On April 22 , 2009, the Appellate Division of the New Jersey Superior Court published its March 9, 2009 opinion holding that the massive Aug. 13, 2003 electrical blackout of the eastern United States and portions of Canada inflicted “property damage” sufficient to support a property insurance claim. The court held that the loss of functionality that resulted when protective safety equipment shut down the power grid and caused the blackout of August 2003 qualified as “physical damage” for property insurance purposes. See Wakefern Food Corporation v. Liberty Mutual Fire Insurance Company, No. A-2010-07T3 slip op (March 9, 2009). As a result, insurers were not entitled to summary judgment in their favor on Wakefern’s claims for food spoilage and business interruption at their supermarkets resulting from the blackout.

On Aug. 14, 2003, three sagging power lines contacted trees in northern Ohio and, ultimately, caused a cascading power outage in the Eastern Interconnection of North American power grid. The Eastern Interconnection encompasses the eastern two-thirds of the United States and much of Canada. The cascading outage was caused by successive overloading of portions of the grid as other portions were taken off-line by protective devices within the grid designed to prevent dangerous overloading and damage to equipment. The protective devices in the system performed their functions well and prevented destruction of the expensive transformers and other transmission equipment interconnected into the power grid, but those same protective devices also locked up this equipment and prevented it from being restarted for as long as four days after the outage began. This deprived customers of electricity for extended periods. “The event contributed to at least 11 deaths and cost an estimated $6 billion.”

Many businesses, including the supermarkets that were plaintiffs in Wakefern Food, suffered property and business interruption losses from the outage. The Wakefern Food plaintiffs claimed the cost of food spoilage and loss of business as a result of the power outage under their all-risk policies, which provided coverage for off-premises electrical power interruptions. That coverage applied “only if the interruption results: … [f]rom physical damage by a peril insured against.” The insurers denied the claims, stating that there had been no physical damage to the power grid apparatus, only a lack of operation. In the ensuing litigation, the Appellate Division overturned the trial court ruling in favor of the insurers, and held that the loss of functionality of the power grid equipment constituted “physical damage” for purposes of insurance coverage.

Undoubtedly, many policyholders faced similar denials of their property insurance claims arising out of the blackout. The general New Jersey contract statute of limitations is six years, so there is still a small window of time in which to challenge denials of coverage subject to that limitation period. Even in situations where there is a shorter suit-limitation period applicable to the insurance, there may still be a chance to challenge a denial, because New Jersey, as well as some other states, follows a practice whereby the statutorily mandated one-year suit limitation period in fire insurance policies is tolled from the time of reporting the claim to the insurer, until there is a definitive denial of the claim. If there was never any definitive denial, there may still be time remaining in which to resurrect the claim.

If you had a claim for damage to your property as a result of the 2003 blackout that was denied, it may be time to take another look.