Tower 570 Company LP v. Affiliated FM Insurance Company

Background

On May 20, 2019, an electrical arc-fault occurred in a vertical cable known as Riser 1, which supplied power to 570 Lexington Avenue. The fault led to an arc-flash and arc-blast that damaged Riser 1, the electrical vault, other nearby building components, and potentially the building’s other risers.

Tower 570 had an all-risk insurance policy from Affiliated FM Insurance Company (AFM) and a separate boiler-and-machinery policy from Travelers Property Casualty Company of America. The AFM policy covered physical loss or damage except where excluded. Its boiler-and-machinery exclusion addressed damage originating in electrical equipment and caused by electrical breakdown. The policy’s definition also stated that boiler-and-machinery damage did not include physical loss or damage caused by a combustion explosion or fire. The policy separately excluded wear and tear, deterioration, and related conditions.

Tower 570 reported the loss as an explosion and later described it as electrical arcing. AFM denied coverage, citing the boiler-and-machinery and deterioration exclusions. Tower 570 claimed total losses of $4,977,971.46. Travelers paid $483,500 and later settled with Tower 570 for the full cost of repairing and replacing Riser 1. Tower 570 therefore sought coverage from AFM only for damage other than the damage to Riser 1.

Expert-Testimony Motions

The court applied Federal Rule of Evidence 702, which permits qualified expert testimony when it is relevant, based on sufficient facts, produced through reliable methods, and reliably applied. Under the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., the trial court acts as a gatekeeper to ensure that expert testimony is relevant and reliable.

AFM moved to exclude testimony from Tower 570’s electrical-engineering expert, John P. McBride, concerning whether the arc-fault or arc-blast was a “combustion explosion.” The court found that McBride’s opinion was unsupported. His reports provided little analysis, relied on a YouTube video that did not establish his claimed proposition, and cited no testing, peer-reviewed sources, authoritative publications, or other experts supporting his interpretation. The court concluded that the opinion was based on unsupported assertion rather than reliable data or methodology. AFM’s motion to exclude that testimony was therefore granted.

Tower 570 moved to exclude AFM’s experts, Dale Cagwin and Christopher Minogue. Because Cagwin had been retained to respond to McBride’s combustion-explosion opinion, the court presumed that AFM no longer needed Cagwin’s testimony after McBride’s exclusion. The court focused on Minogue, who had inspected the risers and concluded that only Riser 1 required repair. The court held that Minogue’s experience estimating repairs provided some basis for evaluating whether damage existed and what caused it. Any weaknesses in his opinion could be addressed through cross-examination and affected its weight rather than its admissibility. Tower 570’s motion to exclude AFM’s expert testimony was denied.

Summary-Judgment Motions

The court explained that, under New York law, Tower 570 first had to establish a prima facie claim under the all-risk policy. Because the policy was an all-risk policy, Tower 570 had an insurable interest in the building, and the arc-fault was a fortuitous loss, the court held that Tower 570 met that initial burden. AFM then had to establish that a policy exclusion applied. If AFM did so, Tower 570 had to prove that an exception to the exclusion restored coverage.

The court held that the boiler-and-machinery exclusion applied generally. The arc-fault was an electrical breakdown that originated in Riser 1, which was part of the building’s electrical equipment. The court also rejected Tower 570’s argument that the exclusion was ambiguous because it was complicated or because some terms, including “explosion,” were undefined. The court stated that the policy terms had to be given their ordinary meaning and that the parties’ disagreement did not by itself make the language ambiguous.

The court ruled that Tower 570 had the burden of proving that the damage resulted from a combustion explosion or fire, which were exceptions to the boiler-and-machinery exclusion. Because McBride’s combustion-explosion testimony was excluded, the court found no evidence supporting Tower 570’s theory that the arc-blast was a combustion explosion. AFM was therefore entitled to summary judgment on that issue.

The court reached a different conclusion concerning fire. Evidence indicated that an independent adjuster observed fire, heat, smoke, soot, and heat damage; that a building engineer saw heavy smoke and firefighters suppressing the fire; and that the damage may have resulted from fire or efforts to extinguish it. AFM also presented evidence that the damage resulted instead from a pressure wave or other concussive force caused by the arc-fault. Because a reasonable jury could decide either way, the court found a genuine dispute of material fact regarding whether fire caused the damage.

Disposition

AFM’s motion to exclude John P. McBride’s testimony was granted. Tower 570’s motion to exclude AFM’s expert witnesses was denied. AFM’s motion for summary judgment was granted in part and denied in part: it was granted as to the general applicability of the boiler-and-machinery exclusion and the inapplicability of the combustion-explosion exception, and denied as to the fire exception and the wear-and-tear exclusion. Tower 570’s motion for summary judgment was denied.

The court directed the parties to submit a proposed joint pretrial order and related materials within forty-five days, stated that it would schedule a pretrial conference, and directed the parties to discuss settlement.