In a recent New Jersey decision regarding business interruption coverage, the Appellate Division held that plaintiff’s insurance policy only covered damage that occurred on the plaintiff’s premises, and that coverage was limited by a coverage extension endorsement.

In Schultz Furriers. Inc. v. Travelers Casualty Ins. Co. of America, plaintiff operated a business selling luxury outerwear and fur, and provided garment cleaning, repair, and storage services.  Schultz procured a commercial liability policy from Travelers with an October 31, 2011 to October 31, 2012 policy period.  In October 2012, during Superstorm Sandy, electrical transformers were knocked down, disrupting the power supply and forcing Schultz to close its business from October 29, 2012 through November 5, 2012.  Schultz filed a business interruption insurance claim and Travelers offered $2,500 while relying on the policy’s “Power Pac Endorsement,” and disclaimed coverage as to any additional loss.  Schultz, seeking coverage for more than $2,500, filed a lawsuit against Travelers.

The Court held that Travelers would have been required to cover actual loss of business income caused by the direct physical loss of or damage to the property at Schultz’s premises pursuant to the Business Income and Extra Expense section of the Travelers policy.  However, Schultz alleged that the business loss was a result of the damaged electrical transformers offsite, as opposed to direct damage to Schultz’s premises.  Furthermore, the Travelers policy contained an exclusion barring coverage for loss caused directly or indirectly by the “failure or fluctuation of power or other utility service … if the cause of the failure or fluctuation occurs away from the described premises.”  The policy’s Equipment Breakdown Coverage Extension did not provide coverage for the loss, as the equipment breakdown occurred away from the premises and the extension excluded coverage for damage resulting from a windstorm.

Additionally, the Court held that Travelers was correct in capping coverage for the loss at $2,500 pursuant to the policy’s Power Pac Endorsement, which provided a coverage extension for the loss of business income caused by the interruption of service to Schultz’s premises.  This endorsement provided that the interruption must have resulted from direct physical loss or damage to, among other things, power supply services “not on the described premises.”  The coverage extension under the Power Pac Endorsement was capped at $2,500 per occurrence.  The Court found that the Power Pac Endorsement allowed Schultz’s claim while capping the amount of coverage, and that Travelers had satisfied its obligation to Schultz by paying that amount for the business interruption due to power outage.

While Superstorm Sandy occurred over four and a half years ago, this case serves as a reminder that the resulting insurance litigation remains ongoing and provides useful instruction for carriers looking to fully satisfy their obligations towards their insureds while minimizing exposure by including similar endorsements and limitations in their policies with respect to business interruption coverage.

Thanks to Rebecca Rose for her contribution to this post.