Hurricane Florence: Service Interruption Claims in North and South Carolina

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As Hurricane Florence, now a Category 3 hurricane, with winds in excess of 120 mph, approaches the Carolinas, it is almost certain that there will be widespread and prolonged power outages throughout both states. This will inevitably lead to commercial insureds seeking coverage for business interruption losses arising from the disruption of power to their businesses. Whether these losses are covered will depend on the policy wording used and the specific facts of each loss. Nevertheless, in anticipation of these types of claims, it is prudent to become familiar with the outcomes of prior litigation arising out of service interruption coverage disputes. While there is a dearth of case law on this issue coming out of the courts of North Carolina and South Carolina, several decisions are instructive in evaluating claims arising from Hurricane Florence.
 
Typically, policies exclude losses arising out of the disruption of power caused by property damage that occurs away from the insured premises. For instance, coverage would not be afforded where high winds topple a tree that strikes a transformer that is located down the road and off of the insured property which in turn causes a power outage.  However, in order to address the impact of power outages of this nature, many commercial property insurers offer a coverage extension or endorsement that provides limited coverage for off-premises service interruption. Generally speaking, coverage for off-premises service interruption responds to a loss when there is:
 
  1. A covered peril or cause of loss;
  2. Resulting physical damage to off-premises utility property that interrupts the utility service;
  3. Physical damage to the covered property on the insured’s premises OR a necessary interruption of the insured’s business operations because of the lack of utility services; and
  4. With respect to business interruption, an actual financial loss.

While the foregoing are general guidelines with respect to the application of off-premises service interruption coverage, the specific policy language at issue is paramount and often outcome determinative. For instance, a North Carolina appellate court found coverage despite the absence of a covered cause of loss in Great American Insurance Co. v. Mesh Case, Inc. 185 N.C. App. 312, 580 S.E.2d 431 (2003) In that case, the power loss was caused by flooding from Hurricane Floyd. Although flooding was not a covered cause of loss, the Court of Appeals of North Carolina held that the extension of coverage for interruption of service provided coverage. Id.  The policy provided that the “interruption must result from direct physical loss or damage by a Covered Cause of Loss…” Id.  The court concluded that this language was ambiguous and subject to two reasonable interpretations. Id. The first would have “Covered Cause of Loss” modify both direct physical loss or damage. Id. The other interpretation would have “direct physical loss” as an alternative to “damage by a Covered Cause of Loss.” Id.  Under the later definition, the court found that direct physical loss caused by flood would be covered. Id.
 
In situations where the extension of coverage specifically excludes losses caused by flood, courts may reach a different conclusion. In Protection Mutual. Insurance Co. v. Mitsubishi Silicon America Corp., 164 Or.App. 385, 992 P.2d 479 (1999) the Court of Appeals of Oregon held that there was no coverage where the endorsement adding coverage for service interruption explicitly excluded loss or damage from flood. Id. at 483-84.
 
In another case applying North Carolina law, Bagelman’s Best, Inc. v. Nationwide Mutual. Insurance Co., 167 N.C.App. 370, 605 S.E.2d 266 (2004), the Court of Appeals for North Carolina held there was no coverage under an extension of coverage for off premises service interruption when the interruption was not caused by an “accident” as defined in the coverage. Id. “Accident” under the policy was defined as the “sudden and accidental breakdown” of covered equipment. Id. In Bagelman’s, a decision was made to discontinue power service in the face of rising flood waters from a series of hurricanes that struck North Carolina in September of 1999. Id. The court noted that the decision to cease power transmission was not the result of any damage, but rather prompted by the threat of damage. Id.  Accordingly, the court determined that the interruption in power did not result from an “accident.” Accord Lyle Enterprises, Inc. v. Hartford Steam Boiler Inspection and Ins. Co., 399 F. Supp. 2d 821 (W.D. Mich. 2005)(blackout in 2003 was not caused by direct physical damage to Detroit Edison’s equipment); Contra Wakefern Food Corp v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 968 A.2d 724 (2009)(court analyzing same 2003 blackout concluded it was caused by direct physical damage and found coverage).
 
South Carolina’s judicial opinions dealing with coverage for service interruption are scant, and primarily address spoilage claims. In Brooklyn Bridge, Inc. v. South Carolina Insurance Co., 309 S.C. 141, 420 S.E.2d 511 (1992), the court held that an exclusion for power failure was not applicable to a spoilage claim arising from the loss of power. In Brooklyn Bridge, Inc. v. South Carolina Insurance Co., 309 S.C. 141, 420 S.E.2d 511 (1992), spoilage occurred when Hurricane Hugo caused power outages. Id. at 512. The policy in question provided the following specific exclusionary language:
 
            B. Exclusions
 
1.  We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other causes or event that contributes concurrently or in any sequence to the loss. 
 
e. Power Failure
 
The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises.
 
But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.
 
Id. The trial court found that the “resulting loss” language in B.1.e provided coverage because the loss was caused by Hurricane Hugo, which was a covered cause of loss. Id. On appeal, the insurer argued that the resulting loss language only provided coverage if the loss of power itself resulted in a separate covered cause of loss. Id.  The appellate court rejected that argument and found the language was ambiguous because it was susceptible to more than one reasonable interpretation. Id.  The court noted that had the insurer could have simply written “but if loss or damage by a Covered Cause of Loss results from a power failure” to remedy the ambiguity. Id.  While the court’s interpretation of that language may have been strained, it is important to note that courts will often go to great lengths to find coverage. This is particularly true after a CAT like Hurricane Florence promises to be.
 
Notwithstanding the minimal precedent to guide courts in North and South Carolina on the issue of service interruption, general principles of coverage still apply. Important factors analyzed by the courts include the particular policy language that is used, including the usage and placement of punctuation, and the particular facts of each loss.  These factors are going to be critical in the analysis of any claim for service interruption arising from Hurricane Florence.
 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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