No Business Interruption in Absence of Total Cessation of Operations
Spring 2007
Published in Property Insurance Law Committee Newsletter, Spring 2007. Copyright © 2007 by the American Bar Association. Reprinted with permission.
Broad Street, LLC v. Gulf Ins. Co., 2006 WL 3593049 (N.Y. App. Div. Dec. 12, 2006), involves the interpretation of the terms “necessary suspension” in the business interruption provision of a commercial property insurance policy following the September 11, 2001, terrorist attack on the World Trade Center. The plaintiff, Broad Street, LLC, is the owner of a lower Manhattan building, consisting of 345 residential units and three commercial spaces, approximately 3 blocks from the World Trade Center site. The building was closed from September 11 through September 17, 2001. The insured’s claim for business interruption damages extended beyond September 17 based on the fact that its business had not resumed its normal business operations as of September 18. The court found that there was no coverage after the insured’s tenants returned to the building because, at that point, the necessary suspension of the insured’s business had ended.
The insured claimed that its business interruption losses were ongoing because it had not resumed normal business operations. The insured noted that not all tenants had returned to the building, that business in the vicinity had not resumed due to transportation limitations and street closures, and that there were utility services interruptions including phone and cable. In addition, the tenants of the building, through counsel, complained to the plaintiff about problems in the area and sought rent abatement and reductions. The plaintiff eventually provided a number of concessions to its tenants, including rent abatements and reductions.
Gulf Insurance Company had issued a commercial property insurance policy to Broad Street which provided business interruption coverage “for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of interruption.’” Id. at *1. “Operations” was defined as “your business activities occurring at the described premises,” and “period or restoration” was defined as the period that “begins on the date of direct physical loss or damage caused by or resulting from the Covered Cause of Loss at the described premises [and] [e]nds at the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.” Id.
When Broad Street brought suit for its continuing business interruption expenses, the insurer moved for partial summary judgment on the basis “that under the terms of the policy, the period of restoration during which plaintiff is entitled to recover its actual loss of business interruption is from September 11, 2001, through and including September 17, 2001,” and that any loss of income sustained after September 17, was not covered by the policy. Id. at *2. The trial court denied the insurer’s motion “finding issues of fact as to whether plaintiff was prevented, after September 17, ‘from providing functionally equivalent services to the residential tenants occupying apartments at the time of the attack.’” Id. at *3. However, the Supreme Court, Appellate Division, First Department, New York, reversed the lower court and ordered that the insurer’s motion should be granted.
The appellate court recited the well-established principles governing the interpretation of insurance contracts, and found, applying the plain and ordinary meaning of the language, that there was no ambiguity in the language at issue. The court stated that “in 54th St. Ltd. Ptrs., L.P. v. Fidelity & Guar. Ins. Co., [763 N.Y.S.2d 243 (N.Y. App. Div. 2003)], and, more recently in Royal Indem. Co. v. Retail Brand Alliance, Inc., 822 N.Y.S.2d 268 (N.Y. App. Div. 2006), this Court addressed the very issue pivotal on this appeal and determined that in order for business interruption insurance to be triggered, there must be a ‘necessary suspension,’ i.e., a total interruption or cessation of operations.” Id. at *4 (internal citations omitted). The court also noted that this conclusion is consistent with rulings from numerous other jurisdictions.
Based on the plain meaning of “necessary suspension,” the court held that “plaintiff’s business interruption loss is restricted to the period between the September 11 attack on the World Trade Center and September 18, when tenants were again allowed to reside in their apartments.” Id. at *5. The court rejected the plaintiff’s policy interpretation argument based on the mitigation provision which reduced payments to the extent operations can be resumed “in whole or in part.” The court also rejected the plaintiff’s argument that it was unable to provide a habitable environment because there was no evidence to support the conclusion that any tenant was prevented from returning to his or her unit. Indeed, the building’s air filters had been changed and ongoing air testing indicated that the air quality was within acceptable EPA levels. Further, the court rejected the argument that the period or restoration extended beyond the one-week period the tenants were barred from their apartments. The court found that this argument “is also unavailing as the restoration period is only as long as necessary for plaintiff to resume operations, as it is tied to the requirement that there be a ‘necessary suspension of your operations.’” Id. at *6 (citations omitted). Last, the court found that complaints expressed by tenants regarding dust, smell and inconvenience in lower Manhattan does not extend the period of restoration, noting that “[t]he policy expressly states that the ‘period of restoration’ does not include any increased period required due to enforcement of any ordinance or law which ‘[r]equires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or address the effects of pollutants.’” Id.
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