Download to read offline
![Bailey-Desiderio-Treiman
From the Front Lines
Page 13
James M. Callahan, an engineer and a vice president of Arcadis, which designed
the barrier, said the wall’s height was determined by the six-foot flooding that can
be expected during a 100-year storm, plus two feet for storm surge, plus one foot
to account for the anticipated rise of sea levels by 2050.44
Notably, Verizon assumes that by the middle of this century the seas will rise by another
foot. 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.”45
Insurance Contracts Are Construed According To Standard Construction Principles
The general principles governing the interpretation of insurance policies are the same
general rules that govern the construction of any written contract and are enforced in accordance
with the intent of the parties as expressed in the language employed in the policy. Generally, the
courts will construe the limitations of an insurance contract in the light of common speech, and
any ambiguities will be resolved against the insurer, as drafter of the policy. The touchstone for
interpreting insurance contracts, as with other contracts, is the reasonable expectation of the
parties.46 Nevertheless, as further explained by the First Department, in Broad Street, LLC v.
Gulf Insurance Company47:
[W]ell-established principles governing the interpretation of insurance contracts .
. . provide that the unambiguous provisions of an insurance policy, as with any
written contract, must be afforded their plain and ordinary meaning, and that the
interpretation of such provisions is a question of law for the court. Moreover,
when interpreting the policy, the court “may not make or vary the contract of
insurance to accomplish [its] notion of abstract justice or moral obligation.”
(Internal citations omitted)
44 David W. Dunlap, “A Modern Flood Barrier Aims to Protect Verizon’s Landmark Building,”
https://www.nytimes.com/2013/10/31/nyregion/a-modern-flood-barrier-aims-to-protect-verizons-
landmark-building.html.
45 Id.
46 See, e.g., Throgs Neck Bagels, Inc. v. GA Insurance Company of New York, 241 AD2d 66, 671 NYS2d 66 (1st
Dept. 1998).
47 37 AD3d 126, 130-131, 832 NYS2d 1, 4 (1st Dept. 2006)](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-13-2048.jpg)
![Bailey-Desiderio-Treiman
From the Front Lines
Page 16
201550 (“TRIPRA”), insurers must offer coverage against such incidents and are reimbursed by
the federal Government for paid claims subject to certain deductible and retention amounts.51
Currently, for certified acts of terrorism, compensation to insurers shall be paid only if
“the aggregate industry insured losses resulting from such certified acts of terrorism exceed”
$160,000,000, for insured losses occurring in calendar year 2018; $180,000,000, for insured
losses occurring in calendar year 2019; and $200,000,000, for insured losses occurring in
calendar year 2020 and any calendar year thereafter.52 The Government share of compensation to
be paid under TRIPRA to insurers, set originally at 85 percent for paid losses above an insurer’s
individual deductible required to be paid in 2016, decreases on a declining scale of one
percentage point, for each calendar year thereafter, until equal to 80 percent of the amount of the
insurer’s paid losses in excess of the deductible it is required to pay in such calendar year.53
Insurers are required to make available property and casualty insurance coverage for
certified terrorism-related losses that does not differ materially from the terms, amounts, and
other coverage limitations applicable to losses arising from events other than acts of terrorism.54
However, “[f]or purposes of this requirement, ‘terms’ excludes price.”55
No payment may be made by the Government to an insurer, with respect to an insured
loss that is covered by the insurer, unless, at the time of offer, purchase, and renewal of the
policy, the person that suffers the insured loss and files a claim with the insurer is given “clear
and conspicuous disclosure” of (a) the existence of the aggregate cap on industrywide
Government reimbursement, and (b) the Government share of compensation for insured losses.56
Insurers are required to quote the premiums for terrorism coverage when quoting the premiums
for ordinary property insurance – leaving the decision to purchase terrorism coverage to the
property owner.
However, the law defines “terrorism” very narrowly. The term is limited to violent acts
dangerous to human life, property, or infrastructure, that have been certified by the Secretary of
the Treasury to have resulted in damage up to a maximum of $5,000,000, within the United
States or outside the United States, and that have been “committed by an individual or
individuals as part of an effort to coerce the civilian population of the United States or to
influence the policy or affect the conduct of the United States Government by coercion.” As
such, the Boston Marathon bombing was deemed to not qualify as an act of terrorism under the
law. However, despite the terrorism exclusion clauses in their basic policies, insurers chose to
pay many claims made for the personal injuries and property damage that resulted from that
event.
There Is A Variety Of Government-backed Insurance and Private Stand-Alone Insurance
Nevertheless, although terrorism coverage is an option for all property owners,
TRIPRA’s narrow definition of “terrorism” is likely to discourage small property and business
owners from opting to pay the higher premiums for terrorism coverage offered under TRIPRA.
Alternatively, for organizations that insurers deem as “high risk,” so-called “stand-alone”
terrorism coverage is offered by certain international insurers, on a worldwide basis -- for a
50 Pub. L. 114-1, 129 Stat. 3.
51 See TRIPRA, Section 102(7).
52 See TRIPRA, Section 103(e)(1)(B).
53 See TRIPRA, Section 103(e)(1)(A).
54 See TRIPRA, Section 103(c).
55 31 CFR 50.22.
56 See TRIPRA, Sections 103(b)(2) and (3).](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-16-2048.jpg)
![Bailey-Desiderio-Treiman
From the Front Lines
Page 17
broad range of acts committed for political, religious or ideological purposes, not necessarily
solely to influence the policy or conduct of the United States Government. One such company’s
“terrorism” coverage includes not only traditional terrorism-type acts, but such actions as “active
shooter,” “malicious attacks,” “sabotage,” “nuclear, chemical, biological, and radiological
(“NCBR”) attacks. Its policies for such terrorism events covers property damage, loss of
business income, crisis management costs, additional security requirements, employee
counseling, and public relations costs incurred. Price is based on a risk profile analysis, and
coverage does not depend on government certification. When evaluating the coverage limitations
imbedded in the TRIPRA program, property and business owners with substantial financial
resources are likely to opt for stand-alone policies that offer greater and more certain protection
against the variety of terrorist-type actions that the World has witnessed in recent years.
There Must Be Proof That The Hazard Was The “Dominant And Efficient Cause” Of The
Damage
The hazard insured against must be the proximate cause of the damage, i.e., “that cause
which is most nearly and essentially connected with the loss as its efficient cause.” For example,
in Throgs Neck Bagels, supra, the Court explained that “the damage for which fire insurers are
liable is not confined to loss by actual burning and consuming, but they are liable for all losses
which are the immediate consequences of fire or burning, or for all loses of which fire is the
proximate cause.” Nevertheless, the “concept of proximate cause when applied to insurance
policies is a limited one. . . [and] the causation stops at the efficient physical cause of the loss, it
does not trace events back to metaphysical beginnings.”57 Accordingly, “[o]nly the most direct
and obvious [efficient] cause should be looked to for purposes of the exclusionary clause.”58
Therefore, if a flood causes a fire to occur in a building’s electrical system, fire would be the
proximate cause of the resulting damage to the building and would be covered by fire insurance.
Unless the property or business owner’s policy insures against damage to the property
originating outside the insured property, such as an interruption in utility supply service at the
utility’s power plant or substation, recovery will be denied under a policy that covers only “direct
physical loss of or damage to Covered Property at the premises caused by or resulting from any
Covered Cause of loss.” Even when the policy does insure against potential interruption of
utility service or water supply outside the insured’s premises, the policy is likely also to require
that the utility or water company have suffered “direct physical damage” that caused the service
interruption that damaged the insured. Whether or not coverage will be granted under such
policy provisions is often hotly disputed by the insured and the insurer.
For example, in La Casa Di Arturo, Inc. d/b/a Arturo’s v. Tower Group, Inc.,59 Hurricane
Sandy caused a restaurant to sustain losses and damages for food spoilage, business interruption,
inability to conduct plaintiff’s usual business, and loss of business income. It also alleged that, as
a result of Sandy the restaurant remained for various times without electrical power, refrigeration
and freezer use, and that it ceased operations from October 31, 2012 through November 3, 2012,
with resulting alleged loss of business income. The insurer’s denial of coverage was upheld by
the Court on the ground that the restaurant’s policy “expressly and unambiguously provided (a)
that coverage for loss associated with power interruptions are limited to those that ‘result from
direct physical loss or damage by a Covered Cause of loss” (italics added),and (b) that “damage
57 Home Insurance Company v. American Insurance Company,147 AD2d 353, 354, 537 NYS2d 516 (1st Dept.
1989). (Internal quotation marks omitted).
58 Kula v. State farm Fire & Casualty Co., 212 Ad2d 16, 628 NYS2d 988 (4th Dept. 1995).
59 49 Misc.3d 1209(A) (Sup. Ct., New York Co., 2015).](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-17-2048.jpg)
![Bailey-Desiderio-Treiman
From the Front Lines
Page 18
caused directly or indirectly by [Water] is excluded [from coverage] regardless of any other
cause or event that contributes concurrently or in any sequence to the loss.”
One Must Examine The Business Losses To Be Covered
The primary business losses incurred by property owners and business owners from
catastrophic damage or destruction to property is loss of business income and loss of rental
value. “The purpose of business interruption insurance is to indemnify the insured against losses
arising from inability to continue normal business operation and functions due to the damage
sustained as a result of the hazard insured against. In other words, the goal is to preserve the
continuity of the insured’s earnings.”60
Coverage for business losses may be provided to the insured as part of policies issued to
insure against ordinary property damage, environmental hazards, other specified hazards, or
under “all perils” policies. The business losses insured against should include loss of business
income not only due to the physical damage or destruction caused by the catastrophic event,
whether terrorism, fire, explosion, wind or snow storm, hurricane, flood, or electrical power loss,
but also attributable to any widespread trade disruption, or event cancellations required by the
circumstances, and caused by the disaster generally. There should also be coverage for
Contingent Business Interruption losses incurred due to the insured’s inability to receive
essential inventory from its suppliers, or for losses incurred from its customers being unable to
receive deliveries from the insured. Civil Authority Coverage should be obtained against losses
necessarily resulting, from building evacuations and/or destruction, mandated by governmental
authority, that cause either the complete temporary suspension of business operations or their
complete termination.
Business income interruption insurance policies generally include provisions requiring
(a) that the business loss incurred be caused by a casualty that directly impacted the premises
where the business was conducted, and (b) that the affected business show actual loss of profits
during the time of incapacity until the time that restoration is completed.61
In Order For It To Be Covered, The Suspension Of The Business Must Have Been
Necessary
Business interruption policies typically insure against loss of business income sustained
“due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’” The
New York State Appellate Division, First Department, has held that the plain meaning of this
language is unambiguous and means exactly what it says: i.e., that in order to be eligible for
business interruption coverage, there must be “a total interruption or cessation of operations.”62
In Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co.63, a case involving a
Duane Reade drug store located at the World Trade Center that was totally destroyed in the 9/11,
Duane Reade’s business interruption policy provided as follows:
The measure of recovery or period of indemnity shall not exceed such length of
time as would be required with the exercise of due diligence and dispatch to
60 Howard Stores Corp. v. Foremost Insurance Co., 82 AD2d 398, 400, 441 NYS2d 674, 676 (1st Dept. 1981)
(Internal citations omitted), affirmed 56 NY2d 991 (1982).
61 See, e.g., Newman, Myers, Kreines, Gross, P.C. v. Great Northern Insurance Co., U.S. Dist. LEXIS 57338, No.
13 Civ. 2177 (PAE) (SDNY 2014).
62 Broad Street LLC v. Gulf Insurance Company, 37 AD3d 126, 132, 832 NYS2d 1 (1st Dept. 2006) (citations
omitted).
63 279 F. Supp.2d 235 (SDNY 2003).](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-18-2048.jpg)
![Bailey-Desiderio-Treiman
From the Front Lines
Page 19
rebuild, repair, or replace such property that has been destroyed or damaged, and
shall commence with the date of such destruction or damage and shall not be
limited by the date of expiration of this policy.
The “Restoration Period” provision of the policy also required, “as soon as practicable after any
loss,” that “the Assured shall resume complete or partial business operations and reduce or
dispense with such additional charges and expense as are being incurred.”
Duane Reade contended that the policy should be interpreted as providing that:
The Restoration Period consists of the actual time period that would, or will, be
required to restore Duane Reade’s operations to the kind, quality, and level which
existed at the WTC Store prior to the terrorist attacks and that such Restoration
Period is coterminous with the time necessary to rebuild the complex which will
replace the World Trade Center.
The Court held (a) that Duane Reade’s proposed interpretation was without support in the
text of the policy and was “manifestly unreasonable,” (b) that the Restoration Period was “the
time it would take to rebuild, repair, or replace the WTC store itself, not the entire complex that
once surrounded it, and (c) that “[o]nce Duane Reade could resume functionally equivalent
operations in the location where its WTC store once stood, the Restoration Period would be at an
end.” The federal court decision cited no New York case law, but was nevertheless consistent
with New York law.
In a similar situation, in Broad Street, supra, the property owner’s building located
approximately three blocks away from the World Trade Center was completely shut down
following the events of September 11, 2001 until September 18, 2001. Nevertheless, despite
being able to permit its tenants to return to the building on the latter date, the property owner
claimed coverage for rent abatements and rent reductions that it felt compelled to provide to
tenants thereafter through September 30, 2002. Citing evidence that tenants had in fact returned
to the building on September 18, 2001, the Court rejected the insured’s contention that “because
it was unable to provide a habitable environment for its residents by September 18, it [could] not
be considered to have resumed operations.”
The First Department of the Appellate Division of New York’s Supreme Court also
rejected a similar World Trade Center claim from a property owner in Royal Indemnity Company
v. Retail Brand Alliance, Inc.64, where a retail business was shut down following the September
11, 2001 events until September 12, 2002. The Court held that “[o]nce the store resumed
operations on September 12, 2002, a year after the terrorist attack on the World Trade Center, the
Business Income coverage terminated, regardless of whether the insured’s income was back up
to pre-loss levels.”
Likewise, the Court had previously held (in a non-World Trade Center case) that, where
Civil Authority had denied access to insured’s restaurant for two days, but permitted access
thereafter, the insured could not recover lost business income when the restaurant reopened, even
though vehicular and pedestrian traffic was diverted; “the restaurant was [still] accessible to the
public, plaintiff’s employees and its vendors.”65
64 33 AD3d 392, 393, 822 NYS2d 268, 269 (1st Dept. 2006).
65 54th Street Ltd Partners, L.P. v. Fidelity and Guarantee Insurance Company, 306 AD2d 67,
763 NYS2d 243, 244 (1st Dept. 2003). See also Bamundo, Zwal & Schermerhorn, LLP. v.](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-19-2048.jpg)
![Bailey-Desiderio-Treiman
From the Front Lines
Page 20
One Must Consider Business Loss Valuation And Deductibles
In Howard Stores, supra, the First Department explained that while the “losses payable
under a business interruption policy are estimated based on ‘experience of the business before
the catastrophe and its probable experience thereafter,’ the burden is on the insured to establish
the extent of the damage caused by the interruption, and applicability of the policy thereto.”
Measurement of damages by the insured’s “experience before the catastrophe” requires proof of
the business income the insured would have realized if business operations had not been
suspended. This is inherently speculative, and insurance companies often argue that, in the midst
of the catastrophe, the insured could not expect to realize the same business it had before the
event. There is no formula for calculating business interruption losses and no guideline to
determine the “probable experience thereafter.” To eliminate unnecessary litigation over the
measurement of damages, property and business owners should therefore attempt to include a
formula in their business interruption policies that fixes a set per diem loss value for each day
that their business is completely shut down by a future catastrophe.
Property and business owners also need to be attentive to the deductibles included in their
business interruption policies. The policy may specify that the deductible will apply per
occurrence, per event, per loss, or per claim. Consideration should be given also to the possibility
of a dispute arising over whether the potential future catastrophe will constitute a single
occurrence, or a series of catastrophic events occurring simultaneously. This issue was
highlighted in World Trade Center Properties v. Hartford Fire Insurance Co.,66 where the
insured contended that the two airline crashes constituted two separate occurrences. The Court
held that the two crashes were part of a single coordinated plan of attack and constituted “at the
least, a ‘series of similar causes [as defined by the policy].”
Flood Insurance Presents Its Own Issues
Since 1968, protection against flood damage, for “business properties which are owned or
leased and operated by small business concerns,” has been covered primarily under the federal
National Flood Insurance Program (NFIP).67 The Federal Emergency Management Agency
(FEMA) administers NFIP which was established to make flood insurance mandatory for those
properties located in areas of special flood hazard, i.e., any area subject to a one percent or
greater chance of flooding in any given year as determined by FEMA. The current
reauthorization of NFIP is set to expire as of July 31, 2018, but the House of
Representatives passed the 21st Century Flood Reform Act (H.R. 2874 in November
2017, and, if the Senate were also to pass the Bill, it would extend the NFIP
through September 2020. In the interim, on June 28, 2018, the Senate passed a
Farm Bill that contains an amendment, sponsored by Louisiana Republican
Senators John Kennedy and Bill Cassidy, to prevent NFIP from expiring in the
middle of the hurricane season and which extends the program for another six
months.
More specifically, flood zones are land areas categorized by FEMA according to their
degree of risk of flooding. Based on the flood risk, zones are classified as A (100-year flood
risk), V (100-year flood risk with additional hazards associated with storm-induced waves),
Sentinel Insurance Company, Ltd., 2015 U.S. Dist. LEXIS 39409, No. 13–CIV-6672 (RJS)
(SDNY 2015).
66 345 F3d 154, 180 (2d Cir. 2003).
67 See 42 USC §4012(a).](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-20-2048.jpg)
![Bailey-Desiderio-Treiman
From the Front Lines
Page 22
denied by the insurer-defendant on the ground that all the alleged damages were the result of
“flooding,” a circumstance expressly excluded from coverage under the policy. Plaintiff sued.
The issue that arose was whether the special additional rider plaintiff had purchased, as
protection for sewer back-up, was overridden by the policy provision that excluded coverage “for
covered losses if those losses were occasioned, even in part, by uncovered causes, i.e., that
damages caused by a combination of uncovered losses (e.g., flood) and covered losses (e.g., a
sewer back-up) rendered the entire loss non-compensable.”
The Court concluded that it was unable to find, as a matter of law,
[w]hether the facial inconsistency in policy language . . . i.e., where the terms of a
separately-purchased rider providing additional coverage for damages by, e.g., a
sewer back-up, and the “anti-concurrent causation” exclusion upon which
[insurer] relies, is subject to “no other reasonable interpretation, when read
together [with the failure to purchase flood insurance], other than to exclude
coverage for all losses caused by any combination of covered and non-covered
occurrences”, or represents, e.g., a trap into which an “average insured” might fall
as a result of the purchase of additional coverage specifically written to cover
sewer and drain back-ups.” (Emphasis added).
Where Possible, Lawyers Should Negotiate Insurance Policies
It is evident that the policies offered by insurance companies may invariably be
characterized as contracts of adhesion sold on a take-it-or-leave-it basis. However, owners of
properties and businesses of sufficient size do have the wherewithal to negotiate the ultimate
terms of any of the coverages discussed above.73 For those property and business owners able to
do so, every effort should be made to ensure that coverages are obtained that will indeed provide
the protection that the insureds may reasonably expect to have purchased in the event of any
potential future occurrence of catastrophic proportions.
73 See, e.g., World Trade Center Properties, supra.](https://image.slidesharecdn.com/459031-191016164831/75/Lawyers-Surviving-The-Apocalypse-Adam-Leitman-Bailey-Dov-Treiman-and-John-Desiderio-22-2048.jpg)
Uploaded byAdam Leitman Bailey, P.C.
Lawyers Surviving The Apocalypse; Adam Leitman Bailey, Dov Treiman, and John Desiderio
This document provides an overview of legal issues related to catastrophic events and commercial real estate. It discusses several key points: 1) Public building owners have a duty to take reasonable steps to prevent foreseeable terrorist attacks on their facilities as attractive targets. 2) Large-scale catastrophes do not necessarily give rise to class action lawsuits, as was the case with renters seeking rent rebates after Superstorm Sandy. 3) While residential leases imply a warranty of habitability, commercial leases follow the common law model of a temporary conveyance, though other grounds for rent abatement can exist depending on the specific lease terms.
More Related Content
![87356964 introduction-to-insurance[1]](https://cdn.slidesharecdn.com/ss_thumbnails/87356964-introduction-to-insurance1-121105111440-phpapp01-thumbnail.jpg?width=640&height=640&fit=bounds)
Similar to Lawyers Surviving The Apocalypse; Adam Leitman Bailey, Dov Treiman, and John Desiderio
More from Adam Leitman Bailey, P.C.
Lawyers Surviving The Apocalypse; Adam Leitman Bailey, Dov Treiman, and John Desiderio
- 2. Bailey-Desiderio-Treiman From the FrontLines Page 2 Contents Introduction...................................................................................................................................3 Public Building Owners Have A Duty To Prevent Attacks ......................................................4 Large Scale Catastrophes Do Not Necessarily Give Rise to Class Action Style Litigation....5 Although There Is No Warranty of Habitability in Commercial Leaseholds, Other Grounds for Rent Abatement Exist.............................................................................................6 The Landlord’s Failure to Maintain the Premises to the Point of the Tenant’s Abandonment of Them Forgives the Rent..................................................................................7 Leases Need Casualty Clauses Avoiding The Default Clause From Statutes..........................8 While Lower Courts Often Favor Tenants In Emergencies, Higher Courts Insist On Strict Lease Enforcement........................................................................................................................9 Courts Enforce Properly Drawn Lease Clauses Absolving A Landlord From Responsibility for Utility Failure ........................................................................................................................10 New York City Is Building Itself Better Than Ever ................................................................11 Insurance Contracts Are Construed According To Standard Construction Principles ......13 Lawyers Need To Consider What Property Is Covered Against What Hazards .................14 How Long Extended Recovery Continues When Premises Are Destroyedin Terror A Group of Events Counts As One For Many Form Insurance Policies...................................14 In The Wake Of 9/11 Congress Mandated Terrorism Insurance ..........................................15 There Is A Variety Of Government-backed Insurance and Private Stand-Alone Insurance .......................................................................................................................................................16 There Must Be Proof That The Hazard Was The “Dominant And Efficient Cause” Of The Damage.........................................................................................................................................17 One Must Examine The Business Losses To Be Covered .......................................................18 In Order For It To Be Covered, The Suspension Of The Business Must Have Been Necessary......................................................................................................................................18 One Must Consider Business Loss Valuation And Deductibles .............................................20 Where Possible, Lawyers Should Negotiate Insurance Policies .............................................22 Conclusion ...................................................................................................................................22 APPENDIX A: RISE-NYC ........................................................................................................24
- 3. Bailey-Desiderio-Treiman From the FrontLines Page 3 Introduction The catastrophes that struck New York City on the large scale, such as Superstorm Sandy and 9/11 or even on the relatively smaller scale ones such as the 1993 World Trade Center bombing or the various construction crane collapses, furnish striking examples and counter- examples for lawyers and lay persons as to how to protect their cities and their states with proper preparation. In dealing with catastrophes, lawyers on the front lines fall into two categories, those who prepare for catastrophes1 and those who challenge or defend the adequacy of the preparations.2 In both categories of attorneys, catastrophes, whether natural or artificial are evaluated as to their foreseeability. While the specific catastrophic events that occur continue to evolve with changing technologies and changing understandings of science, the doctrines around foreseeability of harm, assignment of risk, and drafting of documents to encapsulate this precognition have their roots in well-established common law, some of it merely a century old, some of it considerably older. Some of these common law ideas have undergone substantial evolution. New York, however, when it comes to real estate, like quite a few other states, has a common law specifically devoted to the idea that the common law of real estate should evolve slowly if at all.3 While lease clauses can vary greatly state by state and yet remain of paramount importance in preparation for catastrophe, insurance policy clauses are, to a large extent, the same across the country and many states share the same rules of construction with respect to them. Catastrophic events, such as the 9/11 terrorist attack at the World Trade Center and Hurricane Sandy, and the resulting consequences that follow in their wake, also require real estate lawyers to be especially attentive to the insurance requirements of their landlord and tenant clients. Subsequent weather-related events, such as Hurricane Maria in the summer of 2017 and the widespread power outages that occurred during 2017-2018 winter snow storms, show the continuing need for coverage against such hazards. Commercial property owners and commercial tenants require insurance coverage that offers effective protection against the next unforeseen disaster that will cause widespread damage and disruption to property and business. New York’s experience in dealing with such catastrophic events can offer much guidance on the coverage items that property and business owners, no matter where they are located, should seek from their insurers. As is well illustrated in case law, both before and after 9/11 and Sandy, the coverage that property owners and commercial tenants purchase from insurance companies, against hazards that will cause a business to entirely shut down, either temporarily or permanently, may not necessarily offer the protection that the buyers understood they would receive. Commercial insurance policies invariably contain strict limitations or exclusions on the coverage that is actually provided – whether the damage suffered can be said to proximately result from terrorism, storms, fire, flood, electrical power outage, sewage backup, or governmental mandate. Moreover, insurance companies seek to enforce such limitations and exclusions to the fullest * Adam Leitman Bailey is the Founding Partner and Messrs. Desiderio and Treiman are partners , Mr. Desiderio chairing the Real Estate Litigation Group and Mr. Treiman chairing the Landlord-Tenant Group in New York City based real estate law firm, Adam Leitman Bailey, P.C..The authors wish to acknowledge the invaluable contributions in research for this article by New York Law School student William Pekarsky and Syracuse University College of Law student Michael Lawson, both veterans of the firm’s summer associate program. 1 Most often transactional attorneys and insurance counsel. 2 Litigation counsel. 3 Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 NY2d 130, 661 NE2d 694, 637 NYS2d 964 (1995). The case was argued by AdamLeitman Bailey, P.C. partner, Jeffrey R. Metz.
- 4. Bailey-Desiderio-Treiman From the FrontLines Page 4 extent possible. It is therefore extremely important for real estate lawyers to be conversant with the basics of commercial insurance coverage. Public Building Owners Have A Duty To Prevent Attacks In re World Trade Center Bombing Litigation,4 was focused on the duties owed by operators of facilities that attract international attention to prevent the facility being used as a terrorist target. It recognized that certain buildings and gatherings, perhaps best called “attractive targets,” are going to be more likely to attract terrorists and thus disaster than others, noting: In the early 1980's the Port Authority was aware of terrorist activities occurring in other areas of the world, and that the WTC, as a highly symbolic target, was vulnerable to terrorist attack. Terrorist bombings, including car bombs, were becoming more prevalent, not only in the world but in the United States as well. In fact, the Port Authority recognized that, in 1983-1984, two thirds of domestic terrorist incidents occurred in the New York- New Jersey metropolitan region. This awareness, the court decided, placed a duty on the operators of the World Trade Center and indeed any attractive target to take heightened steps to prevent use of the facility as a focus of terrorist activity. The decision in that case rode entirely on foreseeability.5 While the case acknowledges that foreseeability is a question for the trier of fact, it discusses at great length the special duties of the operators of these attractive targets to take stronger steps to prevent the very kind of terrorist attacks that can obviously take place in such facilities. Indeed, the Port Authority had been specifically warned that its parking ramps where the attack litigated in this case did in fact take place were particularly vulnerable to the very kind of attack that took place in 1993. In the case of attractive targets, there is a duty to make reasonable efforts to prevent the catastrophe in the first place. The decision focused on the actual site of the 1993 terror attack, but discussed at length the specific warnings that the FBI had received of a skyscraper attack coming from across the Atlantic. New York City is full of large gatherings of people, perhaps most famously, Times Square on New Years Eve, but also major baseball and other professional sporting games. Under the teaching of In re World Trade Center, the sponsors of these activities, at least when they have been warned of a terrorist threat, are under duty to protect against that threat.6 Generally, a landowner or landlord, 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.7 The duty includes taking minimal security precautions against reasonably 4 3 Misc. 3d 440 *; 776 N.Y.S.2d 713 (Supreme Court, NY County 2004) 5 Citing to Palsgraf v. Long Island Railroad Co., 248 N.Y. 339, 162 N.E. 99 (1928). This case is used in nearly every law school in the United States of America to teach about whether a plaintiff is in the zone that the defendant is required to protect. However, it also tells a far-fetched story of how it was that the plaintiff happened to be standing in the wrong place at the wrong time so as to be injured by something the defendant could never have predicted.. 6 See also In re World Trade Center Bombing Litigation, 3 Misc.3d 440, 776 NYS2d 713 (Sup. Ct., NY Co., 2004)(held: the record before the court was not sufficient for summary judgment on the issue of foreseeability); In re World Trade Center Bombing Litigation, 17 NY3d 426 (2011)(held: the Port Authority’s liability for failing to secure the parking garage against terrorist attack predominantly derived from a failed allocation of police resources and was protected by governmental immunity). 7 See Basso v. Miller, 40 NY2d 233, 352 (1976).
- 5. Bailey-Desiderio-Treiman From the FrontLines Page 5 foreseeable criminal acts by third parties.8 Accordingly, given the potential liability that could befall a property or business owner in the event of a catastrophic terrorist attack, it is incumbent upon every property or business owner to obtain insurance protection not only against their own property damage and potential loss of business income, but to also obtain appropriate levels of insurance protection against the potential liability that might be adjudged against them for failing to implement security measures that could have forestalled or prevented the terrorist act, or diminished the amount of injuries and damages it caused. That same duty was not, however, breached in the 9/11 disaster, also at the World Trade Center. In a case arising out of that attack, Aegis Ins. Services, Inc. v. 7 World Trade Co 9, the Federal District Court refused recovery to Consolidated Edison for its facility being destroyed when part of the Trade Center was crushed, reciting the particulars of the events that led to the building collapse and holding it unforeseeable in that the building owner of the building that collapsed was not found negligent. The Plaintiff was Aegis Insurance Services, Inc., an insurance company that had insured Consolidated Edison against this loss. One notes that while the District Court found the negligence claim far-fetched, the insurance carriers found the coverage issue sufficiently well-stated to pay on the claim. However, while affirming the District Court’s order, the Second Circuit10 reasoned that the issue of foreseeability did not resolve the case as foreseeability only determines the scope of the duty. Rather, the determination that any negligence of the designers of the building was not, under the totality of the circumstances, the cause-in-fact of the Plaintiff’s loss. The court wrote, “A defendant's conduct is not a cause-in- fact of an injury or loss if the injury or loss would have occurred regardless of the conduct.” Here the actual collapse was occasioned by the Fire Department of the City of New York 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. Generally, in New York’s law of negligence, in order to sustain recovery, there is a requirement that a defendant be found to have been lax in a duty to the plaintiff. When there is no such breach of duty, the case law frequently uses such terms “the defendant is not an insurer.”11 This, then is the key difference highlighted by this case. The owner of the property that collapsed due to a terror attack on another’s property was not an insurer of the latter; the insurance company was. Liability for the adjacent landowner had to be tied to a duty, a duty not including envisioning everything that could possibly go wrong outside of its control. Large Scale Catastrophes Do Not Necessarily Give Rise to Class Action Style Litigation In Adler v Ogden CAP Props., LLC,12 a putative class consisting of all renters in the State of New York sought to sue a putative class consisting of all landlords in the State of New York for rent rebates for violation of the warranty of habitability caused by Superstorm Sandy. The court held that no such classes could within proper constitutional constraints be recognized. 8 See Nellan v. Helmsley-Spear, Inc., 50 NY2d 507, 519-520 (1980). 9 865 F.Supp.2d 370 (2011). 10 737 F.3d 166, 179 *; 2013 U.S. App. LEXIS 24101 **; 2013 WL 6246275 (2013). 11 See, for example, Boyd v Manhattan & Bronx Surface Tr. Operating Auth., 9 N.Y.3d 89, 876 N.E.2d 1197, 845 N.Y.S.2d 781, 2007 N.Y. Slip Op. 07770 (2007) (“It follows from Bethel that a common carrier, like any other defendant, is not an insurer of the safety of its equipment; it can be held liable for defects in the equipment only if it knew, or with reasonable care should have known, that the equipment was defective.”) 12 42 Misc.3d 613, 976 N.Y.S.2d 857, 2013 N.Y. Slip Op. 23428 (Supreme Court NY County 2013).
- 6. Bailey-Desiderio-Treiman From the FrontLines Page 6 Although There Is No Warranty of Habitability in Commercial Leaseholds, Other Grounds for Rent Abatement Exist At common law, the conceptual model for a leasehold is essentially a temporary conveyance. New York’s highest court, the Court of Appeals explained in Park West Management Corp. v. Mitchell:13 Under the traditional common law principles governing the landlord tenant relationship, a lease was regarded as a conveyance of an estate for a specified term and thus as a transfer of real property. Consequently, the duty the law imposed upon the lessor was satisfied when the legal right of possession was delivered to the lessee. The lessor impliedly warranted only the continued quiet enjoyment of the premises by the lessee. This covenant of quiet enjoyment was the only obligation imposed upon the landlord which was interdependent with the lessee's covenant to pay rent. As long as the undisturbed right to possession of the premises remained in the tenant, regardless of the condition of the premises, the duty to pay rent remained unaffected. While recent decades of statutory and case law development have made residential tenancies more a contract for services than a conveyance with abatements in rent commonplace, commercial leaseholds follow, only somewhat modified, the common law model.14 Even to the extent that the common law of commercial leaseholds allows for abatement of rent, with rare exception, commercial leases can exempt landlords from nearly all assignments of risk. Common and enforceable in commercial leases are not only various requirements that the tenant obtain various kinds of insurance on pain of eviction, but that the tenant’s recovery for risks described in the lease is limited to recovery from the insurance the lease requires the tenant to carry.15 For example, in the Maiden Lane Props., LLC v. Just Salad Partners LLC 16 lease, one clause provided, “Anything contained in Article 9 to the contrary, Tenant shall be solely responsible for the insurance for, and in the event of fire or other casualty, the reconstruction, replacement or repair of any damage…” Most such leases require provision of proof to the landlord of such insurance coverage and the failure to provide such proof is deemed sufficient violation of the lease to warrant eviction.17 In a standard lease,18 the destruction of the premises generally completely relieves the tenant of the rent obligation, but in a triple net lease, the rent obligation endures notwithstanding such destruction. The tenant has taken on the risk of the destruction and the obligation to undo it. In Rodriguez v. Nachamie,19 where the parties had allocated the risk of loss to the tenant in a 13 47 NY2d 316, 418 NYS2d 310. 14 Id. 15 Hooters of Manhattan, Ltd. v. 211 W. 56 Assoc., 51 A.D.3d 410, 857 N.Y.S.2d 112 (1st Dept. 2008). 16 2013 N.Y. Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013). Authors Adam Leitman Bailey and Dov Treiman represented the winning landlord is this case. 17 It is also one of the most readily curable lease defaults and one of the most frequent sources of “Yellowstone” litigation in State Supreme Court where the tenant-plaintiff gets additional time to cure the lease default before suffering eviction. First Natl. Stores v Yellowstone Shopping Ctr., 21 NY2d 630. 18 To be distinguished from net leases, double net leases, and triple net leases. 19 57 A.D.2d 920, 395 N.Y.S.2d 51.
- 7. Bailey-Desiderio-Treiman From the FrontLines Page 7 building destroyed by fire, the Second Department held the tenant liable for the balance of the rent on the lease, explicitly finding nothing unconscionable in the parties’ risk allocation. While in residential premises, there is a warranty of habitability,20 no such law currently exists in the commercial context in New York. While Real Property Law §22721 allows both commercial and residential tenants to abandon the premises and the rent obligation in the event of the premises becoming “destroyed or so injured by the elements, or any other cause as to be untenantable, and unfit for occupancy,” it also expressly allows for written waiver of the statute. However, standard leases do not eliminate the possibilities of either actual eviction or constructive eviction. If the landlord actually evicts the tenant from the entire property or a significant part of it without the tenant’s fault, under New York’s rule,22 the tenant is forgiven the remaining rent on the lease.23 However, there is no such abatement if the amount of space taken away from the tenant is de minimis.24 The Landlord’s Failure to Maintain the Premises to the Point of the Tenant’s Abandonment of Them Forgives the Rent A tenant’s rent may also be abated by reason of “constructive eviction,” a situation in which the landlord’s upkeep of the premises is so badly performed that the tenant is compelled to abandon all or part of the premises. Key to the concept of constructive eviction, however, is fault on the part of the landlord. Mere happenstance is not fault. In Barash v. Pennsylvania Terminal Real Estate Corp.25, the court wrote: To be an eviction, constructive or actual, there must be a wrongful act by the landlord which deprives the tenant of the beneficial enjoyment or actual possession of the demised premises. Of course, the tenant must have been deprived of something to which he was entitled under or by virtue of the lease…. On the other hand, constructive eviction exists where, although there has been no physical expulsion or exclusion of the tenant, the landlord's wrongful acts substantially and materially deprive the tenant of the beneficial use and enjoyment of the premises. In Pacific Coast Silks, LLC v. 247 Realty, LLC,26 the First Department wrote, “To establish constructive eviction, a tenant need not prove physical expulsion, but must prove wrongful acts by the landlord.” Thus, for a tenant to claim constructive eviction, mere casualty to the premises is insufficient. There must also be proof of the landlord’s wrongful acts. However, while the landlord may have been blameless in causing the injury to the premises, such as in a severe storm or a terrorist attack, the landlord’s failure to repair the premises after an innocent casualty is blameworthy enough to support a constructive eviction. 20 New York Real Property Law §235-b. 21 See infra. 22 New York is in the minority in adhering to this rule. See discussion in Eastside Exhibition Corp. v. 210 East 86th Street Corp., 18 N.Y.3d 617 (2012). 23 Fifth Ave. Bldg. Co. v. Kernochan, 221 N.Y. 370. 24 Eastside Exhibition Corp. v. 210 East 86th Street Corp., 18 N.Y.3d 617 (2012). 25 26 NY2d 77 (1970). 26 76 A.D.3d 167 (2010).
- 8. Bailey-Desiderio-Treiman From the FrontLines Page 8 As we have seen, however, landlords do have the obligation to prevent foreseeable casualties, such as taking reasonable precautions to prevent a terrorist attack when such an attack is, in fact, foreseeable or even actually foreseen.27 Pacific Silks also refused to allow the tenant an abatement because, inter alia, the tenant did not give written notice of the defective condition as required by the lease. The court reasoned that the written notice was intended to give the opportunity to fix the situation and therefore that aspect of the lease was entitled to full enforcement. In Manfra, Tordella & Brookes, Inc. V. 90 Broad Owner, LLC28, Plaintiff-tenant’s theory is that the landlord was liable for neglecting to take supposedly reasonable precautions against flooding caused by Superstorm Sandy such as window boarding and sandbagging. Amongst the allegations of the complaint were: 32. "Because of its history of flooding and location in low lying Zone A, Defendant was well aware that 90 Broad in general, and MTB's offices in Particular, were highly susceptible to flooding and would likely experience severe flooding in the event of a major storm, such as Hurricane Sandy." 37. Defendant was thus fully aware, and warned of the potential flooding that would occur as soon as Sandy made landfall. Despite this knowledge, and expectation of storm related flooding, Ms. Arce's email did not include any information regarding any steps Defendant took or would take to prevent or at the very least, mitigate, the potential damage to the Building from storm related flooding. The presence of this kind of lawsuit should remind landlords to purchase liability insurance insuring against liability for even the most exotic theories of liability. Regardless of whether tenants actually prevail in a suit such as this, the mere defense of the suit is an expensive proposition that could be funded by the insurer’s duty to defend. Clearly, the tenant should have insured itself and the suit, if any, should have sounded in subrogation. Leases NeedCasualty Clauses Avoiding The Default Clause From Statutes Many states have a legislatively produced casualty clause for leases which usually operates unless the parties agree otherwise. For example, New York has Real Property Law §227 states: § 227. When tenant may surrender premises. Where any building, which is leased or occupied, is destroyed or so injured by the elements, or any other cause as to be untenantable, and unfit for occupancy, and no express agreement to the contrary has been made in writing, the lessee or occupant may, if the destruction or injury occurred without his or her fault or neglect, quit and surrender possession of the leasehold premises, and of the land so leased or occupied; and he or she is not liable to pay to the lessor or owner, rent for the time subsequent to the surrender. 27 The operators of the World Trade Center, being in control of their own basement parking ramps, could have taken steps to avoid the 1993 terrorist attack. Not having control of the skies, they could not be held liable for failing to prevent the attacks of 2001. Liability in the original design of the buildings to survive airplane attacks remains an unanswered question. 28 2013 WL 373327
- 9. Bailey-Desiderio-Treiman From the FrontLines Page 9 Any rent paid in advance or which may have accrued by the terms of a lease or any other hiring shall be adjusted to the date of such surrender. This statute applies both when there are written leases and when the tenancy is entirely oral. However, all commercially available lease forms and all properly drawn leases expand on the simple ideas in §227 so as to be more precise as to what does and does not trigger the tenant’s rights. A clause substituting the Casualty Clause for the statutory provision could read as follows: Tenant hereby, to the full extent allowed by the law, agrees that the provisions in this article shall govern and control in place of any statutes or other laws to the contrary.29 All well written commercial leases call for payment of rent without offset, counterclaim or defense and expressly refer to and waive RPL §227. Such clauses are enforceable.30 However, tenants’ counsel negotiating such clauses will seek abatement of rent any time the building is rendered unusable, regardless of whether the building itself suffered a casualty or whether the neighborhood where the building is located suffered the casualty that had the effect of making the tenant’s space unusable for a time. While Lower Courts Often Favor Tenants In Emergencies, Higher Courts Insist On Strict Lease Enforcement In 4261 Realty Holding LLC v. DB Real Estate Assets II, LLC,31 , the tenant had failed to follow to the letter the lease prescribed method of giving notice. 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. The court specifically relied upon the chaos that ensues in one of these storm situations and used its discretion to lighten the specific requirements of the lease, especially since the landlord could not possibly make a showing of prejudice. By contrast, Milltown Park v. American Felt & Filter Co.,32 required the notice precisely as defined by the lease in spite of tenant’s claim that the landlord had actual knowledge, writing, “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.” While the New York rule on enforcement of lease clauses is not universally followed by other states, it is well stated in Vermont Teddy Bear Co. v. 538 Madison Realty Co.33 in which New York’s highest court set forth the principle: When interpreting contracts, we have repeatedly applied the familiar and eminently sensible proposition of law that, when parties set down their agreement 29 The drafter might be well advised to name the statute by title and section number. 30 Lincoln Plaza Tenants Corp. v. MDS Properties Development Corp., 169 A.D.2d 509, 564 N.Y.S.2d 729 (1st Dept. 1991). 31 40 Misc. 3d 1229(A), 980 N.Y.S.2d 275 (N.Y. Dist. Ct. 2013). 32 180 A.D.2d 235, 584 N.Y.S.2d 927 (Third Dept. 1992). 33 1 N.Y.3d 470, 807 N.E.2d 876 (2004).
- 10. Bailey-Desiderio-Treiman From the FrontLines Page 10 in a clear, complete document, their writing should be enforced according to its terms. We have also emphasized this rule's special import in the context of real property transactions, where commercial certainty is a paramount concern, and where the instrument was negotiated between sophisticated, counseled business people negotiating at arm's length. In such circumstances, courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include. Hence, courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing. (internal quotation marks and citations omitted). Note in Vermont Teddy Bear, one of New York’s most cited cases, that the court included terms “which the parties have neglected to specifically include.” It is not limited in its effect to terms that the parties chose to exclude. Thus, while the courts, particularly lower courts, may show flexibility in interpreting a lease, the lease’s drafters should not expect that flexibility to come. However, one should note that 4261 Realty Holding LLC, supra, reflects the kind of pity for tenants in emergency situations one often finds in the lower courts, but the rule remains that of Vermont Teddy Bear’s dictate of strict enforcement of leases as written. Courts Enforce Properly Drawn Lease Clauses Absolving A Landlord From Responsibility for Utility Failure While practitioners debate the advantages and disadvantages of using preprinted commercial lease forms, the Real Estate Board of New York (“REBNY”) family of preprinted commercial leases do have a specific common law that has developed to construe their clauses, specifically the casualty clause found in these leases’ ¶9. New York’s leading case in all matters of lease construction, Vermont Teddy Bear,34 specifically deals with the effect and use of ¶9 and its complex mechanism for suspending the rent or terminating the lease in the event of casualty. However, neither ¶9, Vermont Teddy Bear nor any other New York case defines just what a casualty is. Rather, under the structures of ¶9, there is no casualty at least until one of the parties to the lease declares there to have been one. In Maiden Lane Props., LLC v. Just Salad Partners LLC,35 when a restaurant resisted paying its rent in the wake of Superstorm Sandy due to the failed electricity it suffered, the New York City Civil Court upheld and enforced clauses absolving the landlord of responsibility for electricity. It recognized that often as a result of a widespread disaster, such as a hurricane, the loss of utilities to the property is no fault of the owner. Usually electricity, it can be any utility, such as natural gas, water, telephone, internet, cable television, or even steam. The court ruled that where there is exculpatory language in the lease, releasing the landlord from responsibility for such a loss of utilities, the exculpatory language is to be enforced. Maiden Lane’s language with respect to electricity, it is readily adaptable to any utility at all, saying: Landlord shall not be liable to Tenant in any way for any interruption, curtailment or failure, or defect in the supply or character of electricity furnished to the 34 supra. 35 supra.
- 11. Bailey-Desiderio-Treiman From the FrontLines Page 11 demised premises by reason of any requirement, act or omission of Landlord or of any public utility or other company servicing the Building with electricity for any reason except Landlord’s gross negligence or willful misconduct. Landlord reserves the right to stop service of the electrical systems or facilities in the Building when necessary, by reason of accident or emergency, or for repairs in the judgment of the Landlord desirable or necessary to be made, until said repairs shall have been completed. Landlord shall have no responsibility or liability for interruption, curtailment or failure to supply electricity when prevented by any cause whatsoever reasonably beyond Landlord’s control or by reason of the conditions of supply and demand which have been or are affected by emergency. The exercise of such right or such failure by Landlord shall not constitute an actual or constructive eviction, in whole or in part, or entitled Tenant to any compensation or to any abatement or diminution of Rent or impose any liability upon Landlord by reason of interruption of Tenant’s business. Landlord shall not be liable to Tenant in any way for any interruption of any service furnished by any public utility. While tenants might object to such a clause, they can offset its effects with the purchase of appropriate insurance. New York City Is Building Itself Better Than Ever The New York City Planning Commission is working with communities throughout the floodplain to identify zoning and land use strategies to reduce flood risks and support the City’s ability to protect against flooding through long-term adaptive planning. To do this, the Commission has created the Flood Resilience Zoning Text as part of a wide range of efforts by the City to recover from Hurricane Sandy, to promote rebuilding, and to increase the City’s resilience to climate-related events. The Flood Text (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. The Flood Text 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, 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. In a report entitled Progress Report: OneNYC 2018,36 New York City describes its program, “One New York: The Plan for a Strong and Just City” as “the City’s strategic plan for inclusive growth and climate action.”37 While much of the report focuses on issues of social justice, the chapter entitled, “Vision 4: Our Resilient City” deals with storm damage prevention and recovery. The report does not speak of the sources of catastrophe other than storms, such as, for example terrorist attacks or seismic events.38 36 https://onenyc.cityofnewyork.us/wp-content/uploads/2018/05/OneNYC_Progress_2018.pdf. 37 OneNYC 2018 p. 4. 38 A 2008 study by scientists at Columbia University surveyed seismic activity over the past three centuries and warned that the New York area was at ‘substantially greater’ risk of a 6- or 7-magnitude earthquake than previously
- 12. Bailey-Desiderio-Treiman From the FrontLines Page 12 The chapter sets its themes by saying: We are working every day to ensure that New York City is prepared for the growing risks from climate change. In the wake of Hurricanes Harvey, Irma, and Maria that devastated communities along the Gulf Coast and on several Caribbean islands, the urgency of climate resiliency has never been clearer.39 While the chapter largely focused on residential matters, commercial matters receive consideration as well. Thus, according to the report: NYC Economic Development Corporation’s $30 million RISE: NYC program is assisting hundreds of small businesses to mitigate the impacts of climate change with innovative telecom, energy, and building systems technologies. In 2017, the City completed the program’s first installation of resiliency technology at Hurricane Sandy-impacted small businesses on the Rockaway Peninsula in Queens, paving the way for future investments, including clean on-site energy production and storage systems that reduce demand on the grid and provide back- up power during outages. 40 The report also notes that there are special programs for small businesses, including the Business Preparedness and Resiliency Program that provides risk assessments and grants to prepare their staff and operations for emergencies, and to protect their assets and investments.”41 In order to prevent damage from storms, New York City is developing zone specific construction standards, linked to presence on the coastal floodplains.42 Finally, the City has put together flood insurance rate maps (“FIRMs”) showing the flood dangers in order to determine the requirements for flood insurance. “In addition to the FIRMs, FEMA and the City will work together to develop a first-of-its-kind climate-smart flood map product that will incorporate the growing risk of climate change and sea level rise.43 Private companies must make their own preparations for catastrophes. Verizon rather spectacularly contracted with a Dutch company, hailing from a land renowned for its dealing with flooding issue, to develop a temporary dam to erect around its switching facilities if it has notice of an impending storm. Truly remarkable are the specifications for the wall: thought.” Ariel Kaminer, Preparing For The Day The Earth Moves, https://www.nytimes.com/2011/03/20/ nyregion /20critic.html 39 OneNYC 2018 p. 78. 40 OneNYC 2018 p. 80. The entry continues, referring to https://www.nycedc.com/program/rise-nyc, an extended excerpt of which is annexed hereto as Appendix A. 41 Id. 42 Id. p. 82. 43 Id.
- 13. Bailey-Desiderio-Treiman From the FrontLines Page 13 James M. Callahan, an engineer and a vice president of Arcadis, which designed the barrier, said the wall’s height was determined by the six-foot flooding that can be expected during a 100-year storm, plus two feet for storm surge, plus one foot to account for the anticipated rise of sea levels by 2050.44 Notably, Verizon assumes that by the middle of this century the seas will rise by another foot. 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.”45 Insurance Contracts Are Construed According To Standard Construction Principles The general principles governing the interpretation of insurance policies are the same general rules that govern the construction of any written contract and are enforced in accordance with the intent of the parties as expressed in the language employed in the policy. Generally, the courts will construe the limitations of an insurance contract in the light of common speech, and any ambiguities will be resolved against the insurer, as drafter of the policy. The touchstone for interpreting insurance contracts, as with other contracts, is the reasonable expectation of the parties.46 Nevertheless, as further explained by the First Department, in Broad Street, LLC v. Gulf Insurance Company47: [W]ell-established principles governing the interpretation of insurance contracts . . . provide that the unambiguous provisions of an insurance policy, as with any written contract, must be afforded their plain and ordinary meaning, and that the interpretation of such provisions is a question of law for the court. Moreover, when interpreting the policy, the court “may not make or vary the contract of insurance to accomplish [its] notion of abstract justice or moral obligation.” (Internal citations omitted) 44 David W. Dunlap, “A Modern Flood Barrier Aims to Protect Verizon’s Landmark Building,” https://www.nytimes.com/2013/10/31/nyregion/a-modern-flood-barrier-aims-to-protect-verizons- landmark-building.html. 45 Id. 46 See, e.g., Throgs Neck Bagels, Inc. v. GA Insurance Company of New York, 241 AD2d 66, 671 NYS2d 66 (1st Dept. 1998). 47 37 AD3d 126, 130-131, 832 NYS2d 1, 4 (1st Dept. 2006)
- 14. Bailey-Desiderio-Treiman From the FrontLines Page 14 Commercial properties and businesses require insurance protection offered to them in two broad categories: property insurance policies and business interruption insurance policies. Basic policies in both categories can and should be backed up by so-called “umbrella” polices with higher coverage for extra protection. Generally, the coverages for both property and business losses may be offered separately or combined in a single policy. In any event, the property or business owner seeking protection against the type of losses caused by potential catastrophic events requires more than the coverage normally contained in basic policies or in standard umbrella policies. Basic “Property Insurance” generally covers damage to real property and other items related to real property, including buildings, fixtures, permanently installed machinery and equipment, and the materials and equipment used to maintain or service the real property. Basic coverage for “Contents Insurance” extends to basic business personal property, including furniture and fixtures, machinery and equipment, “stock,” and other personal property used in the business and located on the real property. In some cases, damage to the property of third parties may also be covered. Such basic policies do not protect the property or business owner against loss of business income, loss of rental income, or any extra expenses that would not have occurred, but for direct damage to the insured property or its physical loss resulting from the catastrophic event involved. Lawyers NeedTo Consider What Property Is Covered Against What Hazards Effort should be made to obtain coverage for every conceivable property interest that the client may plausibly be said to have in the physical property specified in the policy. The policy should cover the replacement cost value of the building or office, including (a) coverage for the costs of demolition of the building, and (b) coverage for lost value of the undamaged portion of the building, if local ordinance or law requires the demolition of the undamaged portion of the building in addition to the damaged portion. The policy should also cover the increased cost of construction repairs or reconstruction that must be incurred to comply with current laws and ordnances; e.g., for sprinkler systems and/or electrical codes that were not in effect when the building was originally constructed. Coverage for the replacement of the contents of the building or office should also be obtained, and such Contents Insurance policies should list all of the valuable contents separately, to avoid any “caps” on total insurer liability that might otherwise apply. The policy should insure against “all perils” or “all risks” (All Risks Policies). Policies that insure against specific “named perils” only, such as fire, flood, and electrical power loss, would not have coverage for damage caused by terrorism, war, “Act or God,” tornados, earthquake, or volcanic eruption, all of which have been excluded under basic polices. Nevertheless, the limitations and exclusions sections of “all perils” policies should be scrutinized to determine whether there are specified “perils” excluded from coverage. How Long Extended Recovery Continues When Premises Are Destroyedin Terror A Group of Events Counts As One For Many Form Insurance Policies In SR Int’l Bus. Ins. C. v. World Trade Ctr. Props., LLC,48 a case arising out of the 9/11 disaster, the courts grappled with the fact that there were two towers struck by two airplanes. Under the terms of the insurance policies, the question was whether there were one or two “occurrences” because each “occurrence” is covered to a certain monetary limit. While, on the surface, it would appear that this is a unique case, dealing with a unique situation, the case does, 48 467 F. 3d 107 (2d Cir 2006).
- 15. Bailey-Desiderio-Treiman From the FrontLines Page 15 in fact, speak more broadly to the entire law surrounding catastrophes that are often made up of distinct events contributing to the larger picture. The case dealt with two levels of inquiry: Since the actual insurance policies had not yet been written and there were only binders in place, the first question was what the terms of insurance implied into those binders would be. From the point of view of insurance questions in catastrophic situations, this is the more unlikely scenario to repeat, although obviously it could happen. The second question, however, was for those policies of insurance that dealt with provisions calling for related occurrences to be treated as a single occurrence, the issue with which the court had to grapple was whether under the circumstances of this case, the two airplane strikes counted as one occurrence or two. While the specific event of two airplanes crashing into two towers at one complex one hopes to be unique in history, the idea of several events converging to create one catastrophe at more than one building is substantially easier to envision. Thus, this issue in this case is one of importance to understanding the law of catastrophe. Since there were numerous insurance policies involved and several different insurance form contracts forming the basis of the relationship, the court had the opportunity to examine in this and in earlier litigation between the parties how each form contract dealt with related occurrences. Since most of the insurers used the “WilProp Form,” its use of the language “attributable directly or indirectly to one cause or to one series of similar causes,” dictated treating the two airplanes as a single event. Where the WilProp Form was not the one the binder referenced, the two planes were treated as two events. The court pointed out that the single occurrence rule had actually been designed as pro- insured as it meant only one set of deductibles in the normal situation where the loss is less than the limits of the coverage. However where, as here, the loss exceeded the coverage, the single occurrence rule had the effect of halving the effective coverage limits. While it is rare for an insured to have any say whatsoever in the wording of the policy, the likelihood of there being a total loss is different in buildings such as the World Trade Center, as acknowledged in In re World Trade Center Bombing Litigation, 49 which should therefore lead to different questions as to whether a policy for an ordinary property is a reasonable choice. In The Wake Of 9/11 Congress Mandated Terrorism Insurance After the 9/11 attacks, the United States General Accounting Office estimated that 1,025 businesses that employed more than 75,000 people were displaced due to the damage caused by the attacks in area of the World Trade Center, and 18,000 businesses in New York City employing 563,000 people were disrupted or forced to relocate. The New York City Partnership and Chamber of Commerce estimated that revenue losses totaled $795,000,000. Retail businesses were closed for an average of eight days, with average weekly losses of $25,000. Damage claims resulted in payouts, under business interruption policies, estimated to be approximately $17 Billion. To stabilize the insurance market after 9/11, Congress, in 2002, enacted the Terrorism Risk Insurance Act (“TRIA”) to guarantee the availability of insurance coverage against acts of international terrorism. Under TRIA, as amended by the Terrorism Risk Insurance Program Reauthorization Act of 2007 and the Terrorism Risk Insurance Program Reauthorization Act of 49 3 Misc. 3d 440 *; 776 N.Y.S.2d 713 (Supreme Court, NY County 2004)
- 16. Bailey-Desiderio-Treiman From the FrontLines Page 16 201550 (“TRIPRA”), insurers must offer coverage against such incidents and are reimbursed by the federal Government for paid claims subject to certain deductible and retention amounts.51 Currently, for certified acts of terrorism, compensation to insurers shall be paid only if “the aggregate industry insured losses resulting from such certified acts of terrorism exceed” $160,000,000, for insured losses occurring in calendar year 2018; $180,000,000, for insured losses occurring in calendar year 2019; and $200,000,000, for insured losses occurring in calendar year 2020 and any calendar year thereafter.52 The Government share of compensation to be paid under TRIPRA to insurers, set originally at 85 percent for paid losses above an insurer’s individual deductible required to be paid in 2016, decreases on a declining scale of one percentage point, for each calendar year thereafter, until equal to 80 percent of the amount of the insurer’s paid losses in excess of the deductible it is required to pay in such calendar year.53 Insurers are required to make available property and casualty insurance coverage for certified terrorism-related losses that does not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism.54 However, “[f]or purposes of this requirement, ‘terms’ excludes price.”55 No payment may be made by the Government to an insurer, with respect to an insured loss that is covered by the insurer, unless, at the time of offer, purchase, and renewal of the policy, the person that suffers the insured loss and files a claim with the insurer is given “clear and conspicuous disclosure” of (a) the existence of the aggregate cap on industrywide Government reimbursement, and (b) the Government share of compensation for insured losses.56 Insurers are required to quote the premiums for terrorism coverage when quoting the premiums for ordinary property insurance – leaving the decision to purchase terrorism coverage to the property owner. However, the law defines “terrorism” very narrowly. The term is limited to violent acts dangerous to human life, property, or infrastructure, that have been certified by the Secretary of the Treasury to have resulted in damage up to a maximum of $5,000,000, within the United States or outside the United States, and that have been “committed by an individual or individuals as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.” As such, the Boston Marathon bombing was deemed to not qualify as an act of terrorism under the law. However, despite the terrorism exclusion clauses in their basic policies, insurers chose to pay many claims made for the personal injuries and property damage that resulted from that event. There Is A Variety Of Government-backed Insurance and Private Stand-Alone Insurance Nevertheless, although terrorism coverage is an option for all property owners, TRIPRA’s narrow definition of “terrorism” is likely to discourage small property and business owners from opting to pay the higher premiums for terrorism coverage offered under TRIPRA. Alternatively, for organizations that insurers deem as “high risk,” so-called “stand-alone” terrorism coverage is offered by certain international insurers, on a worldwide basis -- for a 50 Pub. L. 114-1, 129 Stat. 3. 51 See TRIPRA, Section 102(7). 52 See TRIPRA, Section 103(e)(1)(B). 53 See TRIPRA, Section 103(e)(1)(A). 54 See TRIPRA, Section 103(c). 55 31 CFR 50.22. 56 See TRIPRA, Sections 103(b)(2) and (3).
- 17. Bailey-Desiderio-Treiman From the FrontLines Page 17 broad range of acts committed for political, religious or ideological purposes, not necessarily solely to influence the policy or conduct of the United States Government. One such company’s “terrorism” coverage includes not only traditional terrorism-type acts, but such actions as “active shooter,” “malicious attacks,” “sabotage,” “nuclear, chemical, biological, and radiological (“NCBR”) attacks. Its policies for such terrorism events covers property damage, loss of business income, crisis management costs, additional security requirements, employee counseling, and public relations costs incurred. Price is based on a risk profile analysis, and coverage does not depend on government certification. When evaluating the coverage limitations imbedded in the TRIPRA program, property and business owners with substantial financial resources are likely to opt for stand-alone policies that offer greater and more certain protection against the variety of terrorist-type actions that the World has witnessed in recent years. There Must Be Proof That The Hazard Was The “Dominant And Efficient Cause” Of The Damage The hazard insured against must be the proximate cause of the damage, i.e., “that cause which is most nearly and essentially connected with the loss as its efficient cause.” For example, in Throgs Neck Bagels, supra, the Court explained that “the damage for which fire insurers are liable is not confined to loss by actual burning and consuming, but they are liable for all losses which are the immediate consequences of fire or burning, or for all loses of which fire is the proximate cause.” Nevertheless, the “concept of proximate cause when applied to insurance policies is a limited one. . . [and] the causation stops at the efficient physical cause of the loss, it does not trace events back to metaphysical beginnings.”57 Accordingly, “[o]nly the most direct and obvious [efficient] cause should be looked to for purposes of the exclusionary clause.”58 Therefore, if a flood causes a fire to occur in a building’s electrical system, fire would be the proximate cause of the resulting damage to the building and would be covered by fire insurance. Unless the property or business owner’s policy insures against damage to the property originating outside the insured property, such as an interruption in utility supply service at the utility’s power plant or substation, recovery will be denied under a policy that covers only “direct physical loss of or damage to Covered Property at the premises caused by or resulting from any Covered Cause of loss.” Even when the policy does insure against potential interruption of utility service or water supply outside the insured’s premises, the policy is likely also to require that the utility or water company have suffered “direct physical damage” that caused the service interruption that damaged the insured. Whether or not coverage will be granted under such policy provisions is often hotly disputed by the insured and the insurer. For example, in La Casa Di Arturo, Inc. d/b/a Arturo’s v. Tower Group, Inc.,59 Hurricane Sandy caused a restaurant to sustain losses and damages for food spoilage, business interruption, inability to conduct plaintiff’s usual business, and loss of business income. It also alleged that, as a result of Sandy the restaurant remained for various times without electrical power, refrigeration and freezer use, and that it ceased operations from October 31, 2012 through November 3, 2012, with resulting alleged loss of business income. The insurer’s denial of coverage was upheld by the Court on the ground that the restaurant’s policy “expressly and unambiguously provided (a) that coverage for loss associated with power interruptions are limited to those that ‘result from direct physical loss or damage by a Covered Cause of loss” (italics added),and (b) that “damage 57 Home Insurance Company v. American Insurance Company,147 AD2d 353, 354, 537 NYS2d 516 (1st Dept. 1989). (Internal quotation marks omitted). 58 Kula v. State farm Fire & Casualty Co., 212 Ad2d 16, 628 NYS2d 988 (4th Dept. 1995). 59 49 Misc.3d 1209(A) (Sup. Ct., New York Co., 2015).
- 18. Bailey-Desiderio-Treiman From the FrontLines Page 18 caused directly or indirectly by [Water] is excluded [from coverage] regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” One Must Examine The Business Losses To Be Covered The primary business losses incurred by property owners and business owners from catastrophic damage or destruction to property is loss of business income and loss of rental value. “The purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against. In other words, the goal is to preserve the continuity of the insured’s earnings.”60 Coverage for business losses may be provided to the insured as part of policies issued to insure against ordinary property damage, environmental hazards, other specified hazards, or under “all perils” policies. The business losses insured against should include loss of business income not only due to the physical damage or destruction caused by the catastrophic event, whether terrorism, fire, explosion, wind or snow storm, hurricane, flood, or electrical power loss, but also attributable to any widespread trade disruption, or event cancellations required by the circumstances, and caused by the disaster generally. There should also be coverage for Contingent Business Interruption losses incurred due to the insured’s inability to receive essential inventory from its suppliers, or for losses incurred from its customers being unable to receive deliveries from the insured. Civil Authority Coverage should be obtained against losses necessarily resulting, from building evacuations and/or destruction, mandated by governmental authority, that cause either the complete temporary suspension of business operations or their complete termination. Business income interruption insurance policies generally include provisions requiring (a) that the business loss incurred be caused by a casualty that directly impacted the premises where the business was conducted, and (b) that the affected business show actual loss of profits during the time of incapacity until the time that restoration is completed.61 In Order For It To Be Covered, The Suspension Of The Business Must Have Been Necessary Business interruption policies typically insure against loss of business income sustained “due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’” The New York State Appellate Division, First Department, has held that the plain meaning of this language is unambiguous and means exactly what it says: i.e., that in order to be eligible for business interruption coverage, there must be “a total interruption or cessation of operations.”62 In Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co.63, a case involving a Duane Reade drug store located at the World Trade Center that was totally destroyed in the 9/11, Duane Reade’s business interruption policy provided as follows: The measure of recovery or period of indemnity shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to 60 Howard Stores Corp. v. Foremost Insurance Co., 82 AD2d 398, 400, 441 NYS2d 674, 676 (1st Dept. 1981) (Internal citations omitted), affirmed 56 NY2d 991 (1982). 61 See, e.g., Newman, Myers, Kreines, Gross, P.C. v. Great Northern Insurance Co., U.S. Dist. LEXIS 57338, No. 13 Civ. 2177 (PAE) (SDNY 2014). 62 Broad Street LLC v. Gulf Insurance Company, 37 AD3d 126, 132, 832 NYS2d 1 (1st Dept. 2006) (citations omitted). 63 279 F. Supp.2d 235 (SDNY 2003).
- 19. Bailey-Desiderio-Treiman From the FrontLines Page 19 rebuild, repair, or replace such property that has been destroyed or damaged, and shall commence with the date of such destruction or damage and shall not be limited by the date of expiration of this policy. The “Restoration Period” provision of the policy also required, “as soon as practicable after any loss,” that “the Assured shall resume complete or partial business operations and reduce or dispense with such additional charges and expense as are being incurred.” Duane Reade contended that the policy should be interpreted as providing that: The Restoration Period consists of the actual time period that would, or will, be required to restore Duane Reade’s operations to the kind, quality, and level which existed at the WTC Store prior to the terrorist attacks and that such Restoration Period is coterminous with the time necessary to rebuild the complex which will replace the World Trade Center. The Court held (a) that Duane Reade’s proposed interpretation was without support in the text of the policy and was “manifestly unreasonable,” (b) that the Restoration Period was “the time it would take to rebuild, repair, or replace the WTC store itself, not the entire complex that once surrounded it, and (c) that “[o]nce Duane Reade could resume functionally equivalent operations in the location where its WTC store once stood, the Restoration Period would be at an end.” The federal court decision cited no New York case law, but was nevertheless consistent with New York law. In a similar situation, in Broad Street, supra, the property owner’s building located approximately three blocks away from the World Trade Center was completely shut down following the events of September 11, 2001 until September 18, 2001. Nevertheless, despite being able to permit its tenants to return to the building on the latter date, the property owner claimed coverage for rent abatements and rent reductions that it felt compelled to provide to tenants thereafter through September 30, 2002. Citing evidence that tenants had in fact returned to the building on September 18, 2001, the Court rejected the insured’s contention that “because it was unable to provide a habitable environment for its residents by September 18, it [could] not be considered to have resumed operations.” The First Department of the Appellate Division of New York’s Supreme Court also rejected a similar World Trade Center claim from a property owner in Royal Indemnity Company v. Retail Brand Alliance, Inc.64, where a retail business was shut down following the September 11, 2001 events until September 12, 2002. The Court held that “[o]nce the store resumed operations on September 12, 2002, a year after the terrorist attack on the World Trade Center, the Business Income coverage terminated, regardless of whether the insured’s income was back up to pre-loss levels.” Likewise, the Court had previously held (in a non-World Trade Center case) that, where Civil Authority had denied access to insured’s restaurant for two days, but permitted access thereafter, the insured could not recover lost business income when the restaurant reopened, even though vehicular and pedestrian traffic was diverted; “the restaurant was [still] accessible to the public, plaintiff’s employees and its vendors.”65 64 33 AD3d 392, 393, 822 NYS2d 268, 269 (1st Dept. 2006). 65 54th Street Ltd Partners, L.P. v. Fidelity and Guarantee Insurance Company, 306 AD2d 67, 763 NYS2d 243, 244 (1st Dept. 2003). See also Bamundo, Zwal & Schermerhorn, LLP. v.
- 20. Bailey-Desiderio-Treiman From the FrontLines Page 20 One Must Consider Business Loss Valuation And Deductibles In Howard Stores, supra, the First Department explained that while the “losses payable under a business interruption policy are estimated based on ‘experience of the business before the catastrophe and its probable experience thereafter,’ the burden is on the insured to establish the extent of the damage caused by the interruption, and applicability of the policy thereto.” Measurement of damages by the insured’s “experience before the catastrophe” requires proof of the business income the insured would have realized if business operations had not been suspended. This is inherently speculative, and insurance companies often argue that, in the midst of the catastrophe, the insured could not expect to realize the same business it had before the event. There is no formula for calculating business interruption losses and no guideline to determine the “probable experience thereafter.” To eliminate unnecessary litigation over the measurement of damages, property and business owners should therefore attempt to include a formula in their business interruption policies that fixes a set per diem loss value for each day that their business is completely shut down by a future catastrophe. Property and business owners also need to be attentive to the deductibles included in their business interruption policies. The policy may specify that the deductible will apply per occurrence, per event, per loss, or per claim. Consideration should be given also to the possibility of a dispute arising over whether the potential future catastrophe will constitute a single occurrence, or a series of catastrophic events occurring simultaneously. This issue was highlighted in World Trade Center Properties v. Hartford Fire Insurance Co.,66 where the insured contended that the two airline crashes constituted two separate occurrences. The Court held that the two crashes were part of a single coordinated plan of attack and constituted “at the least, a ‘series of similar causes [as defined by the policy].” Flood Insurance Presents Its Own Issues Since 1968, protection against flood damage, for “business properties which are owned or leased and operated by small business concerns,” has been covered primarily under the federal National Flood Insurance Program (NFIP).67 The Federal Emergency Management Agency (FEMA) administers NFIP which was established to make flood insurance mandatory for those properties located in areas of special flood hazard, i.e., any area subject to a one percent or greater chance of flooding in any given year as determined by FEMA. The current reauthorization of NFIP is set to expire as of July 31, 2018, but the House of Representatives passed the 21st Century Flood Reform Act (H.R. 2874 in November 2017, and, if the Senate were also to pass the Bill, it would extend the NFIP through September 2020. In the interim, on June 28, 2018, the Senate passed a Farm Bill that contains an amendment, sponsored by Louisiana Republican Senators John Kennedy and Bill Cassidy, to prevent NFIP from expiring in the middle of the hurricane season and which extends the program for another six months. More specifically, flood zones are land areas categorized by FEMA according to their degree of risk of flooding. Based on the flood risk, zones are classified as A (100-year flood risk), V (100-year flood risk with additional hazards associated with storm-induced waves), Sentinel Insurance Company, Ltd., 2015 U.S. Dist. LEXIS 39409, No. 13–CIV-6672 (RJS) (SDNY 2015). 66 345 F3d 154, 180 (2d Cir. 2003). 67 See 42 USC §4012(a).
- 21. Bailey-Desiderio-Treiman From the FrontLines Page 21 Coastal A (an area landward of a V zone, or landward of an open coast without mapped V zones, where the principal source of flooding will be astronomical tides, storm surges, seiches, or tsunamis, but not riverine flooding), and Shaded X (an area that has an 0.2% probability of flooding every year. Zone A is an area not subject to high velocity waves, but subject to flooding for a 1% chance per year. Under NFIP, commercial property owners and businesses are eligible for flood insurance coverage up to $500,000.68 Flood insurance is also available from private insurers who can offer higher levels of coverage. Claims for both property losses and business income losses may result from a flood catastrophe. Flood insurance exclusions need to be carefully scrutinized, as they are often ambiguous and lead to litigation over what coverage was intended.69 As noted in the discussion above regarding La Casa Di Arturo, Inc. d/b/a Arturo’s v. Tower Group, Inc.,70 the policy in that case expressly excluded coverage for damage caused by water, and the resulting damage the restaurant suffered from flood waters generated by Hurricane Sandy was not covered. Sandy generated many possible causes of loss: wind, wind-driven rain, storm surge, flooding, power outages, orders by civil authority, and looting. In some cases, more than one of these conditions were associated with an insured’s losses. The definition of “flood” in policies may vary significantly from insurer to insurer and from policy to policy. One policy may define “flood” as meaning “rising water, surface water, waves, tidal water, tidal wave, or tsunami; rising, overflowing or any breach of streams, rivers, lakes, reservoirs, or other bodies of water; or spray from any of the foregoing, all whether driven by wind or not.” Some policies may not include the phrase “whether driven by wind or not.” In addition, some policies may include a definition for “high hazard flood zones.” Other unique issues arose from Sandy’s devastation. In Pietrangelo v. S&E Customize It Auto Corp.,71 the plaintiff had left her car at defendant’s motor vehicle repair shop before Sandy hit the New York City area. The defendant’s carrier disclaimed liability for damage to the car that was “totaled” as a result of significant flooding of the defendant’s repair shop. The plaintiff’s auto liability carrier paid the plaintiff the total value of the car, less a $1,000 deductible. The defendant refused to pay the $1,000 differential to plaintiff and plaintiff sued defendant in Small Claims Court. The issue the Court ruled upon was whether defendant had been negligent in not procuring flood insurance. The Court ruled that the law of bailments applied to the case, and that “it is not negligence for a bailee such as defendant to fail to carry insurance to cover the bailor’s property.” The Court further ruled that, in the absence of liability under the law of bailments, it was still defendant’s burden under the common law to establish a non-negligent cause for the damage to plaintiff’s property, and the Court ruled that Sandy, a “hurricane/superstorm” was an “act of nature” that relieved defendant of any liability. Elite Catering Company, Inc. v. National Specialty Insurance Co.,72 involved a similar situation, where the plaintiff catering company suffered extensive property damage, food spoilage, and loss of business income from the impact of Hurricane Sandy. Plaintiff alleged that when its principals returned to the premises on the day after the storm, they found the restaurant filled with refuse from a sewer backup that occurred during the storm. A claim was filed but was 68 See 42 U.S.C. §4013(b)(4). 69 See, e.g., XL Insurance America, Inc. v. Howard Hughes Corp., 154 AD3d 505, 61 NYS3d 497 (1st Dept. 2017). 70 49 Misc.3d 1209(A) (Sup. Ct., New York Co., 2015). 71 39 Misc.3d 1239 (a), 972 NYS2d 146 (Civil. Ct., New York Co., 2013). 72 54 Misc.3d 1210 (A), 52 NYS3d 346 (Sup. Ct., Richmond Co., 2017).
- 22. Bailey-Desiderio-Treiman From the FrontLines Page 22 denied by the insurer-defendant on the ground that all the alleged damages were the result of “flooding,” a circumstance expressly excluded from coverage under the policy. Plaintiff sued. The issue that arose was whether the special additional rider plaintiff had purchased, as protection for sewer back-up, was overridden by the policy provision that excluded coverage “for covered losses if those losses were occasioned, even in part, by uncovered causes, i.e., that damages caused by a combination of uncovered losses (e.g., flood) and covered losses (e.g., a sewer back-up) rendered the entire loss non-compensable.” The Court concluded that it was unable to find, as a matter of law, [w]hether the facial inconsistency in policy language . . . i.e., where the terms of a separately-purchased rider providing additional coverage for damages by, e.g., a sewer back-up, and the “anti-concurrent causation” exclusion upon which [insurer] relies, is subject to “no other reasonable interpretation, when read together [with the failure to purchase flood insurance], other than to exclude coverage for all losses caused by any combination of covered and non-covered occurrences”, or represents, e.g., a trap into which an “average insured” might fall as a result of the purchase of additional coverage specifically written to cover sewer and drain back-ups.” (Emphasis added). Where Possible, Lawyers Should Negotiate Insurance Policies It is evident that the policies offered by insurance companies may invariably be characterized as contracts of adhesion sold on a take-it-or-leave-it basis. However, owners of properties and businesses of sufficient size do have the wherewithal to negotiate the ultimate terms of any of the coverages discussed above.73 For those property and business owners able to do so, every effort should be made to ensure that coverages are obtained that will indeed provide the protection that the insureds may reasonably expect to have purchased in the event of any potential future occurrence of catastrophic proportions. 73 See, e.g., World Trade Center Properties, supra.
- 23. Bailey-Desiderio-Treiman From the FrontLines Page 23 Conclusion The life of a human, the life of a building, the life of a society is an endless concatenation of discreet events, many of which, in their own right are highly unlikely events. The unexpected will occur; no one will experience a life made up solely of utterly predictable events. The vagaries of the weather are, for most human beings, mere metaphors for the utterly predictable nature of an unpredictable life. But for real estate lawyers, the weather along with tectonic forces, rebellions, insurrections, and acts of terror are of the very fabric of events for which the lawyers must not be prepared, but rather for which they have written the mechanisms that already demonstrate the preparations in place, ready predictably to spring into action when the unpredictable actually happens. Our documents must be clear and concise, giving absolute certainty in enabling our clients to cope with omnipresent uncertainty. Cities and states that build better structures, have stronger building codes, and are governed by stronger documents, when suffering catastrophic losses, more rapidly get back on their feet. Haiti and Puerto Rico are unfortunate examples of everything that can go wrong both in superstructure and infrastructure. New York City, by contrast, rose from the challenges of weather and terror to create a modernized gleaming downtown financial district. It owes its success to the preparations made in the wake of earlier disaster. Our duty as lawyers serving the nation and to protect our clients and society as a whole is to support the physical structures with our paper structures, as legal dikes against the storms of adversity.
- 24. Bailey-Desiderio-Treiman From the FrontLines Page 24 APPENDIX A: RISE-NYC RISE : NYC provides small businesses affected by Superstorm Sandy with free resiliency improvements to help them prepare for future storms and the impacts of climate change. RISE The program leverages innovative technologies and up to $28 million in federal disaster recovery funds to improve the resiliency of New York City's small businesses while strengthening New York City’s long-term resiliency efforts. The program also helps strengthen the City’s small business community and emerging tech entrepreneurs. Overview NYCEDC’s RISE : NYC program launched in January 2014 as a global competition to identify innovative resiliency technologies to help prepare New York City small businesses for the impacts of future storms, sea level rise, and other effects of climate change. Following months of community engagement, project design, and careful evaluation of almost 200 applications, 11 technologies were selected. The winning proposals will receive funding to implement projects at Sandy-impacted small businesses to help them prepare for extreme weather. The technologies selected for funding will be installed at no cost to small businesses across New York City. The first RISE : NYC technology was installed in June 2017 by Rockaway-based NYC Daylighting. Learn more in the press release. Projects RISE : NYC resiliency solutions include energy technologies, building systems, and telecom networks, and represent some of the most cutting-edge technologies available. Energy Technologies – systems that provide clean, resilient, efficient power, keeping small businesses up and running even during grid failures Building Systems – solutions that improve the resiliency of critical building components before, during, and after a storm Telecom Networks – technologies that help small businesses stay connected and operating, even when traditional communication networks are down RISE : NYC Resiliency Technologies Energy Technologies Bright Power: a New York City-based company that will combine solar, energy storage, and co- generation technologies into a Resilient Power Hub to provide back-up power for critical operational and small business needs during power outages. CALM Energy: a New York City-based company that will deploy an intelligent building management system, Energy Watchdog, integrated with standby generation and commercially available technologies, to provide small business owners with smarter, efficient, more resilient buildings. Go Electric: an Indiana-based company with a New York City satellite office that will use its Energy Resiliency System to provide uninterruptible electric power during an outage, as well as reduce business electricity costs year-round through system monitoring and energy storage. Local Office Landscape and Urban Design: a New York City-based firm that will deploy Safe Space solutions at business locations throughout the Rockaway peninsula by developing a custom suite of technologies that provide affordable, site-specific renewable energy-based solutions for basic heating, lighting, security, and communications. UGE: a Canadian-based company with a New York City satellite office, UGE’s turn-key microgrid power solution harnesses solar and wind energy to provide uninterrupted power to
- 25. Bailey-Desiderio-Treiman From the FrontLines Page 25 small businesses during utility service disruptions and allows them to save on energy costs year- round. Building System Technologies F. W. Brown: a Connecticut-based company that will lead the deployment of Sandwich Plate System Flood Panels, designed by Flood Panel, LLC, to provide small businesses with flood protection in the form of thin, interlocking, impact-resistant panels that provide a modular barrier against flood waters. Geosyntec: a Massachusetts-based environmental engineering firm whose Active Floodproofing systems will combine resiliency audits with OptiRTC’s monitoring and control system to measure real-time flood risk data and trigger advanced flood risk alerts, actuated control valves, flood guards and other active flood-proofing measures to protect business-critical utility systems from inundation. NYC Daylighting: a New York City-based company that will deploy Solatube Daylighting Systems to capture, transfer, and deliver natural daylight into dark interior building spaces. This passive lighting technology reduces demand on the grid, lowers energy costs, and allows backup power to be conserved for business-critical uses during an outage. Telecom Networks goTenna: a New York City-based company whose goTenna devices enable communication via smartphone without cell or data connectivity, ensuring that businesses have resilient, peer-to- peer emergency communication capability. New America Foundation: a D.C.-based nonprofit organization with a New York City satellite office is developing decentralized mesh Wi-Fi networks as the flagship project of its Resilient Communities initiative. The networks can route around points of failure to keep small businesses and their surrounding community connected during an outage. Red Hook Initiative: a New York City-based nonprofit organization that will expand the current reach of their Red Hook Wi-Fi network to provide local small business connectivity, improving Internet resiliency and access to online resources in the event of a power outage.