Introduction

This coverage dispute sits at the intersection of equipment breakdown insurance and the increasingly common reality that a physical or electrical incident can wipe out critical digital information. After a power surge damaged Arizona Beverages’ computer hardware and erased its 2016–2017 financial data, the company incurred over $550,000 in additional audit, employee overtime, and loan-extension costs to recreate the information necessary to satisfy an annual audit required by its credit facility with JP Morgan Chase. Hanover Insurance paid the policy’s $250,000 “Data Restoration” sublimit for other data-recovery costs, but refused to cover the audit-related expenses under the policy’s “Extra Expense” coverage.

The district court granted summary judgment to Arizona Beverages, holding that the “restoration period” did not end when the hardware was repaired on January 8, 2018, but when the business could reasonably resume its usual level of service—here, when Deloitte completed the annual audit on October 24, 2018 using enhanced procedures that functionally replaced the lost financial data. The Second Circuit affirmed.

Key issues on appeal:

• Whether the “restoration period” ends upon repair/replace/rebuild of “covered equipment,” or instead upon repair/replace/rebuild of “property,” including lost financial data needed to resume business to a similar level of service.
• Whether audit costs, employee overtime assisting the audit, and fees to extend an audit deadline (to avoid loan default) are “necessary” Extra Expenses that would not have been incurred but for the covered accident.
• Whether the presence of a “Data Restoration” sublimit makes that provision the exclusive vehicle for data-related losses.

Summary of the Judgment

The Second Circuit (Judges Chin, Carney, and Sullivan) affirmed summary judgment for Arizona Beverages on its breach-of-contract claim. Applying New York law, the court held that:

• The policy’s definition of “restoration period” ties the end of the period to the time reasonably necessary to resume the insured’s business to a similar level of service, ending when “property” is rebuilt/repaired/replaced or when business resumes at a new permanent location. The term “property” (unlike “covered equipment”) is not specially defined and encompasses the insured’s financial data.
• Because the power surge destroyed Arizona’s financial data, the restoration period did not end when the hardware was fixed on January 8, 2018. It ended when Deloitte’s enhanced audit procedures functionally “replaced” the lost data, enabling completion of the annual audit on October 24, 2018 and the resumption of business to a similar level of service.
• Audit fees, employee overtime assisting the audit, and extension fees to avoid a loan default were “necessary” Extra Expenses that would not have been incurred absent the covered accident, and thus were covered.
• The “Data Restoration” sublimit did not operate as an exclusive remedy for all data-related losses; any ambiguity created by the policy’s structure is construed against the insurer and in favor of coverage.

Analysis

A. Precedents and Authorities Relied Upon

• Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938): As this is a diversity case, New York substantive law governs interpretation of the insurance policy.
• Ment Bros. Iron Works Co. v. Interstate Fire & Cas. Co., 702 F.3d 118 (2d Cir. 2012): Under New York law, the intent of the parties is derived from the policy’s clear language; courts read the contract as a whole and enforce unambiguous terms as written.
• Primavera v. Rose & Kiernan, Inc., 670 N.Y.S.2d 223 (3d Dep’t 1998): Extrinsic evidence is considered only if terms are ambiguous; if ambiguity persists, it is construed in favor of coverage and against the drafter. The insurer must show its interpretation is not merely reasonable but the only fair one.
• McBride v. BIC Consumer Prods. Mfg. Co., 583 F.3d 92 (2d Cir. 2009): De novo review of summary judgment, with inferences drawn for the non-movant.
• Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283 (2007): New York recognizes electronic records indistinguishable from printed documents as “property” susceptible to conversion. The Second Circuit’s reasoning draws support from Thyroff to treat business data as “property” in ordinary parlance.
• J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 37 N.Y.3d 552 (2021): Any remaining ambiguity is resolved in favor of the insured; the opinion cites this rule to reject Hanover’s exclusivity argument for the Data Restoration sublimit.
• Dictionary sources: The court invoked Black’s Law Dictionary (definition of “property”) and the New Oxford American Dictionary (definition of “replace”) to give terms their ordinary meaning.

These authorities together empowered the court to read the policy text literally, lean on ordinary meanings where the policy is silent, and resolve structural uncertainty in favor of the insured.

B. Legal Reasoning

1) The operative policy language

Two provisions drove the outcome:

• Extra Expense coverage: Hanover must cover “extra expenses” that are necessary during the “restoration period” and would not have been incurred but for direct physical loss or damage to property caused by an “accident” or “electronic circuitry impairment” to “covered equipment.”
• Restoration period definition: The period starts on the date of physical loss or damage at a covered location and ends when “the property should be rebuilt, repaired, or replaced” or business is resumed at a new permanent location. Notably, this clause uses “property,” not “covered equipment.”

2) “Property” versus “covered equipment”

Hanover argued the restoration period ended when the damaged hardware was fixed (January 8, 2018). The Second Circuit rejected that framing. The drafters used “covered equipment” to describe the trigger (“electronic circuitry impairment”), but used “property” (undefined) to define the end-point for the restoration period. In ordinary English, and consistent with New York’s recognition of digital records as property (Thyroff), “property” includes the insured’s financial data. Because the accident destroyed that data, the insured’s “property” remained unrepaired until the functional equivalent of the data was recreated.

3) Functional replacement of data as repair/replace/rebuild

Although the financial data could not be recovered in its original form, Deloitte’s enhanced audit procedures—analyzing alternate sources and employing additional testing—“created a functional simulacrum of the lost data” sufficient to complete the 2017 audit. That work “replaced” the missing property for purposes of the company’s audit obligations and was necessary for Arizona to “resume business to a similar level of service.” The restoration period therefore extended to October 24, 2018, when the audit was completed.

4) “Usual business operations” include servicing lending covenants

Hanover contended that annual audits are not part of Arizona’s “business,” defined by the policy as “the usual business operations occurring at covered locations.” The court disagreed: maintaining a major line of credit was core to Arizona’s operations, and completing mandatory annual audits is integral to servicing that credit agreement. There was no genuine dispute of material fact on this point.

5) Necessity and causation of the extra expenses

The Extra Expense clause requires that costs be “necessary” and not incurred but for the covered accident. The court linked each element:

• Deloitte’s additional fees: Incurred only because the loss of data forced a change in audit procedures and a 2,200-hour increase in work.
• Employee overtime: Necessary to assist the enhanced audit in the absence of normal data access.
• Audit deadline extension fees: Necessary to avoid default under the Chase credit facility after the audit could not be completed on time due to the data loss.

All were directly “caused by or resulting from” the electronic circuitry impairment, satisfying the coverage trigger and the necessity requirement.

6) The Data Restoration sublimit is not exclusive

Hanover paid the $250,000 “Data Restoration” sublimit for other data-recovery efforts and argued that data-related losses are confined to that sublimit. The policy, however, does not state that the sublimit is the exclusive avenue for all costs associated with data loss. At most, the structure created ambiguity—and New York law resolves that in favor of the insured. The Extra Expense coverage thus remained available for different categories of necessary, time-element costs arising during the restoration period.

C. Impact and Practical Implications

1) For time-element coverage: the endpoint can turn on data, not hardware

This decision underscores that, where policy language mirrors the wording here, the “restoration period” may end when the insured’s “property” (including intangible data) is repaired, replaced, or rebuilt—rather than when physical equipment is repaired. If resuming business to a similar level of service reasonably requires functional replacement of critical information, the period can extend months beyond physical repairs.

2) Audit and compliance costs can be covered “Extra Expenses”

Costs to meet regulatory, contractual, or financing obligations can be covered if they are necessary to avoid impairment of business operations and would not have been incurred but for the covered accident. This includes third-party professional fees, internal overtime, and fees paid to avoid default where those payments are a direct outgrowth of the covered event.

3) The presence of a data sublimit does not shut the door on other coverages

Insurers often include a discrete “Data Restoration” sublimit. This decision cautions that, absent clear exclusivity language, that sublimit will not displace separate coverage parts (like Extra Expense) for distinct categories of loss associated with data destruction.

4) Drafting and underwriting adjustments for insurers

• Consider expressly defining “property” to include or exclude digital data, and specify whether the period of restoration is tied to “covered equipment” or to “property.”
• If intended, add clear exclusivity language stating that costs connected to restoring, recreating, or substituting for data are recoverable only under the data sublimit.
• Address audit, compliance, and covenant-related expenses directly—either by sublimit or exclusion—if the underwriting intent is to limit such exposures.

5) Claim presentation strategies for policyholders

• Document the causal chain: show that the extra expenses were incurred only because of the covered accident and were necessary to resume business at a comparable level.
• Tie the end of the restoration period to the earliest date the functional replacement of lost capabilities/data was achieved, not just the date of physical repair.
• Capture “usual business operations” evidence, including credit agreements, audit obligations, and how those functions are integral to ongoing operations at covered locations.

6) Broader doctrinal signal

While nonprecedential, the case is a datapoint in a larger trend recognizing that modern “property” encompasses core business data and that “repair/replace/rebuild” can be satisfied by recreating a functional equivalent when original data is unrecoverable. Courts may look to how the business actually returns to its pre-loss level of service rather than focus exclusively on hardware repair dates.

Complex Concepts Simplified

• Extra Expense coverage: Pays the additional costs you must spend to keep the business going during the recovery period—costs you would not have had if the loss had not occurred.
• Restoration period: The window of time from the loss until the business can reasonably get back to a similar level of operations. It ends when the “property” is repaired/replaced/rebuilt or operations move to a new permanent location.
• Electronic circuitry impairment: A covered type of accident involving electronic equipment that causes it to fail or malfunction (for example, due to a power surge).
• Data Restoration sublimit: A capped amount the insurer will pay specifically to research, replace, and restore lost data. Without clear exclusivity language, it does not necessarily limit other coverages for different kinds of losses tied to the same event.
• Contra proferentem: When policy language is genuinely ambiguous, courts interpret it against the insurer (who drafted it) and in favor of coverage.
• Functional replacement: When original data is unrecoverable, recreating the necessary information from other sources to perform the same business function can count as “replacing” the property.
• Usual business operations: Not just production or sales—also includes essential functions like meeting audit requirements tied to financing, when those are integral to running the business.
• Summary order (nonprecedential): A decision that is citable but not binding as precedent. It still offers useful guidance on how courts interpret similar policy language.

Conclusion

The Second Circuit’s summary order affirms a pragmatic, text-driven approach to modern time-element insurance. Three messages stand out.

• Text matters: By using “property” rather than “covered equipment” to mark the end of the restoration period, the policy left room for the court to include digital financial data. That choice extended the restoration period beyond the date of physical repair.
• Business reality matters: The restoration period tracks when the insured can reasonably resume operations at a similar level, which for Arizona meant completing an annual audit necessary to maintain its credit facility. Expenses to accomplish that—Deloitte’s extra work, employee overtime, and deadline-extension fees—were “necessary” Extra Expenses caused by the loss.
• Structure is not exclusivity: A data-restoration sublimit does not, by itself, displace other coverage parts for distinct categories of loss associated with data destruction. Ambiguity is resolved in favor of the insured.

Although nonprecedential, the decision will be persuasive in future disputes over the scope of “restoration period” and coverage for audit/compliance costs after data loss from an equipment breakdown. Insurers seeking a different outcome should draft with precision; policyholders should document how data loss impairs core business functions and why the claimed expenses were necessary to regain a comparable level of service.