In the aftermath of Hurricane Sandy, many businesses in Manhattan’s Financial District suffered business losses due to flooding that made their buildings inaccessible because of lack of basic services such as electricity and heat.  One such company was the law firm of Lester Schwab Katz & Dwyer, who filed a claim against its policy with Great Northern Insurance Co. for $490,000 in loss of business income incurred from October 29, 2012 and the days following the storm.  Lester Schwab’s policy insured against loss of business income and expenses as a result of a covered peril and specifically contained a flood endorsement with $1,000,000 in coverage.

However, Great Northern denied coverage, and in its coverage opinion cited to the fact that the loss of power and communications suffered by Lester Schwab was due to damage to the underground utility electrical infrastructure caused by flood damage, which was not a covered peril.  Furthermore, Great Northern cited to the fact that the City of New York ordered an evacuation of Flood Zone A only, and since Lester Schwab’s office was located outside of Flood Zone A, there was no order of evacuation which prohibited access to its premises.

Lester Schwab’s complaint notes that an explosion at Consolidated Edison’s facility – which is a covered peril – caused the “Loss of Utilities.”  Moreover, Lester Schwab cites to the Flood Endorsement schedule in its policy, which did not delete coverage for the “Business Income with Extra Expense” coverage form that contained “Additional Coverage” for a loss sustained by “Loss of Utilities.”

This lawsuit was filed after an unsuccessful attempt at mediation.  It will be interesting to see how the court rules on interpretation of this policy, as it is arguable that there are other businesses with similar policies that could also bring suit.

Special thanks to Michael Nunley for his contributions to this post.  For more information, please contact Nicole Y. Brown at .