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

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. 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. • 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. Duty to Build Safer Building Did
Not Apply to World Trade
Center on 9-11-2001

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. Developer’s Liability?
• Liability in the original design of the buildings to survive airplane
attacks remains an unanswered question.

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. 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. • 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. 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. 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. 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. 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. Private Companies Must Make Their
Own Preparations for Catastrophes
Before

15. After
Private Companies Must Make Their
Own Preparations for Catastrophes

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. 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. 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. Louisiana
States’ Progress with Preparations
to Withstand Next Casualties

20. Florida
States’ Progress with Preparations
to Withstand Next Casualties

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. The Must-Have Insurances of 2018

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. • 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. • 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. • 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. • 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. • 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. THE END