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Surviving the Apocalypse: Tales from Lawyers on the Front Lines of Catastrophic Losses

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Adam Leitman Bailey speaks on hurricanes and other catastrophic events and how real estate professionals can learn from past mistakes

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Surviving the Apocalypse: Tales from Lawyers on the Front Lines of Catastrophic Losses

  1. 1. American College of Real Estate Lawyers Fall Annual Meeting New Orleans, LA October 19, 2018 SURVIVING THE APOCALYPSE: TALES FROM LAWYERS ON THE FRONT LINES OF CATASTROPHIC LOSSES Adam Leitman Bailey, Adam Leitman Bailey, P.C. Eric D. Rapkin, Akerman LLP Lee Z. Sher, Sher Garner Cahill Richter Klein & Hilbert, L.L.C.
  2. 2. Building Owners Have a Duty to Prevent Attacks/Disasters • In In re World Trade Center Bombing Litigation, focusing on the 1993 attack, the Court decided that the World Trade Center being a “highly symbolic target, was vulnerable to terrorist attack.” • As such, the court, with a lot of other evidence of possible attacks, decided that there is a duty to make reasonable efforts to prevent the catastrophe in the first place.
  3. 3. • Generally, a landowner, who holds its land open to the public, is under a legal duty to exercise reasonable care under the circumstances to maintain the premises in a reasonably safe condition. See Basso v. Miller, 40 NY2d 233 (1976). Building Owners Have a Duty to Prevent Attacks/Disasters
  4. 4. Duty to Build Safer Building Did Not Apply to World Trade Center on 9-11-2001
  5. 5. Duty to Build Safer Building Did Not Apply to World Trade Center on 9-11-2001 • Here the actual collapse was occasioned by the Fire Department having no water with which to subdue the blaze that caused the building to collapse, not any questions of building design. • Thus, there was no recovery against the owner. Aegis Ins. Services v. 7 World Trade Co. 865 F.Supp2d370 (2011).
  6. 6. Developer’s Liability? • Liability in the original design of the buildings to survive airplane attacks remains an unanswered question.
  7. 7. Improving Commercial Lease Agreements to Be Ready for Next Disaster Examples: • New Insurance Requirements • Move In and Rent Payment Requirements • Negotiation of Rebuilding or Termination of Leasehold • Requiring Buildings Are Equipped to Handle Next Natural Disaster
  8. 8. The Commercial Lease’s Casualty Clause • Many states have a legislatively produced casualty clause for leases unless the parties agree otherwise. • New York: In a standard lease and the common law, the destruction of the premises completely relieves the tenant of the rent obligation.
  9. 9. • While New York maintains a statute, Real Property Law Section 227 allowing tenants to abandon the premises in the event of “becoming destroyed or so injured by the elements or any other cause as to be untenantable”, it also expressly allows for written waiver of the statute and every standard leases waives this statute. • Instead, the landlord and tenants gets to choose within a certain amount of days or months whether it will decide to rebuild and remain as a tenant. The Commercial Lease’s Casualty Clause
  10. 10. Despite the Equities and the Casualties Involved, Louisiana and New York Lower Courts Showed Mercy While the Appellate Courts Strictly Interpreted the Contracts and Leases
  11. 11. Superstorm Sandy • In 4261 Realty Holding LLC v. DB Real Estate Assets II, LLC, the tenant had failed to follow the method of giving notice as prescribed by the lease. The Court, ruling in a Superstorm Sandy case, forgave the tenant for the form of the notice, noting that the landlord had actually received the notice and that was enough to satisfy the spirit of the lease. • In Milltown Park v. American Felt & Filter Co., an appellate court stated, “Even accepting defendant's conclusory allegation that the premises were unusable, defendant's failure to give the prompt written notice required by the lease bars defendant from obtaining the benefit of the related provision which would relieve defendant from liability for rent while the premises are unusable.”
  12. 12. Hurricane Katrina • After nearly eight years of legal proceedings before various federal courts (collectively, the “Katrina Cases”), the final ruling as to liability was handed down in 2013: The United States Army Corps of Engineers was responsible for both the levee failures and navigation channel flooding, but it was immune from liability due to the applicability of several distinct federal laws. • In 2008, for example, the Louisiana Supreme Court reversed two lower court decisions in ultimately upholding a flood exclusion in a commercial “all-risks” insurance policy.
  13. 13. Hurricane Katrina • Mr. Joseph Sher – had carried an “all-risks” insurance policy on the apartment building he had owned and lived in since 1965. After the building was inundated with more than four feet of floodwater in the wake of Hurricane Katrina, Mr. Sher filed suit against the insurer that had refused to cover the water-related damage to the property with an all-risk policy, claiming losses that amounted to $870,000. The lower courts found that the term “flood” was ambiguous, and found that the policy did in fact cover damage from floods. • The Louisiana Supreme Court disagreed, finding that there could only be one “reasonable interpretation” of the word “flood” – “the overflow of a body of water causing a large amount of water to cover an area that is usually dry.”
  14. 14. Private Companies Must Make Their Own Preparations for Catastrophes Before
  15. 15. After Private Companies Must Make Their Own Preparations for Catastrophes
  16. 16. • Verizon contracted with a Dutch company, from a land renowned for its dealing with flooding issues, to develop a temporary dam around its switching facilities in case of notice of an impending storm. • Truly remarkable are the specifications for the wall: o Height was determined by 6-foot flooding that can be expected during a 100-year storm, plus 2 feet for storm surge and 1 foot to account for the anticipated rise of sea levels by 2050. o The explanation is simple: “We follow the science and act accordingly,” said John M. Vazquez, the senior vice president of Verizon for global real estate, human resources and administration Private Companies Must Make Their Own Preparations for Catastrophes
  17. 17. States’ Progress with Preparations to Withstand Next Casualties New York has been aggressively implementing and promoting preventative measures. Examples: a) Enables and encourages flood resistant building construction throughout designated floodplains, b) Seeks the modification of zoning and regulatory barriers that have hindered or prevented the reconstruction of storm-damaged properties, and c) Promotes the enabling of new and existing buildings to comply with new, higher flood elevations issued by FEMA, and to comply with new requirements in the New York City Building Code.
  18. 18. States’ Progress with Preparations to Withstand Next Casualties New York has been aggressively implementing and promoting preventative measures. Examples: d) Focuses on elevation requirements in the Building Code, the repositioning of stairs and ramps, implementing more flexibility for the accommodation of off-street parking above grade, e) Implementing more flexibility in locating mechanical systems above flood levels, and adopting alternative flood-focused design elements to maintain vibrant streetscapes, and facilitating the retrofitting of existing buildings.
  19. 19. Louisiana States’ Progress with Preparations to Withstand Next Casualties
  20. 20. Florida States’ Progress with Preparations to Withstand Next Casualties
  21. 21. Cities are putting together flood insurance rate maps (FIRMS) showing the flood dangers in order to determine the requirements for flood insurance as well as flood maps that will incorporate the growing risk of climate change and sea level rise. States’ Progress with Preparations to Withstand Next Casualties
  22. 22. The Must-Have Insurances of 2018
  23. 23. • The Special Policy Insurance Form aka Causes of Loss - Special Form — why must you buy it and what does it cover? • Is buying an All Risk policy a must-buy and why? What Policy to Buy?
  24. 24. • Understanding it is best to select a Replacement Cost Policy, do these policies pay 100 percent of the cost to rebuild? What Amount is Insured?
  25. 25. • Coinsurance penalties are the insurance companies’ way of being sure that owners insure the entire cost of rebuilding – not just the costs they think they will incur. • Property owners do not want to be hit with a coinsurance penalty. Policies written with an Agreed Value Endorsement in which the insurer and the owner stipulate a Replacement Cost or Actual Cash Value for the property and suspend the coinsurance clause. Understanding the Danger of Coinsurance Penalties
  26. 26. • Lost Business income is calculated as: I. The Net Income (net profit or loss before taxes) that would have been earned or incurred but for the insured peril; and II. The continuing normal operating expenses, including payroll. • However, Lost Business Income is payable only if the loss is incurred by reason of physical damage to property at the insured premised described in the Declarations. • Then only if the loss is caused by a “Covered Cause of Loss” as described in the Basic, Broad, or Special Causes of Loss form selected by the insured (or by additional causes of loss added by endorsement). Business Interruption Insurance
  27. 27. • A standard property damage policy excludes damage caused by flood, surface, water, waves, tides, tidal water, overflow of a body of water, and spray from any of these (whether or not driven by wind). • The National Flood Insurance Program (NFIP), established by Congress, provided coverage for those areas not covered in the standard policy which cause the litigation in the affected states. Flood Insurance
  28. 28. • It is possible for a property owner or business operator to obtain coverage for loss of business caused by loss of utility equipment outside the insured property – but only by a special endorsement for utility interruption. This endorsement will provide coverage only if the off-site utility equipment is damaged by a Covered Cause of Loss and then, only after a specified waiting period. Further, transmission or distribution lines are generally excluded. Damage Caused by Loss of Utility Service
  29. 29. THE END

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