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Seminar 7
When Tragedy Strikes: A Roadmap for Post-Casualty
Protocols and Processes
Thursday, October 29, 2015
9:00 – 10:1...
What is a Casualty?
• A casualty can have a number of definitions.
• It can be limited to naturally-occurring disasters,
o...
TOP 12 MOST COSTLY HURRICANES IN U.S. HISTORY*
(Insured losses, 2013 dollars, $billions)
Source: Insurance Information Ins...
Hurricane Katrina
August 23 – August 31, 2005
• $150 Billion in US Economic damage
• $108 Billion in Property damage – lar...
Super Storm Sandy
October 22 – November 2, 2012
• Impacted 24 US States
• $65 Billion in US Economic damage
• $68 Billion ...
Because of Past Casualties, Will
Previous Owners Be Legally
Required To Do More to Protect
Their Buildings?
Manfra, Tordella & Brookes, Inc. V. 90 Broad Owner, LLC, 2013 WL 373327
Plaintiff-tenant’s theory is that the landlord was...
Issues in Tort: Can a Landlord
be Liable for Damaging a
Neighborhood?
• When a casualty originates in a landlord’s own
building, the effects may spread beyond the
premises, subjecting the owne...
532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr.,
Inc., 96 N.Y.2d 280, 750 N.E.2d 1097 (2001)
• The accident, from c...
• In analyzing a tort claim against the owner, the New York Court of
Appeals held that a landowner who engages in activiti...
Drafting a Better
Casualty Lease Clause
Carefully Define “Casualty”
• Definition should specify whether it is
limited to natural disasters: earthquakes,
wind and ...
• Provides proportional rent abatement
based on amount of unusable space
– Limited to the time between the casualty to
the...
• Requires tenant’s notification to landlord of
casualty and/or intent to cease rent payments due
to casualty.
• Requires ...
• Contains a provision for complete
or near-complete destruction of
the premises allowing landlord to
terminate lease.
Dra...
Whether Tenant Receives
Rent Abatement
• Maiden Lane Props.,
LLC v. Just Salad
Partners LLC, 2013
N.Y. Misc. LEXIS 2647
(N...
Maiden Lane Props., LLC v. Just Salad Partners LLC, 2013
N.Y. Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013)
Maiden Lane P...
Rent Abatement: A Tenant’s
Right to Not Pay Rent
At common law, a casualty did not relive a
tenant of its obligation to pa...
N.Y. R.P.L. § 227
• “Where any building, which is leased or occupied, is
destroyed or so injured by the elements, or any o...
• The New York statute, as with many similar
statutes, also specifically allows for contrary
provisions in contract. There...
• That same form lease provides, in its
casualty clause:
o If the premises are partially damaged or
partially unusable ren...
• A lease should indemnify the landlord against
casualties caused by the tenant or by the
tenant’s agents or customers.
• ...
Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d
835 (6th Cir. 2000)
• Plaintiff is the insurer of the
landlord of a sho...
Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d
835 (6th Cir. 2000)
• The lease required Defendant tenant to:
– Indemni...
Scottsdale Ins. Co. v. Mason Park Partners LP,
249 F. App'x 323 (5th Cir. 2007)
• The court found that the landlord was no...
Constructive Eviction: When
is the lease automatically
terminated in the wake of a
casualty?
Protecting Your Client
Through Casualty Insurance
Market Value Rider
• A market value rider to an insurance policy ensures that
the maximum coverage provided under the poli...
• Code upgrade coverage applies to extra costs
incurred as a result of rebuilding property under
codes or ordinances which...
Importance of Type of Policy
and Policy Language
• A policy can be a “named perils
policy” which covers only the perils
ex...
Importance of Type of Policy
and Policy Language (Continued)
• Most lenders will require all risk policies.
• With an all ...
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. Worl...
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. Worl...
The Second Circuit held that this $3.5 billion question, how to define “occurrence,” was to be decided by a jury. The jury...
Types of Casualty Insurance
• As Black’s Law Dictionary notes, “[t]he
meaning of casualty insurance has become
blurred bec...
Property Insurance
• Fair Market Value
• Actual Cash Value
• Replacement Cost
– “Replacement cost coverage was devised to ...
Attributing Damage to Water vs. Wind
• Because many insurance policies exclude flood and water damage,
businesses which do...
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 re...
Flood Exclusions and Concurrent
Causation Clauses
• An insurance theory
stating that if loss or
damages occur as a result
...
In re Katrina Canal Breaches Litig., 495 F.3d 191
(5th Cir. 2007)
Flood or Explosion
Lester Schwab v. Great Northern, Index #: 652708/2013
The Plaintiff argues that the Defendant is legall...
Flood or Explosion
Require Tenant Insurance
• Property insurance at minimum, but
possibly general commercial liability
insurance and/or busin...
The End
When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes
When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes
When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes
When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes
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When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes

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Adam Leitman Bailey, P.C.

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

  1. 1. Seminar 7 When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and Processes Thursday, October 29, 2015 9:00 – 10:15 AM Joe Nuñez, Esq. Vantage Law Group, PLLC Minneapolis, MN Dorothy Bolinsky, Esq. Drinker Biddle & Reath LLP Princeton, NJ Adam Leitman Bailey, Esq. Adam Leitman Bailey, P.C. New York, New York
  2. 2. 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.
  3. 3. TOP 12 MOST COSTLY HURRICANES IN U.S. HISTORY* (Insured losses, 2013 dollars, $billions) Source: Insurance Information Institute Sandy Fact File, October 2014
  4. 4. Hurricane Katrina August 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
  5. 5. 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)
  6. 6. Because of Past Casualties, Will Previous Owners Be Legally Required To Do More to Protect Their Buildings?
  7. 7. Manfra, Tordella & Brookes, Inc. V. 90 Broad Owner, LLC, 2013 WL 373327 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.
  8. 8. Issues in Tort: Can a Landlord be Liable for Damaging a Neighborhood?
  9. 9. • When a casualty originates in a landlord’s 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?
  10. 10. 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.
  11. 11. • 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)
  12. 12. Drafting a Better Casualty Lease Clause
  13. 13. Carefully Define “Casualty” • Definition 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. Drafting a Better Casualty Lease Clause
  14. 14. • 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. Drafting a Better Casualty Lease Clause
  15. 15. • Requires tenant’s notification to landlord of casualty and/or intent to cease rent payments due to casualty. • Requires landlord’s notification to tenant of substantial completion of repairs and restoration, or alternatively, establishes circumstances under which landlord can terminate the lease. Establish Notice Requirements Drafting a Better Casualty Lease Clause
  16. 16. • Contains a provision for complete or near-complete destruction of the premises allowing landlord to terminate lease. Drafting a Better Casualty Lease Clause
  17. 17. 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)
  18. 18. 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. • Tenant’s claim was entirely based on loss of electricity, which was tenant’s 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.
  19. 19. Rent Abatement: A Tenant’s Right to Not Pay Rent At 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.
  20. 20. N.Y. R.P.L. § 227 • “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. 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.”
  21. 21. • 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
  22. 22. • That same form lease provides, in its casualty clause: o 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.”
  23. 23. • A lease should indemnify the landlord against casualties caused by the tenant or by the tenant’s 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 provisions Landlord’s Ability to Recover or Avoid Payment After a Casualty
  24. 24. 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 Defendant’s store, causing extensive damage and requiring approximately $1 million in payments from the plaintiff insurer to the landlord.
  25. 25. 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 tenant’s use of the premises. • The court found that there were no “claims and demands” here, and so that indemnification provision did not apply.
  26. 26. 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 tenant’s property coverage because he was not specifically named. The court also found that the landlord was not covered under the tenant’s 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 tenant’s damage to landlord’s building. All leases should require that the landlord be named as an additional insured party under the tenant’s insurance policy
  27. 27. Constructive Eviction: When is the lease automatically terminated in the wake of a casualty?
  28. 28. Protecting Your Client Through Casualty Insurance
  29. 29. Market Value Rider • 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. – 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.
  30. 30. • 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
  31. 31. 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.
  32. 32. 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.
  33. 33. 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)
  34. 34. 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
  35. 35. 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….”
  36. 36. Types of Casualty Insurance • As Black’s 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.
  37. 37. Property Insurance • Fair Market Value • Actual Cash Value • Replacement Cost – “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.”
  38. 38. Attributing Damage to Water vs. Wind • Because 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)
  39. 39. 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 “Exclusions 1. 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 openings • But 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.”
  40. 40. Flood Exclusions and Concurrent Causation Clauses • An 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.
  41. 41. In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007)
  42. 42. Flood or Explosion Lester 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 Edison’s 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 Plaintiff’s 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 Plaintiff’s offices, there was no legal inability to ingress and egress from the premises. The Defendant takes the position that the Plaintiff’s employees technically could have carried on its regular business activities and, therefore, is under no legal obligation to indemnify the Plaintiff for its losses.
  43. 43. Flood or Explosion
  44. 44. Require Tenant Insurance • Property insurance at minimum, but possibly general commercial liability insurance and/or business interruption insurance Drafting a Better Casualty Lease Clause
  45. 45. The End

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