning. Here, the Policy stated that Tower would pay for lost business income due to the necessary suspension of operations that resulted from a “direct physical loss or damage to property” at the Premises.  However, with regards to Northern’s claim for lost business income, the Policy’s flood damage exclusion expressly said that Tower “will not pay for loss or damage caused <em>directly or indirectly</em> by . . . . Flood, surface water, waves, tides, tidal waves, overflow of any body of water, other their spray, all whether driven by wind or not.” A second subsection, concerning food spoilage, similarly stated that Tower “will not pay for loss or damage <em>directly or indirectly</em> caused by . . .the failure of power supplied to the described premises, however caused, if the failure occurs away from the described premises.”
It was uncontested that Northern’s claims for loss of business income and food spoilage resulted from a power outage, and that power outage was due to flooding of the ConEd Substation. Although Northern’s loss of business income was caused by the direct physical loss or damage to property at the Premises (in the form of food spoilage), the food spoilage itself was not caused by a “covered cause of loss” within the Policy. Because both of Northern’s claims were caused, albeit indirectly, by flooding, which was not a covered cause of loss, the Court granted Tower’s motion for summary judgment dismissing the complaint.  Thanks to Evan King for his contribution.  Please email <a href="">Brian Gibbons</a> with any questions.


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