Hidden dangers lurk beneath the streets of New York City by virtue of over 6,000 miles of aging pipelines transporting natural gas to thousands of buildings. The city’s underground network of pipelines is one of the oldest in the country; The Center for an Urban Future reports that the average age of the pipes is 56 years old. Complicating matters is that many of the apartment buildings are more than 75 years old and often contain internal gas distribution piping systems that have not been maintained, inspected, or repaired/replaced since installation. The gas is relied upon for heating the buildings and, in apartment buildings, for cooking.
Consolidated Edison Company of New York Inc. (Con Edison) provides gas, steam, and electricity to more than 10 million people living in New York City and Westchester County, and is authorized to withhold or discontinue its gas service whenever a gas distribution line or a part thereof is deemed to be unsafe. To help ensure a safe system, Con Edison requires that an internal system pass a gas meter pressure test in order to restore service that is discontinued as a result of someone smelling gas, a fire, a break in the pipe itself caused by faulty workmanship of a contractor, or some other dangerous condition. This also applies in instances where gas service to a building is interrupted for longer than six months.
Throughout our combined 60 years working with the insurance industry, we have been involved in many claims that initially arise because someone in a New York City apartment complex smells gas and contacts the local utility company, which then discontinues the gas service while investigating, refusing to turn it back on until the gas lines are pressure tested.
The pressure testing often reveals leaks in the system that are the result of pre-existing wear and tear and deterioration of the gas lines over a period of time. The building owner often is required to replace the gas piping system throughout the building as a result of the failure of pressure testing.
Each claim involving gas lines differs. The most publicized cases arise from gas explosions, which result in first- and third-party property claims, as well as general liability claims involving personal injuries. We will address only the first-party property claims that arise from the failure of gas lines to survive the pressure testing that is mandated before gas service can be restored, along with the various policy exclusions and extensions of coverage that may impact these claims. Of course, as with all claims, a complete and thorough investigation of the facts for each loss must be undertaken and supported by, when necessary, qualified experts.
Wear and Tear Exclusion
The pressure testing that is legally required to be conducted prior to the restoration of gas service often detects failures due to wear and tear and corrosion of the gas piping system. For instance, in 415 East 80th Street Housing Corp. v. Agricultural Insurance Company, the insured smelled gas. Con Edison discovered a leak in the main gas line outside the insured’s building and turned off the gas service to the building while it repaired the line. Pressure testing revealed leaks throughout the building.
Applying the policy’s wear and tear exclusion, the court found for the carrier. Noting that the first occurrence in the series of events was the leak in the gas line outside of the insured’s building, the court explained that “if a fire or explosion had resulted, and if the insured’s building had been damaged thereby, it would surely have been a casualty covered by the insurance policy. However, no such casualty happened. Instead, the events led to the discovery of leakage inside plaintiff’s building.”
Further, the court held that this was caused by the wear and tear and deterioration of the interior lines, and it is these lines that were repaired for the amount claimed. (See also Simkowitz v. Firemen’s Fund Ins. Co.)
Faulty Workmanship Exclusion
Insureds also have filed claims seeking recovery for the replacement of gas lines damaged by contractors who mistakenly punctured gas pipes while doing unrelated work. Insurance companies often will deny such claims based on the standard ISO commercial property policy exclusion for loss or damage caused by “faulty, inadequate, or defective…workmanship, repair, construction [and] renovation,” as well as “maintenance of part or all of any property on or off the described premises.”
New York courts have upheld the validity of the faulty workmanship exclusion, but we have not found any reported cases involving gas lines. For example, see Copacabana Realty LLC v. Fireman’s Fund Ins. Co., which dismissed the insured’s coverage complaint, as the insurer demonstrated that its defective or inadequate workmanship exclusion clearly and unambiguously applied to the insured’s property damage, and Bodine v. Am. Intl. Ins. Co., which found that the “faulty, inadequate, or defective planning” exclusion applied where the insured contracted to have an addition to his house constructed, and this construction was found to be one of various reasons that the insured’s retaining wall collapsed.
In at least one case, New York courts have found that the faulty workmanship exclusion applies only to work performed by or on behalf of the insured, despite the lack of such limitation in the policy wording. As an example, see 242-44 E. 77th St., LLC v. Greater N.Y. Mut. Ins. Co., in which the court states, “The only reasonable explanation of the negligent work exclusion is that it applies to negligent work by or on behalf of the insured in planning, designing, or constructing the insured building, which results in damage to the building.”
Ordinance or Law Exclusion/Coverage
The standard ISO commercial property policy contains an ordinance or law exclusion that precludes coverage for “any loss or damage caused directly or indirectly by the enforcement of any ordinance of law: (1) regulating the construction, use, or repair of any property; or (2) requiring the tearing down of any property, including the cost of removing its debris.”
In 20 East 35 Owners Corp. v. Great Am. Ins. Co., a tenant’s contractor drilled through the floor of the insured’s building and accidentally ruptured a gas line, which resulted in Con Edison shutting off the gas to the entire building. A plumber who performed a preliminary pressure test of the gas lines became concerned that gas would leak due to the age of the gas cocks and, specifically, that the gas meter headers that control gas flow and the individual apartment gas valves had to be replaced because they would not sustain the pressure test due to its age and worn condition. After the gas cocks were replaced, the building passed the test and gas service was restored.
The insured sought recovery for the cost of the gas cocks and to repair damage to the walls, but did not seek coverage for the repair of the gas pipe itself. Significantly, the insurers admitted that the initial break of the gas pipe in the tenant’s floor was a covered cause of loss.
The court found that the insured was entitled to coverage, holding that Section 27-922(d) of the New York City Building Code is “an ordinance regulating the construction use or repair of any property,” but that compliance with the ordinance was not the cause of the claimed damages. The court found that the damages arose solely through the ordinance’s enforcement, which required the demolition of the operational gas cocks and portions of the apartment walls. “These gas cocks were part of the same property and were not damaged by the covered cause of loss, namely, the ruptured gas pipe. Replacement of the old but functional gas cocks was necessary to satisfy the ordinance requirement that the gas system be tested at eight times the normal working conditions.”
The court also found that the policy’s wear and tear exclusion was inapplicable, stating that since the carrier admitted the initial break of the gas pipe was a covered cause of loss, the required replacement of the gas cocks and portions of the walls resulted not from deterioration or wear and tear, but rather from the rupturing of the gas pipe.
In 61 Jane Street Tenants Corp. v. Great American Insurance Company and American Alliance Insurance Company, the building owner sought a declaration that its all-risk insurance policy covered the expenses of repairing a gas distribution system in its building that failed a pressure test after being turned off due to a fire involving an apartment stove. The court found in favor of the insurer, based on the ordinance or law exclusion, which specifically precluded coverage for “the cost associated with the enforcement of any ordinance or law that requires [the insured] to test plumbing, gas, or other building systems for integrity or condition.”
The court found that the stove fire did not damage the gas system or cause the system to fail the test; rather, the weaknesses in the system predated the fire and the fire was simply the occasion for its discovery. Since the language in the policy excluding costs associated with testing was clear, the court found that the losses claimed by the plaintiff were not covered by the insurance policy.
Insurers often argue that ordinance or law coverage is only applicable for properties that sustain covered, direct physical damage that “results in enforcement of the ordinance or law.” For instance, in St. George Tower v Insurance Co. of Greater New York, the insurer was not obligated to cover the cost of repairing concrete floor slabs to bring the property into compliance with the building code because the problem with the slabs was not related to the covered water damage, and, as such, the ordinance or law coverage was not triggered.
In situations where the claim involves uncovered, direct physical damage to the insured’s building caused by faulty workmanship (damage caused by faulty workmanship caused the gas distribution system to be shut down and the legally required testing to be performed), insurers have a potential argument that a policy’s affirmative ordinance or law coverage is not triggered.