when tragedy strikes: a roadmap for post-casualty protocols and processes

General Session 1 Session Title Wednesday, October 28, 2015 2:00 3:15 PM

Seminar 7

When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes

Thursday, October 29, 20159:00 10:15 AMJoe Nuez, Esq.Vantage Law Group, PLLCMinneapolis, MNDorothy Bolinsky, Esq.Drinker Biddle & Reath LLPPrinceton, NJ

Adam Leitman Bailey, Esq.Adam Leitman Bailey, P.C.New York, New York

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What is a Casualty?A casualty can have a number of definitions.

It can be limited to naturally-occurring disasters, or be widened to include acts of war or terrorism.

The governing definition will be the one used in a particular contract, and the lease or policy will only extend so far as that definition allows.

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TOP 12 MOST COSTLY HURRICANES IN U.S. HISTORY* (Insured losses, 2013 dollars, $billions)Source: Insurance Information Institute Sandy Fact File, October 2014

Hurricane KatrinaAugust 23 August 31, 2005

$150 Billion in US Economic damage $108 Billion in Property damage largest single insurance loss event ever$41.1 Billion in Insured Losses plus$16.1 Billion in FEMA claims plus $3 Billion in off shore energy facility losses

Super Storm Sandy October 22 November 2, 2012

Impacted 24 US States$65 Billion in US Economic damage $68 Billion Overall Economic damage$50 Billion in Property damage$28.2 Billion in Insured Losses$18.75 Billion in Insured Property Losses (excluding FEMA claims)

Because of Past Casualties, Will Previous Owners Be Legally Required To Do More to Protect Their Buildings?

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Manfra, Tordella & Brookes, Inc. V. 90 Broad Owner, LLC, 2013 WL 373327

Plaintiff-tenants 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.

What happened to this case? Research.

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Issues in Tort: Can a Landlord be Liable for Damaging a Neighborhood?

Depending on the lease provision, when premises are rendered unusable or uninhabitable the tenant is considered constructively evicted and is no longer responsible for rent, as of the time it abandons the premises. 11

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When a casualty originates in a landlords own building, the effects may spread beyond the premises, subjecting the owner to litigation by nearby building owners, tenants, and others.

While the owner may be responsible for physical damage ensuing from the casualty, courts have held that the landlord typically is not responsible for the purely economic harm caused by a casualty. Issues in Tort: Can a Landlord be Liable for Damaging a Neighborhood?

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532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 96 N.Y.2d 280, 750 N.E.2d 1097 (2001)

The accident, from construction on a single building, damaged other buildings and required the closure of 15 heavily-trafficked blocks in midtown Manhattan for at least two weeks. Multiple plaintiffs sued the owner and managing agent of the building where the construction was being done, including a proposed class action covering all businesses within 30 square blocks of midtown Manhattan. The case centered on whether the defendant owner could be found liable for purely economic damages to the nearby affected businesses.

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In analyzing a tort claim against the owner, the New York Court of Appeals held that a landowner who engages in activities that may cause injury to persons on adjoining premises owes those persons a duty to take reasonable precautions to avoid injuring them, but such a landowner does not owe a duty to protect an entire urban neighborhood against purely economic losses.

532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 96 N.Y.2d 280, 750 N.E.2d 1097 (2001)

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Drafting a Better Casualty Lease Clause

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Carefully Define CasualtyDefinition should specify whether it is limited to natural disasters: earthquakes, wind and fire, or includes acts of god, war, terrorism, negligence, etc.

Definition should include a provision apportioning liability to tenant for any casualty caused by tenant, its agents, or customers.


Definition should specify whether it is limited to natural disasters such as fires, earthquakes, wind storms and sinkholes, or includes acts of god, war, terrorism, negligence, etc.

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Provides proportional rent abatement based on amount of unusable space

Limited to the time between the casualty to the earlier of the substantial completion date (which must be defined)The date at which the tenant or subtenant retakes possession of the space.


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Requires tenants notification to landlord of casualty and/or intent to cease rent payments due to casualty.

Requires landlords notification to tenant of substantial completion of repairs and restoration, or alternatively, establishes circumstances under which landlord can terminate the lease. Establish Notice RequirementsDrafting a Better Casualty Lease Clause

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Contains a provision for complete or near-complete destruction of the premises allowing landlord to terminate lease. Drafting a Better Casualty Lease Clause

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Whether Tenant Receives Rent Abatement Maiden Lane Props., LLC v. Just Salad Partners LLC, 2013 N.Y. Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013)

Case should be explained verbally and grab the audiences attention NOT read off the slide.

The case concerned a commercial lessee which went without electricity after Sandy. Plaintiff, the lessor, obtained a generator for its own use and for the use of residential tenants in the building, but did not allow commercial tenants to use it. The tenant failed to pay a portion of its rent, and alleged that this nonpayment was justified by the lessors failure to repair damage after Sandy. The issue in the case was whether the tenants lease allowed such nonpayment in these circumstances.Article 9(a) of the REBNY lease states [i]f the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth.In this case, the tenant never gave notice of a casualty as required by the lease. Furthermore, there was no physical damage to the leased premises. Most damningly, a separate clause in the lease noted that the lessor had no responsibility for interruptions in electricity, and that such interruptions would not give rise to constructive eviction or to an abatement of rent.Therefore the court held that the tenant was required to continue to pay rent and there is no basis for its defense or any abatement here.

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Maiden Lane Props., LLC v. Just Salad Partners LLC, 2013 N.Y. Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013)

Maiden Lane Properties v. Just Salad Partners, 056312/13, NYLJ 1202598292879,At *1 (Civ NY Schecter).

Tenant did not give notice as required by lease, but still claimed the benefits of rent abatement allowances.

Tenants claim was entirely based on loss of electricity, which was tenants exclusive responsibility under the lease, and other in which the damage to the premises themselves was light, but the weeks of no public utility provided electricity inspired the tenant to claim an abatement of the rent.

The court in Just Salad wrote:

Theses terms establish that loss of electricity was a contingency that was anticipated and accounted for by the parties and not, under the circumstances, a type of casualty damage subject to section nine.

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Rent Abatement: A Tenants Right to Not Pay RentAt common law, a casualty did not relive a tenant of its obligation to pay its landlord rent. The common law has been modified in most states by statute.

For example, N.Y. Real Property Law 227 allows a tenant to break a lease or tenancy and surrender the premises in the event of disaster. 23

N.Y. R.P.L. 227Where 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. 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.

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The New York statute, as with many similar statutes, also specifically allows for contrary provisions in contract. Therefore, most commercial leases explicitly waive 227.Ex: section 9(f) of the Real Estate Board of New York Form Store Lease reads: Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof.

Lease Control

However, the New York statute, as with many similar statutes, also specifically allows for contrary provisions in contract. Therefore, most commercial leases explicitly waive 227. For example, section 9(f) of the Real Estate Board of New York Form Store Lease reads: Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof.

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That same form lease provides, in its casualty clause:If the premises are partially damaged or partially unusable rent is to be apportioned from the day following the casualty according to the part of the demised premises which is usable.

However, the New York statute, as with many similar statutes, also specifically allows for contrary provisions in contract. Therefore, most commercial leases explicitly waive 227. For example, section 9(f) of the Real Estate Board of New York Form Store Lease reads: Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof.

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A lease should indemnify the landlord against casualties caused by the tenant or by the tenants agents or customers. The lease also needs to clearly provide whether a waiver of subrogation is intended, and how the subrogation provision works with indemnification provisionsLandlords Ability to Recover or Avoid Payment After a Casualty

. In the case on the next slide the lease was poorly drafted and the landlord was not fully indemnified against a fire caused by the tenants customer.

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Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d 835 (6th Cir. 2000)Plaintiff is the insurer of the landlord of a shopping mall, and covered the landlord for both property damage and business interruption. Defendant is a commercial tenant in the mall.

A fire was started by a customer in Defendants store, causing extensive damage and requiring approximately $1 million in payments from the plaintiff insurer to the landlord.

http://www.enquirer.com/editions/1997/02/01/loc_woolfire.html photo28

Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d 835 (6th Cir. 2000)The lease required Defendant tenant to:Indemnify the landlord against any and all claims and demands, including for personal injury, loss of life, or property damage, if the injury or damage occurred within the demised premises and arose out of the tenants use of the premises.

The court found that there were no claims and demands here, and so that indemnification provision did not apply.

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Scottsdale Ins. Co. v. Mason Park Partners LP, 249 F. App'x 323 (5th Cir. 2007) The court found that the landlord was not covered under tenants property coverage because he was not specifically named. The court also found that the landlord was not covered under the tenants general liability coverage, as commercial liability coverage is only triggered when the insured is legally required to pay damages, which did not extend to the tenants damage to landlords building.All leases should require that the landlord be named as an additional insured party under the tenants insurance policy

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Constructive Eviction: When is the lease automatically terminated in the wake of a casualty?

Depending on the lease provision, when premises are rendered unusable or uninhabitable the tenant is considered constructively evicted and is no longer responsible for rent, as of the time it abandons the premises. 31

Protecting Your Client Through Casualty Insurance

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Market Value RiderA market value rider to an insurance policy ensures that the maximum coverage provided under the policy will be the fair market value of the property rather than the original purchase price.

In the event that the insured property increases in value, the insurance will still cover the full value of the property in case of casualty.

A market value rider to an insurance policy ensures that the maximum coverage provided under the policy will be the fair market value of the property rather than the original purchase price. Therefore, in the event that the insured property increases in value, the insurance will still cover the full value of the property in case of casualty. This is often used in title insurance.

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Code upgrade coverage applies to extra costs incurred as a result of rebuilding property under codes or ordinances which have been updated since the original construction of the premises.

These new requirements can be from local, state, or federal law. For example, local building code might require changes to the construction of older buildings in order to be accessible.

Code Upgrade Coverage

Code upgrade coverage applies to extra costs incurred as a result of rebuilding property under codes or ordinances which have been updated since the original construction of the premises. These new requirements can be from local, state, or federal law. For example, local building code might require changes to the construction of older buildings in order to be accessible. This type of coverage may be referred to by other names, including ordinance or law insurance, depending on the area.This coverage can be included in or excluded from either standard property insurance or business interruption insurance.See Scott G. Johnson, Insurance Coverage for Building Code Upgrades, 44 Tort Trial & Ins. Prac. L.J. 1031 (2009)

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Importance of Type of Policy and Policy Language

A policy can be a named perils policy which covers only the perils expressly listed or an all risk policy, which covers all perils except those explicitly excluded.

A policy can be a named perils policy which covers only the perils expressly listed or an all risk policy, which covers all perils except those explicitly excluded. Most lenders will require all risk policies. With an all risk policy, the burden of proof shifts to the insurer to show the loss is not covered once the insured has demonstrated that a loss has been suffered.

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Importance of Type of Policy and Policy Language (Continued)Most lenders will require all risk policies. With an all risk policy, the burden of proof shifts to the insurer to show the loss is not covered once the insured has demonstrated that a loss has been suffered.

A policy can be a named perils policy which covers only the perils expressly listed or an all risk policy, which covers all perils except those explicitly excluded. Most lenders will require all risk policies. With an all risk policy, the burden of proof shifts to the insurer to show the loss is not covered once the insured has demonstrated that a loss has been suffered.

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World Trade Ctr. Properties, L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir. 2003); SR Int'l Bus. Ins. Co. v. World Trade Ctr. Properties, LLC, 467 F.3d 107 (2d Cir. 2006)

Silverstein Properties, which leased the World Trade Center from Port Authority, obtained insurance from about two dozen insurers in the collective amount of $3.5 billion per occurrence. The difference between defining the casualty as one or two occurrences (for the two separate planes) meant the different between being able to recover $3.5 billion and $7 billion. This resulted in massive litigation involving Silverstein, Port Authority, and the insurance companies, among others.

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World Trade Ctr. Properties, L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir. 2003); SR Int'l Bus. Ins. Co. v. World Trade Ctr. Properties, LLC, 467 F.3d 107 (2d Cir. 2006)Silverstein Properties, which leased the World Trade Center from Port Authority, obtained insurance from about two dozen insurers in the collective amount of $3.5 billion per occurrence. The difference between defining the casualty as one or two occurrences (for the two separate planes) meant the different between being able to recover $3.5 billion and $7 billion.

This resulted in massive litigation involving Silverstein, Port Authority, and the insurance companies, among others.

Continued


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The Second Circuit held that this $3.5 billion question, how to define occurrence, was to be decided by a jury. The jury found that under the definition of some policies it was a single occurrence, whereas under others it was two separate occurrences. The court found that [t]hese forms were designed with different interests in mind and, not surprisingly, yielded different results. In our opinion, the jury's determination that the insurers provided different coverage is not a manifestation of judicial error.


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Types of Casualty InsuranceAs Blacks Law Dictionary notes, [t]he meaning of casualty insurance has become blurred because of the rapid increase in different types of insurance coverage. Insurance, Black's Law Dictionary (10th ed. 2014). After an event like Sandy or Katrina, losses can stem from different causes, such was wind, wind driven rain, storm surge, flooding, power outages, order by civil authority, change in codes, looting etc.

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Property Insurance Fair Market ValueActual Cash ValueReplacement CostReplacement cost coverage was devised to remedy the shortfall in coverage which results under a property insurance policy compensating the insured for actual cash value alone. That is, while a standard policy compensating an insured for the actual cash value of damaged or destroyed property makes the insured responsible for bearing the cash difference necessary to replace old property with new property, replacement cost insurance allows recovery for the actual value of property at the time of loss, without deduction for deterioration, obsolescence, and similar depreciation of the property's value.

Fair Market ValueThis valuation method is based on the price that a property would sell for if placed on the market today and purchased in a fair, arms-length transaction. To determine that price an insurer is likely to look at recent sales of nearby comparable properties.This valuation may be similar to an actual cash value valuation, discussed below, because the market value typically takes into consideration any deterioration of the property. However, the fair market value method is more susceptible to outside forces such as the strength of the real estate market at the time.Actual Cash ValueThis valuation method attempts to calculate the cost to replace insured property, and then subtracts from that amount to account for depreciation of assets. This means that the amount paid by an insurer would be less than the cost to replace the insured property, and would continue to decrease over time. Under an actual cash value policy the insured is responsible for making up the difference between the cost to replace the property and the lesser amount the insurer will pay.Replacement CostThis valuation method attempts to estimate the cost to reconstruct or repair the insured property, typically using comparable methods and materials. A replacement cost policy will not deduct for deterioration or depreciation, differentiating it from fair market value or actual cash value policies.Replacement cost coverage was devised to remedy the shortfall in coverage which results under a property insurance policy compensating the insured for actual cash value alone. That is, while a standard policy compensating an insured for the actual cash value of damaged or destroyed property makes the insured responsible for bearing the cash difference necessary to replace old property with new property, replacement cost insurance allows recovery for the actual value of property at the time of loss, without deduction for deterioration, obsolescence, and similar depreciation of the property's value. 12 Couch on Ins. 176:56.

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Attributing Damage to Water vs. WindBecause many insurance policies exclude flood and water damage, businesses which do not obtain separate flood policies are often left with damage in the wake of a casualty such as a hurricane which may not be covered by the policy. If there is any chance of water damage, whether from direct flooding, hurricane, or other cause, a landlord should obtain additional flood insurance. Cashew Holdings, LLC v. Canopius U.S. Ins., Inc., No. 13-CV-4528 ERK SMG, 2013 WL 4735645 (E.D.N.Y. Sept. 3, 2013)

The case below provides an example of a court deciding whether damage was caused by water or wind, and accordingly whether the damage was excluded by the policys flood exclusion clause.

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Cashew Holdings, LLC v. Canopius U.S. Ins., Inc., No. 13-CV-4528 ERK SMG, 2013 WL 4735645 (E.D.N.Y. Sept. 3, 2013)

The relevant exclusion in the policy provided

Exclusions1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.g. Water(1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not;(2) Mudslide or mudflow;(3) Water that backs up or overflows from a sewer, drain or sump; or(4) Water under the ground surface pressing on, or flowing or seeping through:(a) Foundations, walls, floors or paved surfaces;(b) Basements, whether paved or not; or(c) Doors, windows or other openingsBut if Water, as described in g.(1) through g.(4) above, results in fire, explosion or sprinkler leakage, we will pay for the loss or damage caused by that fire, explosion or sprinkler leakage.

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Flood Exclusions and Concurrent Causation ClausesAn insurance theory stating that if loss or damages occur as a result of more than one cause, one of which is covered (insured) while the other is not, the damages are likely to still be compensated for by the insurer.

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In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007)

This case consolidated a number of residential and commercial property insurance claims brought in the wake of Hurricane Katrina. The plaintiffs policies contained flood exclusions, but they nevertheless made insurance claims, primarily under the theory that the New Orleans flooding was caused by the negligent design, construction and maintenance of the levees, and that the insurance policies flood exclusions do not exclude coverage for flooding cause by negligence. The defendant insurance companies, of course, contested that interpretation of the flood exclusion clauses.Sample exclusion clauses from some of the consolidated cases:We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.Water Damage, meaning:... Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind ....We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:... Water Damage, meaning: (1) flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, all whether driven by wind or not....Definition of FloodThe court found that although the term flood was not specifically defined in the policies, it was not ambiguous and so should be accorded its plain meaning. The court also found that even though other insurance policies specifically addressed floods caused by negligence, the omission of that particular contingency from these policies did not render the terms ambiguous. The court ultimately looked to standard usage of the term, and found that it included flooding as the result of negligence: When a body of water overflows its normal boundaries and inundates an area of land that is normally dry, the event is a flood. This is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina.Though the court held that the term flood was not ambiguous, this costly litigation might have been avoided by including a definition.All Risk PoliciesThe plaintiffs also raised the argument that because they had all risk policies, they had heightened expectations of coverage. The court rejected this argument based on the clearly-stated exclusions.This is a cautionary tale, and should be taken as a reminder that simply labeling a policy as all risk does not guarantee that it, in fact, covers all risks.Efficient Proximate Cause and AntiConcurrentCausation ClausesThe court found that any negligence with regard to the levees was not a separate cause of damage from the flooding itself, and so this doctrine did not apply.

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Flood or ExplosionLester Schwab v. Great Northern, Index #: 652708/2013

The Plaintiff argues that the Defendant is legally bound to indemnify the Plaintiff for its losses because the damage that resulted from Hurricane Sandy is a covered peril. Specifically, the Plaintiff argues that its loss of utilities that prevented it from carrying out regular business activities was caused by an explosion (and not by a flood) to Con Edisons transformer which is a covered peril under the policy. In the alternative, the Plaintiff makes clear that it purchased an additional Flood Endorsement policy through the Defendant which provides an additional avenue for coverage if it is discovered that the flood, and not the explosion, caused the loss of utilities.

The Defendant disclaimed coverage and argues that the Plaintiffs loss of utilities (which ultimately led to its inability to carry out regular business operations on the premises) was caused directly by flood damage to the underground utility infrastructure and not by an explosion. Since flood damage does not suffice as a covered peril, the Defendant refuses to indemnify the Plaintiff. Further, the Defendant argues that because the state of New York did not order an evacuation of Plaintiffs offices, there was no legal inability to ingress and egress from the premises. The Defendant takes the position that the Plaintiffs employees technically could have carried on its regular business activities and, therefore, is under no legal obligation to indemnify the Plaintiff for its losses.

Insurance on Real PropertyComplaints46

Flood or Explosion

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Require Tenant Insurance Property insurance at minimum, but possibly general commercial liability insurance and/or business interruption insurance


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The End

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