Hanover Insurance Co. must cover the maker of Arizona Iced Tea for additional audit expenses from a power surge that erased years of financial data, the Second Circuit determined Tuesday, finding that delays and additional costs were directly traced to the surge and therefore covered.

A three-judge panel affirmed a New York federal judge's ruling that Arizona's audit expenses are covered under the "extra expenses" portion of the commercial insurance policy. The federal judge reasoned the expenses are covered because the policy language suggests that to be so if the audit was part of the iced tea producer's usual business operations and were incurred during the restoration period. The restoration period ended in October 2018 when Deloitte and Touche LLP concluded the audit, the Second Circuit said, upholding the lower court's finding.

The appellate court rejected Hanover's argument that the "restoration period" should have ended Jan. 8, 2018, when Arizona replaced its damaged computer hardware and regained software functionality.

"The plain language of the Extra Expense provision does not tie the end of the restoration period to the repair, replacement or rebuilding of 'covered equipment,'" the panel said.

Instead, "restoration period" is defined in the policy as the time it reasonably takes to resume "'business' to a similar level of service starting from the date of a physical loss of or damage to property" and ending either on the date the property should be rebuilt, repaired or replaced or that business is resumed at a new permanent location, the opinion said.

On Oct. 29, 2017, a power surge at Arizona's corporate headquarters in Woodbury, New York, damaged multiple disc drives, leaving the company unable to access account balances, inventory and order information. By Jan. 8, 2018, Arizona regained functionality of its present period operations but lost the data for 2016 and 2017, which was needed for its annual audit, according to court records.

Since the audit expenses were thus incurred during the policy's restoration period, the Second Circuit agreed with the lower court that those expenses were covered under the extra expense provision.

"Arizona incurred the costs of Deloitte's enhanced audit and paid overtime to employees assisting Deloitte with its audit only because of the power surge that resulted in the failure of Arizona's account operating system and the loss of its 2017 financial data," the panel said.

Without that data, Deloitte was unable to complete the annual audit by a May 31, 2018, deadline set under the terms of a credit agreement Arizona entered into with JPMorgan Chase, according to court records. As a result, Arizona was required to pay to extend that deadline to avoid defaulting on its credit agreement.

"Avoiding default clearly makes these expenses 'necessary,' and they undoubtedly were only incurred because of the damage caused by the power surge," the Second Circuit said.

Representatives of Arizona and Hanover did not respond to requests for comment Tuesday.

U.S. Circuit Judges Denny Chin, Susan L. Carney and Richard J. Sullivan sat on the panel for the Second Circuit.

Arizona is represented by Amanda Peterson and Johnathan C. Lerner of Lerner Arnold & Winston LLP.

Hanover is represented by Jeremiah L. O'Leary and Robert M. Wolf of Finazzo Cossolini O'Leary Meola & Hager LLC.

The case is Arizona Beverages USA LLC v. Hanover Insurance Co., case number 23-1177, in the U.S. Court of Appeals for the Second Circuit.