A recent case from a New York intermediate appeals court sheds some light on how the courts interpret property and business interruption coverage for power-generating equipment.  The case raised two interesting issues.  First, whether a pre-existing crack in a power-generating turbine precludes coverage.  The second, whether time-element coverage was available for a loss of future capacity revenues.  Insuring large power-generating equipment is a serious risk, especially when the equipment is not new.  Underwriters and claims examiners involved in property risks for utilities and other industrial equipment may find this case instructive.

In National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., a power-generating turbine at a power generating station was taken out of operation because of excessive vibrations caused by a crack in the turbine’s rotor.  The insured sought coverage for its losses under its property insurance policy tower.  The unit was taken out of operation during the policy period and had been functioning property until that time, notwithstanding the pre-policy crack in the rotor.  It was undisputed that the crack started prior to the inception of the policy and continued to lengthen during the policy period.  Notably, the unit functioned in line with an alarm and trip system with protocols established when the insurance policy was underwritten and was functioning properly under these protocols until the date it had to be taken off line because of the excessive vibrations caused by the expanding crack.

In affirming the grant of partial summary judgment to the insured and against the carriers, the court stated that the insured’s property sustained a physical loss or damage during the policy period.  A key factor in finding for the insured was the lack of any provision in the policy excluding physical loss or damage originating prior to the commencement of the policy period.  While prior acts exclusions may be commonplace in professional liability and E&O policies, realistically, it appears that excluding coverage for a turbine with a crack that complies with functionality protocols would have been a non-starter for the carriers and the insured.  This also contrasts with many of the property policies with anti-concurrent causation clauses precluding any recovery for hurricane damage when any part of the loss was caused by a non-covered cause.

The appellate court also affirmed the finding of time-element damages for the entire period when the unit was not available to generate electricity (8 months).  The court noted that New York case law does not generally period business interruption losses beyond the time needed to physically restore the property, but that those cases (retail) were not applicable here.  Because the unit was not available for power generation for the 8-month period, the insured was unable to earn future capacity revenues during the liability period.  The court rejected the application of the time element exclusion that provides no coverage for any increase in loss due to retroactive or future changes in capacity or bonus payments in effect at the time of loss.  Those payments were defined in the policy to be those paid in return for attaining or exceeding certain production levels.  Here, the insured was a regulated entity that sold at actual production capacity, not when it attained or exceeded specific production levels.  According to the court, the carriers did not meet their burden to show that the exclusion applied.