A law firm sued its insurer for loss of business income when its power was shut off before Superstorm Sandy. The court denied the claim, finding that without physical damage to the office, there was no "direct physical loss" as required by the policy. However, the court also said that if damage had occurred, the flood exclusion would not apply because the power shutoff was precautionary, not directly caused by flooding.

1. The Insurance Coverage Law Information Center
The following article is from National Underwriter’s latest online resource,
FC&S Legal: The Insurance Coverage Law Information Center.
UTILITY’S PRE-SANDY POWER SHUTDOWN DID NOT CAUSE
“DIRECT PHYSICAL LOSS” TO UNHARMED OFFICE, COURT
RULES – BUT IT REJECTS INSURER’S ARGUMENT THAT FLOOD
EXCLUSION WOULD HAVE APPLIED
May 1, 2014 Steven A. Meyerowitz, Esq., Director, FC&S Legal
A federal district court in New York has rejected a law firm’s “loss of business income” claim resulting from a utility’s
decision to shut down power in anticipation of Superstorm Sandy’s arrival, finding that because the firm’s office had not
been damaged, the firm had not suffered “direct physical loss or damage.” However, the court also found, in dicta, that if
there had been such a loss, coverage would not have been excluded by the policy’s flood exclusion because “flooding”
and concerns of “imminent flooding damage” were not equivalent.
The Case
On October 29, 2012, in anticipation of storm-related flooding, utility provider Consolidated Edison Co. of New York, Inc.
(“Con Ed”) preemptively shut off power to certain of its service networks to preserve the integrity of the utility system. As
a result, Newman Myers Kreines Gross & Harris P.C., a law firm, was without power at its lower Manhattan office for several
days.
Newman Myers filed a claim under its property insurance policy, issued by Great Northern Insurance Company, for loss of
business income and extra expenses occasioned by its inability to access its office during the power outage.
Great Northern denied the claim on the ground that Newman Myers had not suffered a covered loss under the policy.
Newman Myers sued. The parties moved for summary judgment.
The Policy
The policy provided coverage for loss of business income and extra expenses in the event of:
direct physical loss or damage by a covered peril to property.
The policy’s “Ingress And Egress” provision afforded additional coverage for business income loss or extra expense due
to the impairment of business operations:
when existing ingress to or egress from a premises shown in the Declarations is prevented due to direct physical loss or
damage by a covered peril to property at a location contiguous to such premises.
The policy’s “Loss of Utilities” provision afforded additional coverage for loss of business income and extra expenses due
to a business interruption that was:
caused by or result[s] from direct physical loss or damage by a covered peril to: building; personal property of a utility
located either inside or outside of a building; or service property
necessary to provide the insured premises with:
power supply.
Call 1-800-543-0874 | Email customerservice@SummitProNets.com | www.fcandslegal.com

2. The Court’s Decision
The court granted the insurer’s motion.
In its decision, it first noted that Newman Myers’ office had not sustained any structural damage as a result of Sandy.
In the court’s view, the “critical policy language” in this case – “direct physical loss or damage” – unambiguously required
some form of “actual, physical damage to the insured premises to trigger loss of business income and extra expense
coverage.” The court said that the firm could not show any such loss or damage to its building as a result of either (1) its
inability to access its office for a few days or, (2) Con Ed’s decision to shut off the power. It ruled that:
The words “direct” and “physical,” which modify the phrase “loss or damage,” ordinarily connote actual, demonstra-
ble harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the
premises themselves, or the adverse business consequences that flow from such closure…. [T]he Court is unaware of
authority supporting, Newman Myers’s argument that “direct physical loss or damage” should be read to include to
extend to mere loss of use of a premises, where there has been no physical damage to such premises.
Interestingly, the court, in dicta, rejected Great Northern’s argument that even if there were “direct physical loss or
damage” to a covered premises as a result of the Sandy-related power outage, Newman Myers still could not recover
because the policy expressly excluded coverage for loss or damage caused by flooding.
The court explained that Con Ed had preemptively shut down the power as Sandy made its approach, before any flood
damage actually was sustained. In other words, the court declared, “Con Ed’s was a precautionary measure, to maintain
the integrity of the utility network in the event of future flooding. Thus, the power outage Newman Myers complains of
was not directly caused by flood, as that term is commonly understood.” Indeed, the court concluded, although Great
Northern argued that “flooding” and “concerns of imminent flood damage” were the reason for “the preemptive
shutdown of power,” “those terms are not equivalent.”
The case is Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., No. 13 Civ. 2177(PAE) (S.D.N.Y. Apr. 24,
2014).
Call 1-800-543-0874 | Email customerservice@SummitProNets.com | www.fcandslegal.com

3. Call 1-800-543-0874 | Email customerservice@SummitProNets.com | www.fcandslegal.com
Copyright © 2014 The National Underwriter Company. All Rights Reserved.
NOTE: The content posted to this account from FC&S Legal: The Insurance Coverage Law Information Center is current to the date of its initial
publication. There may have been further developments of the issues discussed since the original publication.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding
that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent
professional person should be sought.
For more information, or to begin your free trial:
• Call: 1-800-543-0874
• Email: customerservice@SummitProNets.com
• Online: www.fcandslegal.com
FC&S Legal guarantees you instant access to the most authoritative and comprehensive
insurance coverage law information available today.
This powerful, up-to-the-minute online resource enables you to stay apprised
of the latest developments through your desktop, laptop, tablet, or smart phone
—whenever and wherever you need it.