First-Party Water Damage Sublimit

Black River Partners, et al. v. Adirondack Mechanical Services and Liberty Mut. Ins. Co., Index No. 252627/2016, New York Supreme Court, Rensselaer County (December 5, 2018)

The court held that all the insured’s property damage and resulting business interruption loss was subject to a $50,000 per occurrence “Water Damage” sub-limit, thus finding in favor of Mound Cotton’s client, Liberty Mutual, and dismissing all claims in excess of $50,000.

Plaintiff-insured, the owner and operator of a hydroelectric generating facility, hired co-defendant Adirondack Mechanical Services to disassemble, inspect, and supervise repairs to one of two powerhouse generating units. Two weeks after the unit was reinstalled, the powerhouse flooded, causing significant water damage. After the powerhouse was de-watered, plaintiff discovered that the plate separating the powerhouse from the water had shifted and eight bolts had come loose. Liberty Mutual denied coverage on the ground that the cause of the failure of the mechanism securing the unit to the powerhouse constituted excluded faulty workmanship. Plaintiff brought an action against Adirondack for negligence, as well as against Liberty Mutual for a declaratory judgment that the policy provided coverage and plaintiff was entitled to $1,325,000 in damages. Liberty Mutual moved for partial summary judgment dismissing plaintiff’s claims in excess of the $50,000 “Water Damage” sub-limit.

The court agreed with Liberty Mutual that both the claimed property damage and resulting business interruption loss were subject to the $50,000 “Water Damage” sub-limit. In particular, the policy provided coverage for “Water Damage,” i.e., “loss, including salvage expenses, on property damaged by water resulting from any One Accident,” subject to a single $50,000 sub-limit. The policy defined an “accident” as a “sudden and accidental breakdown of an Object or part thereof which manifests itself at the time of its occurrence by physical damage that necessitates repair or replacement of the Object or part thereof.” An “Object” was defined as “any mechanical or electrical machine or apparatus used for the generation . . . of electrical power.” An “occurrence” was defined as a “loss, incident or series of incidents immediately arising out of a single event or originating case and includes all resultant or concomitant Named Insured losses.”

The court concluded that the sudden failure of the bolts securing the unit to the powerhouse fell squarely within the “Water Damage” sub-limit and held that there was no evidence that the runner or turbine blades were damaged and that “[a]ll of the claimed property damage was due to water that flooded the powerhouse.” Further, the sub-limit applied “per occurrence” and included “all resultant or concomitant Named Insured losses.” Thus, the court ruled that “Liberty was entitled to an order declaring that coverage for all loss and damage, including business interruption loss, resulting from water is subject to a $50,000 water damage sub-limit and dismissing Plaintiff’s claims against Liberty in excess of the $50,000 sub-limit.”

In addition, the court denied Adirondack’s cross-motion for summary judgment, rejecting Adirondack’s argument that it did not breach its duty of care with respect to installing the unit and that plaintiff had released it from all past and future claims. Specifically, Liberty had raised questions of fact relating to the cause of the malfunction, and the release entered into between plaintiff and Adirondack did not “express any intention to exempt Adirondack from liability for damages which may result from its own failure to use due care.”

Liberty Mut. Ins. Co. was represented by partner Philip C. Silverberg.

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