(Article from Insurance Law Alert, September 2025)
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Holding
A policyholder was entitled to “Extra Expense” coverage for audit expenses incurred after a power surge caused a breakdown to the company’s computer system. Arizona Beverages USA, LLC v. Hanover Ins. Co., 2025 U.S. App. LEXIS 22456 (2d Cir. Sept. 2, 2025).
Background
A 2017 power surge at the corporate headquarters of Arizona Beverage resulted in damage to multiple disc drives and a failure of the company’s accounting system. Arizona Beverage was unable to access its account balances, receivables, inventory and order information. It also lost its financial data from 2016 and 2017, jeopardizing a credit agreement it had with Chase which required the submission of annual audits to avoid default.
To address these issues, Arizona Beverage’s independent auditor, Deloitte & Touche, had to change its standard auditing procedures, resulting in an additional $450,000 in expenses. Additionally, Arizona Beverage incurred other expenses, including overtime pay of its own employees to assist in the audit.
Hanover denied coverage for the audit expenses, instead reimbursing Arizona Beverage the $250,000 maximum for “Data Restoration” coverage. Arizona Beverage filed suit, seeking coverage under the Extra Expense clause. A New York district court ruled that the “restoration period” set forth in the Extra Expense clause began on the date of the power surge and ended when Deloitte completed its audit. The Second Circuit affirmed.
Decision
The Extra Expense provision stated that Hanover will “cover only the extra expenses that are necessary during the ‘restoration period’ that [Arizona Beverage] would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from an ‘accident’ or ‘electronic circuitry impairment’ to ‘covered property.’” In turn, “restoration period” was defined to end when property is “rebuilt, repaired, or replaced,” among other things.
The court rejected Hanover’s assertion that the “restoration period” ended on January 8, 2018, when Arizona Beverage’s computer equipment was repaired and/or replaced, and when the company regained software functionality. The court reasoned that the language of the Extra Expense provision does not tie the end of the restoration period to the repair or replacement of “covered equipment,” but rather defines “restoration period” to extend to the date upon which “property” is repaired or replaced. Therefore, while the term “covered equipment” would likely exclude financial data, the standalone term “property” does not. Importantly, Hanover did not dispute that the lost financial data constituted “property” under the policy, and the court found no basis to question the district court’s conclusion that Deloitte’s enhanced auditing procedures constituted a type of repair, replacement or rebuilding of the lost data.
Finally, the court ruled that the expenses incurred by Arizona Beverage were “necessary” because without the additional auditing procedures and overtime hours, the company would have defaulted on its credit agreement with Chase.
Comments
In finding coverage under the Extra Expense clause, the court deemed it irrelevant that the policy also included a specific Data Restoration provision, noting that “nothing in the plain language of the policy provides that the Data Restoration provision is the exclusive vehicle for policyholders to seek recovery for damages associated with lost data.”