In the United States of America, the number of natural disasters has gradually increased. Most of the costliest disasters have resulted from hurricanes and terrorist attacks. Other major casualties have resulted from earthquakes, monsoons, tsunamis, and wildfires. The damage to business and property from these events substantially affects the lives and livelihoods of millions of Americans who look to their attorneys to protect them from the collateral effects of these disasters that occur on an irreparable scale. Inherent within the operation and management of a business and building comes the risk of unexpected and unpreventable outside elements. Nevertheless, informed businesses and building owners can save their businesses or properties from the financial and physical ruin attendant on any catastrophic disaster and also be better prepared to protect themselves in lease negotiations, as well as understand the scope of available insurance liability coverages and equally important but less-known insurance strategies.
It Takes More than an Informed Building Owner to Save the Nation on a Larger Scale
Not discussed extensively in this article are some observations that need to be given serious consideration by policy makers. First, the worst disasters occur where the existing structures are not built with the ability to withstand a major storm or other disaster. This is why some towns and cities can recover faster than others. The manner and way the real estate is built, combined with the sewage systems, roads, and overall urban structure and planning, separate the impact of the damage. One concrete example stems from information collected after Hurricane Irma in Florida. Almost 80 percent of the homes subjected to and able to sustain Irma’s highest winds were built after the adoption of Florida’s new building code (which was put in place after Floridians had experienced Hurricane Andrew’s wrath). On the other hand, take, for example, Ocracoke, an Outer Banks island village located twenty-six miles off of the mainland coast of North Carolina. This island, which averages out at five feet above sea level, was overwhelmed by the wrath and ferocity of Hurricane Dorian’s previously unheard of seven-foot storm surge. The omnipresent lack of protective infrastructure and flood-preventative measures throughout the sun-kissed, beautiful community of Ocracoke left this otherwise small, natural disaster susceptible island drowning and desolate in the aftermath of Hurricane Dorian.
Second, people and businesses are rebuilding or building in areas that are most likely going to be targets again. Some of this rebuilding has been done well by taking the worst-case scenario and putting homes and businesses high enough in the sky so they will hopefully be able to survive the next Hurricane. Other rebuilding efforts, for example, those depending on highly vulnerable broken levees, should probably be condemned to avoid putting the real estate and its residents in peril. Governments need to make difficult decisions on when to stop challenging mother nature right up to the point where technology becomes incapable of protecting against the worst floods and natural disasters.
As New York lawyers, we spent over a hundred hours learning how New York prepares for the next natural and unnatural disasters. We were very impressed by many of the requirements for new construction that focused on rebuilding to withstand the next natural disaster. Second, without governmental prodding, many large property owners themselves undertook measures to get ready for the next storm by moving equipment to the roof and waterproofing the lower floors of the building. This is joined with the observations of how other large and small commercial buildings whose owners obviously have decided to do nothing to prepare for the next hurricane or a terrorist attack, thus putting design and profits ahead of prudential planning for any possible disaster.
Preparing Businesses and Building Owners to Better Protect Their Property When A Casualty Occurs
This article is limited to instructing businesses and building owners in how to best prepare for another disaster and the state of the law when such casualty strikes. Although this article is written for the nation, it has a focus on New York not only because of the authors’ residence but it is home to several unnatural disasters including the costliest casualty on record as well as another relatively recent natural disaster.
The catastrophes that struck New York City on the large scale, such as Superstorm Sandy and 9/11, or even the relatively smaller scale ones such as the 1993 World Trade Center bombing and the various construction crane collapses, furnish striking examples and counterexamples, for businesses and building owners, as to how to protect their cities, States, and property interests with proper preparation.
In dealing with catastrophes, businesses and building owners on the front lines fall into two categories; those who prepare for catastrophes and those who challenge or defend the adequacy of the preparations. Courts will evaluate whether a business or property owner is liable for a natural disaster’s damages based on its 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. 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 Hurricanes Harvey, Katrina, Ike, Rita, Wilma, and the resulting consequences that follow in their wake, also require businesses and building owners to be especially attentive to the insurance requirements of their property interests. Subsequent weather-related events, such as Hurricane Maria in the summer of 2017 and the widespread power outages that occurred during the 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. It is therefore extremely important for businesses building owners to be conversant with the basics of commercial insurance coverage.
By far, besides the most expensive disaster events are hurricanes, accounting for seven of the ten worst disasters, although they are not as frequent as the most common disastrous events—tornadoes, flash floods, and winter storms. Thus, of all of these, the most important insurance considerations for businesses and building owners will relate to those most likely to require attention, hurricanes.
Buildings Deemed Foreseeable to and Vulnerable to Attack Have A Duty to Prevent Attacks
In re World Trade Center Bombing Litigation, 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 rested entirely on foreseeability. 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.
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. The duty includes taking minimal security precautions against reasonably foreseeable criminal acts by third parties. 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 , 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 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 Circuit 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 as “the defendant is not an insurer.” 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.
Although Standard Commercial Leases Compel Tenant to Bear Burdens of Non-Structural Repairs and Insurance, 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:
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. 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.
For example, in the Maiden Lane Props., LLC v. Just Salad Partners LLC  lease, one clause provided, “[a]nything 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.
In a standard lease, 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, where the parties had allocated the risk of loss to the tenant in a 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, no such law currently exists in the commercial context in New York. While Real Property Law § 227 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, the tenant is forgiven the remaining rent on the lease. However, there is no such abatement if the amount of space taken away from the tenant is de minimis.
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., 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, the First Department wrote, “[t]o 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.
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.
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, LLC, 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.
Whether by Statute or Negotiation, Leases Must Contain Casualty Clauses Permitting Terminating The Lease After A Casualty
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. 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.
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. 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.
Properly drawn leases give landlords the option but not the requirement to terminate the lease in the event of a casualty. These clauses typically call for some very sensitive timing and may require the landlord to sit mute for a period while the tenant’s option to terminate expires. However, where the landlord is exercising its right of termination in spite of the tenant’s desire to resume operation after the catastrophic event, the tenant generally has no ability to contest the termination and can cover the damage to its business only with properly drawn insurance.
The tenant can procure a Loss of Leasehold Interest endorsement appended to its All Risk policy, using ISO form CP 00 60 06 95. Under this form, if the landlord terminates the lease by reason of a disaster, the insured will pay: (a) the “Net Leasehold Interest,” defined as the present value of the (i) monthly rental value of the premises minus (ii) the actual monthly rent and other amounts payable by the tenant (the present value will be determined by the rate of interest set out on a Schedule), plus (b) the unamortized portion of the tenant’s improvements and betterments that will be lost if the landlord terminates the lease (a normal property policy would cover damage to these improvements, but this endorsement will cover loss of the undamaged improvements if landlord terminates), and (c) the amount of any prepaid rent (amortized by the number of months remaining in the lease).
Despite Casualty, 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, such as those developed by the Real Estate Board of New York (REBNY), the meaning of clauses in many preprinted commercial leases have been developed through a common law-like construction by the courts; e.g., specifically, the casualty clause found in ¶9 of the REBNY leases.
New York’s leading case in all matters of lease construction, Vermont Teddy Bear, 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, 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 a rider containing lease 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. Although 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 lease language with respect to electricity is readily adaptable to any utility at all:
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 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.
Businesses Must Prepare for Disaster with Proper Insurance Policies in Place
Although insurance policies are nationally sold and can be purchased anywhere in the United States, property owners and businesses, in those States in which frequent Hurricanes and flooding occur, are going to purchase different policies than property owners and businesses in parts of the country that have never been devastated by a Hurricane, but which may be prone to Tornadoes or Terrorist Attacks. After Hurricane Katrina and the September 11, 2011 attacks a new menu of options have been offered.
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” policies 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.
Standard Forms Allow for Uniform Interpretation
Effort should be made to obtain coverage for every conceivable property interest that the business or building owner may plausibly be said to have in the physical property specified in the policy.
The Insurance Services Office, Inc. is “[a]n organization that collects statistical data, promulgates rating information, develops standard policy forms, and files information with state regulators on behalf of insurance companies that purchase its services.” These standard policy forms are national in scope and subject to a substantial body of case law interpreting them, although, as in all things, different states interpret identical language differently.
Policies taking advantage of these standards are built of two standard forms, The Building and Personal Property coverage form, and the Causes of Loss form. ISO form CP 00 10 10 12 is the Building and Personal Property Coverage Form, setting forth which property is covered. The form includes real personal property and lists these items with great specificity, including not only the insured’s own property, but those of others. The form is equally specific about items of personal property not covered, such as, for example, currency, paved surfaces, and contraband. It is important to recall, however, that these excluded items can be included by procuring coverage for those specific items the business needs to insure. Thus, for example, a private airport may well wish to obtain insurance protecting its paved surfaces.
The ISO Causes of Loss forms are more complicated. There are three choices, the Basic form, ISO form CP 10 10 10 12; the Broad Form (which is anything but broad), ISO form CP 10 20 10 12; and the Special Form, ISO form CP 10 30 10 12 (formerly and inaccurately known as “All Risk.”) These forms provide for more expansive coverage in ascending order. However, none of these general forms cover every possible peril and if there is a particular peril peculiar to a specific business, the business owner should be procuring insurance to cover that unusual peril. Counsel must also research whether the particular peril for which coverage is sought is insurable in the business’s home state.
Businesses and Building Owners Need to Consider What Property Is Covered Against What Hazards
A typical business 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 ordinances; 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.
Loss of Business Income/Loss of Rental Value Insurance
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 of God,” tornados, earthquake, or volcanic eruption, all of which have been excluded under basic policies. Nevertheless, the limitations and exclusions sections of “all perils” policies should be scrutinized to determine whether there are specified “perils” excluded from coverage that need to be covered for the particular business.
Where there is a business that is being conducted at a leased property, there has to be coverage for business income losses resulting from fires or other catastrophes affecting damage on the business. For a landlord, that will mean loss of rents, but the nature of the loss—loss of business—and the cause of the loss, a catastrophic event—is the same for both the landlord and the tenant and both need to be insured. However, along with the immediate loss of the business, there are likely to be additional expenses entailed and these too will require coverage, generally by means of an endorsement to the policy covering the physical loss.
In addition to the losses actually suffered, the standard form covers expenses for preventing further losses, except for those for extinguishing a fire. It also covers losses when civil authorities prohibit the business operator from accessing the covered premises.
Losses with respect to “Rental Value” receive considerable attention in the standard forms and will require that the forms be made out precisely to cover this, if it is an issue to the insured. Both the timing for covered periods and the kinds of physical events needed to trigger coverage require detailed reading of the policy. There are various options available to the insured and these will show up on the Declarations Page where they are either elected or omitted.
Business income/rental value insurance becomes a covered insurance loss and is payable only when there is physical damage to the insurer’s premises and physical property described in the policy’s declarations. Then it also has to qualify as an insured loss or “Covered Cause of Loss” as described in the property insurance policy. Loss of power from a utility company would not qualify as a covered event unless the direct damage from a utility pole or line exists.is not usually covered. So if a company cannot access its building or use its computers as a result of a loss of power, such would not qualify as an insurable business income loss.
Contingent Business Income Insurance should be purchased for business losses caused by damage to a key property such as a property relying on an anchor tenant which has been damaged or another structure that the business relies on to succeed.
Understanding Flood Insurance and Its Benefits and Inadequacies
Private companies must make their own preparations for catastrophes. Verizon rather spectacularly contracted with a Dutch company, hailing from a land renowned for its history of dealing with flooding issues, to develop a temporary dam to erect around its switching facilities if it has notice of an impending storm.
Standard insurance policies of the types we have been discussing do not cover damage from flooding or nearly any other water-based damage. Normally, one procures one’s flood insurance from the National Flood Insurance Program (NFIP), a federal program administered by FEMA, as more fully discussed below. While it does require the payment of premiums, the very design of the program is that it operates at a loss and, ultimately, receives tax-based support. As such, it is subject to the ups and downs of congressional and White House philosophy as to the extent to which it should figure in the federal budget and periodically comes up for renewal, as it recently received. Since it is not a profit-making venture, its premiums are also the subject of periodic congressional adjustment. One question constantly up for discussion before Congress is whether the premiums for a second casualty after there has been a previous payout should be higher than the original premiums. While the existence of the program itself remains politically popular, its funding is less so. Two ways Congress has of cutting its expense to the taxpayer are to increase its premiums and to reduce (or hold steady) the coverage it provides. Coverages under the program are only for actual cash value of a loss, rather than its replacements value and it does not provide for loss of business income or rent.
These policies cover $500,000 damage to a building and another $500,000 for damage to the building’s contents.
Under the program, maps are created setting forth the risk of flooding. Obviously, oceanfront property is mapped as the most flood-prone, but other less obvious areas can be as well, based on the peculiarities of their geography.
While flood insurance is obviously a good idea, many contracts require it. Landlords routinely require it in their leases. Lenders routinely require it in their mortgages, but in theory any business relationship could require the procurement of flood insurance.
Where the owner desires so or where there is a contractual obligation to procure higher limits on the insurance, there are insurers who will insure floods and other water casualties above the NFIP limits. Normally, these policies do not cover the NFIP limits (setting them as a deductible), but only the losses above those limits. Such policies normally do cover replacement cost and for losses of business income and rent. By reviewing the economic realities resulting from many of the stricken states, this amount of insurance offered only covers a small fraction of the cost to replace or repair.
Besides obtaining additional insurance from more expensive private markets, many businesses have decided to take action to protect their properties. For example, as noted above, Verizon rather spectacularly contracted with a Dutch company, hailing from a land renowned for its history of dealing with flooding issues, 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: