Turbine Damage Covered Despite Crack Existed Before Policy Inception

NY court found “injury-in-fact” theory did not bar $58MM claim as policy only requires some injury during its term.

A trial judge in New York State Court found that Ace INA Insurance (“Ace INA”) Factory Mutual Insurance Co. (“Factory Mutual”) and Arch Insurance Co. (“Arch”) were obligated to reimburse approximately $58MM to TransCanada Energy USA, Inc. (“TransCanada”) for property damage and business interruption associated with the failure of a turbine.

TransCanada had purchased policies by the insurers that had inception dates after it had purchased the Ravenswood Generating Station in Long Island in 2008.  The faulty turbine at issue experienced excessive vibrations on September 12, 2008 and it was taken out of service.  On September 16, 2008, a crack in the unit’s rotor was discovered.  It was not returned to service until May 18, 2009.

Two coverage actions ensued:  1) one by TransCanada seeking in excess $48MM for “lost sales of capacity” under a first-party “all risks” and combined business interruption policy by which the property was insured against all risks of physical loss or damage;  and 2) another in which the defendant insurers sought a declaration of no coverage.

Transcanada moved for summary judgment in both cases arguing that the property policy applied to the loss, the “capacity payments” exclusion, did not apply, and the “period of liability” policy provision did not limit its right to payment for the business interruption loss as a result of being out of service from September 12, 2008 and May 18, 2009.  The insurers also moved for summary judgment, and the court consolidated all of the pending motions for disposition.

TransCanada argued that it was covered because: 1) the “all risks” nature of the policy; 2) the turbine was operating properly on the inception date, August 26, 2008; 3) the unit operated properly until September 12, 2008; and 4) the crack that was found in the rotor on September 16, 2008 had expanded during the policy period and caused the breakdown.  The insurers denied coverage on the grounds that the loss or damage was caused by a crack that had formed before the inception of the policy.

The Court found that TransCanada had met its prima facie burden to show coverage under the policy citing case law that held that as long as some of the damage was sustained during the policy period, it was immaterial when the causative event occurred.

The court noted that the unit functioned normally until September 12, 2008 despite the crack, and that it did not break down until it experienced excessive vibrations on that day.  The court thus found that “Even if the crack required repair before then, it caused no damage until September 12.”

The opinion rejected the insurers’ reliance on the “injury-in-fact” theory, branding it  “misplaced as TransCanada does not argue that discovery of the crack during the policy period triggered coverage; rather, it argues that because the loss was incurred during the policy period, it is covered.” The court found “it is irrelevant here whether the crack existed or could have been discovered before the policy commenced.”

With respect to alleged damages, TransCanada’s business interruption losses were not realized until “auctions of capacity” held after the policies ended because capacity revenues are calculated and paid based on a “rolling average and capacity” of previous periods.  The insurers refused to pay for the losses at these auctions because they were incurred after the “period of liability” ended.  The court noted that a recognized  purpose of business interruption insurance is to “return the insured that amount of profit that would have been earned during the period of interruption had a casualty not occurred.”  The court said it was “undisputed” that TransCanada had been unable to generate the usual amount of electricity and that when it sold those months of electricity at auction it did so at a decreased amount due to its decreased capacity.  Because the economic loss occurred due to a “covered physical loss or damage” TransCanada had met its coverage burden.

Finally, the court addressed the insurers’ argument that TransCanada’s claim for lost capacity sales was excluded as “capacity payments” were defined as those “that become payable to the Insured in return for attaining or exceeding certain production levels.”  The court rejected the insurers’ argument accepting TransCanada’s argument that its capacity sales are not capacity payments as defined in the policy because it is paid on its actual production and not for attaining or exceeding certain production levels.

Nat’l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA Inc., No. 650515/2010 and TC Ravenswood LLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pennsylvania, No. 400759/2011 (N.Y.Sup.Ct. Mar. 2, 2016).

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