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A New York appellate court ruled that an insurance policy covered losses arising from the malfunction of a turbine engine, notwithstanding that the mechanical issues were caused by a turbine crack that had begun before the policy incepted.  TransCanada Energy USA, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2017 WL 4125652 (N.Y. App. Div. 1^st Dep’t Sept. 19, 2017).

TransCanada sought coverage under an all-risk policy for losses that resulted when a power turbine was taken out of operation due to excessive vibrations.  The turbine was removed from operation during the policy period, although a crack in the turbine had begun to form prior to the policy period.  The insurer denied coverage on several bases, each of which was rejected by a New York trial court, which granted summary judgment in TransCanada’s favor.  The appellate court affirmed.

The appellate court ruled that the covered physical loss occurred when the turbine was taken out of operation, emphasizing that the policy does not exclude physical loss that originated prior the commencement of the policy.  The court further held that TransCanada’s business interruption coverage was not limited by the date upon which the turbine was returned to service.  The insurer argued that a “period of liability” provision, defined as the period beginning at the time of physical loss until the time of repair or replacement, limited damages to the period ending on May 18, 2009, when the turbine was reinstalled.  The court disagreed, explaining that although TransCanada’s lost sales were not calculated and paid until after May 18, 2009, the revenue losses represent decreased revenues sustained during the “period of liability.”  As the trial court noted, New York law typically holds that “business interruption losses experienced by the insured beyond the time needed to physically restore the destroyed or damaged property are not recoverable.”  However, the Appellate Division deemed this case distinguishable based on the particular manner in which TransCanada calculated and paid its capacity revenues.  Finally, the court rejected application of a “capacity payments” exclusion, finding that it applies to losses of bonus-type payments based on the attainment of certain production levels, which were not implicated here.