Hunton Insurance Recovery Blog

A New York trial court has ruled that TransCanada Energy USA Inc. (TransCanada) is entitled to recover $58 million from its property insurers for loss caused by a cracked generator turbine rotor.  The recovery encompasses approximately $7 million in property damage to the cracked turbine and more than $50 million in lost profits.

Central to the dispute was whether the damage to the turbine, which emanated from a crack in turbine rotor that pre-dated inception of the insurance policy, constituted “physical loss or damage” to covered property occurring during the policy period.  The crack apparently grew in size and, within weeks of TransCanada purchasing the facility and its insurance incepting, resulted in a vibration that required a shutdown of the turbine.  TransCanada tendered the claim to its first-party property insurers who denied coverage for the loss.  The insurers claimed that the damage to the turbine occurred before the policy’s effective date.

The parties moved for summary judgment, which the court granted in favor of TransCanada.  The court found that the policy affords coverage for loss caused by damage to property that occurs during the policy period.  The court found that nothing in the plain language of the policy requires that the damage first begin during the policy period, or that damage that precedes the policy period should somehow be excluded.  Rather, as the court explained, “the policy insures against ‘all risks of physical loss or damage’ to the property occurring during the policy period, without regard to the date or time of the incident giving rise to the loss or damage.”

The insurers also tried to avoid covering the resulting loss of income, claiming that the manner in which TransCanada recognized revenue placed the claimed income loss beyond the policy’s “period of liability.”  The court rejected the insurers’ argument that because the “capacity payments” that TransCanada would have received for the electricity had the turbine not been shut down would not have occurred until after the turbine had been repaired, those payments would not have occurred during the “period of liability.”  In rejecting that argument, the court noted that the manner in which TransCanada receives payment for the electricity is not relevant to whether a loss of resulting income is covered under the policy.  Rather, what matters is that TransCanada was unable to generate and sell its service during the “period of liability.”  Thus, the resulting loss of income would be covered, regardless of when that income would be recognized.