Power Blackout – Do You Have Insurance?
Following the province-wide power failure in August, 2003, wide-spread power outage continues to be of concern in Southern Ontario. For farmers, agribusinesses and other industries who maintain inventories of perishable products which require refrigeration, losses which may be incurred as a result of extended power outages may be substantial. Can these businesses claim recovery of such losses from their insurance companies?
The Ontario Superior Court of Justice recently considered an insurance claim in excess of $1 million by the owner of a chain of grocery stores for the loss of its perishable food inventory resulting from the August, 2003 power outage. The insurance policy at issue indemnified the insured for any property lost or damaged by the “perils insured” but “subject to the terms and conditions” of the policy. Insured perils included “all risks of direct physical loss or damage to the property insured, except as herein excluded”. Included in the exclusion was “loss or damage caused directly or indirectly by … changes of temperature”. However, the exclusion clause expressly provided that “this exclusion does not apply to loss or damage caused directly by a peril otherwise insured and not otherwise excluded”.
In determining that this insurance coverage extended to indemnify the insured for the losses claimed, the court was required to consider whether the loss or damage to the perishable food inventory was “caused directly” by an ensured peril so as to render inapplicable the exclusion of loss or damage caused by changes of temperature. The court stated:
“Significant argument was focussed on what direct means. This determination is fundamental to the coverage questions. If the losses are determined indirect/consequential ones, the court’s involvement is complete. Resort need not be had to the exclusions. If however, the losses are deemed direct, coverage will extend unless there are exclusions that apply”.
The court referred to a number of previous court decisions which have established that, for the purpose of determining insurance coverage, “the cause of the loss or damage covered by the contracts must be a ‘proximate cause’ ”, or “the effective or dominant cause of the occurrence”. Included in these prior cases was a successful insurance claim by the owner of a chicken farm for the value of chickens which were smothered and died following a power interruption which shut down the ventilation system to the chicken barn. The court concluded:
“In this case, the province-wide blackout caused the loss of power at (the supermarkets). This loss of power led to the inevitable result of a loss in refrigeration, which in turn led to the spoilage of food. Such inevitability leads to the conclusion that the blackout was the efficient or actual cause of the spoilage of food. …. The court finds that the property losses suffered by the applicant are directly – proximately – caused by the blackout and would be covered by the broad terms of the policy. That said, coverage may still be legally denied if the event falls under an exception within the policy”.
With respect to the change of temperature exclusion, the court similarly concluded that, since the loss or damage was caused “directly” by an insured peril, the change of temperature exclusion did not apply.
For businesses facing substantial risk of damage to perishable food inventories from future power outages, availability of applicable insurance coverage is a significant concern. Since responding coverage will depend upon the wording of specific insurance contracts, these businesses should carefully review their existing coverage to ensure they have the necessary protection.