Preparing Practitioners for the Next Disasters

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).^[1] 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.^[2] 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.^[3]

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.^[4] 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,^[5] 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,^[6] 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.^[7] 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.^[8]

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.^[9] The duty includes taking minimal security precautions against reasonably foreseeable criminal acts by third parties.^[10] 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 ^[11],
 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^[12] 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.”^[13] 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:^[14]

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.^[15] 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.^[16]

For example, in the Maiden Lane Props., LLC v. Just Salad Partners LLC ^[17] 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.^[18]

In a standard lease,^[19] 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,^[20] 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,^[21] no such law currently exists in the commercial context in New York.  While Real Property Law § 227^[22] 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,^[23] the tenant is forgiven the remaining rent on the lease.^[24]  However, there is no such abatement if the amount of space taken away from the tenant is de minimis.^[25]

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.^[26], 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,^[27] 
 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.^[28]

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^[29], 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.^[30]

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.^[31] 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,^[32] 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,^[33] 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.”^[34] 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^[35] 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;^[36] the Broad Form (which is anything but broad), ISO form CP 10 20 10 12;^[37] and the Special Form, ISO form CP 10 30 10 12^[38] (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:

James M. Callahan, an engineer and a vice president of
Arcadis, which designed the barrier, said the wall’s height was
determined by the six-foot flooding that can be expected during a
100-year storm, plus two feet for storm surge, plus one foot to account
for the anticipated rise of sea levels by 2050.^[39] 

Notably, Verizon assumes that by the middle of this century the seas
will rise by another foot.  The explanation is simple: “’We follow the
science and act accordingly,’ said John M. Vazquez, at the time of this
article, the senior vice president of Verizon for global real estate,
human resources and administration.” ^[40] 

Numerous developers have built newly constructed buildings and
existing business and building owners have mitigated potential damages
to its infrastructure by moving integral building systems to the top of
the building to taking measures to weatherproof these structures.

Congressional Mandated Terrorism Insurance

To stabilize the insurance market after 9/11, Congress, in 2002,
enacted the Terrorism Risk Insurance Act (“TRIA”) to guarantee the
availability of insurance coverage against acts of international
terrorism. Under TRIA, as amended by the Terrorism Risk Insurance
Program Reauthorization Act of 2007 and the Terrorism Risk Insurance
Program Reauthorization Act of 2015^[41]  (“TRIPRA”), insurers
 must offer coverage against such incidents and are reimbursed by the
federal Government for paid claims subject to certain deductible and
retention amounts. ^[42] 

The Government share of compensation to be paid under TRIPRA to
insurers, set originally at 85 percent for paid losses above an
insurer’s individual deductible required to be paid in 2016, decreases
on a declining scale of one percentage point, for each calendar year
thereafter, until equal to 80 percent of the amount of the insurer’s
paid losses in excess of the deductible it is required to pay in such
calendar year. ^[43] 

Currently, the Insurer Deductible set at 20% of an insurer’s direct
earned premium and the federal share of compensation at 85 percent
reduced by 1 percentage point per year since 2016 will be at 80% in 2021
 and 81% in 2020 of insured losses that exceed insurance deductibles. ^[44] However, terrorism insurance will only be paid when the following occurs:

1.     The term is limited to violent acts dangerous to
human life, property, or infrastructure, that have been certified by the
 Secretary of the Treasury in consultation with the Secretary of
Homeland Security and;

2.     to have resulted in damage up to a maximum of $5,000,000, within the United States or outside the United States, and

3.     that have been “committed by an individual or
individuals as part of an effort to coerce the civilian population of
the United States or to influence the policy or affect the conduct of
the United States Government by coercion.” ^[45] 

As such, the Boston Marathon bombing was deemed to not qualify as an
act of terrorism under the law. However, despite the terrorism exclusion
 clauses in their basic policies, insurers chose to pay many claims made
 for the personal injuries and property damage that resulted from that
event.

There Is A Variety of Government-backed Insurance and Private Stand-Alone Insurance

Nevertheless, although terrorism coverage is an option for all
property owners, TRIPRA’s narrow definition of “terrorism” is likely to
discourage small property and business owners from opting to pay the
higher premiums for terrorism coverage offered under TRIPRA.
Alternatively, for organizations that insurers deem as “high risk,”
so-called “stand-alone” terrorism coverage is offered by certain
international insurers, on a worldwide basis — for a broad range of acts
 committed for political, religious or ideological purposes, not
necessarily solely to influence the policy or conduct of the United
States Government. One such company’s “terrorism” coverage includes not
only traditional terrorism-type acts, but such actions as “active
shooter,” “malicious attacks,” “sabotage,” and “nuclear, chemical,
biological, and radiological (“NCBR”) attacks. Its policies for such
terrorism events covers property damage, loss of business income, crisis
 management costs, additional security requirements, employee
counseling, and public relations costs incurred. Price is based on a
risk profile analysis, and coverage does not depend on government
certification. When evaluating the coverage limitations imbedded in the
TRIPRA program, property and business owners with substantial financial
resources are likely to opt for stand-alone policies that offer greater
and more certain protection against the variety of terrorist-type
actions that the World has witnessed in recent years.

There Must Be Proof That the Hazard Was The “Dominant and Efficient Cause” Of the Damage

The hazard insured against must be the proximate cause of the damage, i.e., “that cause which is most nearly and essentially connected with the loss as its efficient cause.” For example, in Throgs Neck Bagels, supra,
 the Court explained that “the damage for which fire insurers are liable
 is not confined to loss by actual burning and consuming, but they are
liable for all losses which are the immediate consequences of fire or
burning, or for all losses of which fire is the proximate cause.”
Nevertheless, the “concept of proximate cause when applied to insurance
policies is a limited one. . . [and] the causation stops at the
efficient physical cause of the loss, it does not trace events back to
metaphysical beginnings.”^[46]  Accordingly, “[o]nly the most direct and obvious [efficient] cause should be looked to for purposes of the exclusionary clause.” ^[47]  Therefore,
 if a flood causes a fire to occur in a building’s electrical system,
fire would be the proximate cause of the resulting damage to the
building and would be covered by fire insurance.

Unless the property or business owner’s policy insures against damage
 to the property originating outside the insured property, such as an
interruption in utility supply service at the utility’s power plant or
substation, recovery will be denied under a policy that covers only
“direct physical loss of or damage to Covered Property at the premises
caused by or resulting from any Covered Cause of loss.”  Even when the
policy does insure against potential interruption of utility service or
water supply outside the insured’s premises, the policy is likely also
to require that the utility or water company have suffered “direct
physical damage” that caused the service interruption that damaged the
insured. Whether or not coverage will be granted under such policy
provisions is often hotly disputed by the insured and the insurer.

For example, in La Casa Di Arturo, Inc. d/b/a Arturo’s v. Tower Group, Inc.,^[48]  Hurricane
 Sandy caused a restaurant to sustain losses and damages for food
spoilage, business interruption, inability to conduct plaintiff’s usual
business, and loss of business income. It also alleged that, as a result
 of Sandy the restaurant remained for various times without electrical
power, refrigeration and freezer use, and that it ceased operations from
 October 31, 2012 through November 3, 2012, with resulting alleged loss
of business income. The insurer’s denial of coverage was upheld by the
Court on the ground that the restaurant’s policy “expressly and
unambiguously provided (a) that coverage for loss associated with power
interruptions are limited to those that ‘result from direct physical loss or damage by a Covered Cause of loss”
 (italics added),and (b) that “damage caused directly or indirectly by
[Water] is excluded [from coverage] regardless of any other cause or
event that contributes concurrently or in any sequence to the loss.”

One Must Examine the Business Losses to Be Covered

The primary business losses incurred by property owners and business
owners from catastrophic damage or destruction to property is loss of
business income and loss of rental value. “The purpose of business
interruption insurance is to indemnify the insured against losses
arising from inability to continue normal business operation and
functions due to the damage sustained as a result of the hazard insured
against. In other words, the goal is to preserve the continuity of the
insured’s earnings.” ^[49] 

Coverage for business losses may be provided to the insured as part
of policies issued to insure against ordinary property damage,
environmental hazards, other specified hazards, or under “all perils”
policies. The business losses insured against should include loss of
business income not only due to the physical damage or destruction
caused by the catastrophic event, whether terrorism, fire, explosion,
wind or snow storm, hurricane, flood, or electrical power loss, but also
 attributable to any widespread trade disruption, or event cancellations
 required by the circumstances, and caused by the disaster generally.
There should also be coverage for Contingent Business Interruption
losses incurred due to the insured’s inability to receive essential
inventory from its suppliers, or for losses incurred from its customers
being unable to receive deliveries from the insured. Civil Authority
Coverage should be obtained against losses necessarily resulting from
building evacuations and/or destruction or mandated by governmental
authority, both of which cause either the temporary suspension of
business operations or their complete termination.

As noted in a different context above, business income interruption
insurance policies generally include provisions requiring (a) that the
business loss incurred be caused by a casualty that directly impacted
the premises where the business was conducted, and (b) that the affected
 business show actual loss of profits during the time of incapacity
until the time that restoration is completed. ^[50] 

In Order for It to Be Covered, The Suspension of The Business Must Have Been Necessary

Business interruption policies typically insure against loss of
business income sustained “due to the necessary suspension of your
‘operations’ during the ‘period of restoration.’” The New York State
Appellate Division, First Department, has held that the plain meaning of
 this language is unambiguous and means exactly what it says: i.e.,
 that in order to be eligible for business interruption coverage, there
must be “a total interruption or cessation of operations.” ^[51] 

In Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co.^[52] ,
 a case involving a Duane Reade drug store located at the World Trade
Center that was totally destroyed in the 9/11, Duane Reade’s business
interruption policy provided as follows:

The measure of recovery or period of indemnity shall not
exceed such length of time as would be required with the exercise of due
 diligence and dispatch to rebuild, repair, or replace such property
that has been destroyed or damaged, and shall commence with the date of
such destruction or damage and shall not be limited by the date of
expiration of this policy.

The “Restoration Period” provision of the policy also required, “as
soon as practicable after any loss,” that “the Assured shall resume
complete or partial business operations and reduce or dispense with such
 additional charges and expense as are being incurred.”

Duane Reade contended that the policy should be interpreted as providing that:

The Restoration Period consists of the actual time period
 that would, or will, be required to restore Duane Reade’s operations to
 the kind, quality, and level which existed at the WTC Store prior to
the terrorist attacks and that such Restoration Period is coterminous
with the time necessary to rebuild the complex which will replace the
World Trade Center.

The Court held (a) that Duane Reade’s proposed interpretation was
without support in the text of the policy and was “manifestly
unreasonable,” (b) that the Restoration Period was “the time it would
take to rebuild, repair, or replace the WTC store itself, not the entire
 complex that once surrounded it, and (c) that “[o]nce Duane Reade could
 resume functionally equivalent operations in the location where its WTC
 store once stood, the Restoration Period would be at an end.” The
federal court decision cited no New York case law but was nevertheless
consistent with New York law.

In a similar situation, in Broad Street, supra, the
property owner’s building located approximately three blocks away from
the World Trade Center was completely shut down following the events of
September 11, 2001 until September 18, 2001. Nevertheless, despite being
 able to permit its tenants to return to the building on the latter
date, the property owner claimed coverage for rent abatements and rent
reductions that it felt compelled to provide to tenants thereafter
through September 30, 2002. Citing evidence that tenants had in fact
returned to the building on September 18, 2001, the Court rejected the
insured’s contention that “because it was unable to provide a habitable
environment for its residents by September 18, it [could] not be
considered to have resumed operations.”

The First Department of the Appellate Division of New York’s Supreme
Court also rejected a similar World Trade Center claim from a property
owner in Royal Indemnity Company v. Retail Brand Alliance, Inc. ^[53] ,
 where a retail business was shut down following the September 11, 2001
events until September 12, 2002. The Court held that “[o]nce the store
resumed operations on September 12, 2002, a year after the terrorist
attack on the World Trade Center, the Business Income coverage
terminated, regardless of whether the insured’s income was back up to
pre-loss levels.”

Likewise, the Court had previously held (in a non-World Trade Center
case) that, where Civil Authority had denied access to insured’s
restaurant for two days, but permitted access thereafter, the insured
could not recover lost business income when the restaurant reopened,
even though vehicular and pedestrian traffic was diverted; “the
restaurant was [still] accessible to the public, plaintiff’s employees
and its vendors.” ^[54] 

One Must Consider Business Loss Valuation and Deductibles

In Howard Stores, supra, the First Department explained that
while the “losses payable under a business interruption policy are
estimated based on ‘experience of the business before the catastrophe
and its probable experience thereafter,’ the burden is on the insured to
 establish the extent of the damage caused by the interruption, and
applicability of the policy thereto.” Measurement of damages by the
insured’s “experience before the catastrophe” requires proof of the
business income the insured would have realized if business operations
had not been suspended. This is inherently speculative, and insurance
companies often argue that, in the midst of the catastrophe, the insured
 could not expect to realize the same business it had before the event.
There is no formula for calculating business interruption losses and no
guideline to determine the “probable experience thereafter.” To
eliminate unnecessary litigation over the measurement of damages,
property and business owners should therefore attempt to include a
formula in their business interruption policies that fixes a set per
diem loss value for each day that their business is completely shut down
 by a future catastrophe.

Property and business owners also need to be attentive to the
deductibles included in their business interruption policies. The policy
 may specify that the deductible will apply per occurrence, per event,
per loss, or per claim. Consideration should be given also to the
possibility of a dispute arising over whether the potential future
catastrophe will constitute a single occurrence, or a series of
catastrophic events occurring simultaneously. This issue was highlighted
 in World Trade Center Properties v. Hartford Fire Insurance Co.,^[55]  where
 the insured contended that the two airline crashes constituted two
separate occurrences. The Court held that the two crashes were part of a
 single coordinated plan of attack and constituted “at the least, a
‘series of similar causes [as defined by the policy].”

The Amount Insured

There are three concepts that will govern how much the insurer will
pay in the event of a loss: the limits set forth on the declarations
page, the Actual Cash Value, and the Replacement Cost. The insured
selects how much insurance to buy (the limits) or whether to use the
lower Actual Cash Value of the property that is insured or the generally
 higher Replacement Cost. All of these factors will influence the amount
 of the premium. These numbers may be with reference to a single
occurrence or aggregated if they are covering multiple properties. This
concept was at the center of SR Int’l Bus. Ins. C. v. World Trade Ctr. Props., LLC. ^[56] 

If the owner merely seeks to recover the loss, Actual Cash Value
could suffice, but if the property owner is seeking to rebuild, either
on the same site or elsewhere, the insurance coverage should be for the
Replacement Cost. Of course, calculating what those costs would be can
also be the subject of considerable controversy and litigation.

Contractual obligations may, however, essentially make the choice for
 the owner. This choice, most often, is indeed for Replacement Cost.
Certainly, landlords requiring insurance of their tenants should require
 Replacement Cost. However, since insurers do not allow for profit to
the insured from the insurance contract, if no actual replacement takes
place, the insurer will only pay Actual Cash Value. Typically, the
insurer starts by paying the Actual Cash Value and reimburses the
Replacement Cost after the replacement has actually taken place.

However, “Replacement Cost” may be a tricky affair. Many policies
include “sublimits” placing dollar figures on particular pieces of the
replacement process. An underrun in the expense of one of these
particular pieces will not allow an overrun on another. Thus, the
insured will need good quality estimates of the projected expense for
each of these sublimited items.

Coinsurance Penalties

Insurance companies are not naïve. Popular culture is full of
awareness of insureds attempting to commit insurance fraud. The means of
 doing so are simple and crude—overstating the expense of the
reconstruction. In order to fight this, the insurers have a few weapons
at their disposal. One of the most important of these is the so-called
“coinsurance penalty.” On its face, the penalty compels the insured to
insure the entire cost of the rebuilding. The standard forms (such as
ISO form CP 00 10 12) establish a so-called “coinsurance percentage” of
the Actual Cash Value or of the Replacement Cost, as the insured has
elected. Typical coinsurance percentages are 80% or 90%.

The first question for the penalty to come into play is whether the
insured limit the owner purchased reaches a certain threshold. If the
insurance limits the insured bought were below the “coinsurance
percentage” of the Replacement Cost (or, if Actual Cash Value was
selected, then of that amount), then the coinsurance penalty comes into
play. For example, if the insured bought $50,000 of insurance on a
$100,000 building, it is below the coinsurance percentage of (for
example) $80,000. Thus, the penalty comes into play. Note that this
question is without regard to the loss the owner actually suffered. The
underinsurance reduces the recovery for the loss even if the insurance
purchased was in an amount greater than the actual loss.

This invokes the formula for the actual penalty, a completely mathematical calculation. It is as follows:

1.     Take the actual Replacement Cost and multiply it
by the “coinsurance percentage”.  This gives rise to what we will call
the “Insured Replacement Cost.”

2.     Divide the purchased limits of coverage by the
Insured Replacement Cost, providing a fraction we will call the “Insured
 Replacement Percentage.”

3.     Multiply the actual loss by the Insured
Replacement Percentage to create a dollar figure we will call the
“Insured Actual Loss.”

4.     Deduct from the Insured Actual Loss the policy’s
agreed deductible to arrive at a number we will call the “Penalized Loss
 Payment.”

Thus, owner receives from the insurance company the lesser of the purchased limits or the “Penalized Loss Payment.”

However, the insured can protect against this entire system by either
 fully insuring the building or accurately estimating Replacement Cost
or Actual Cash value.

The insured can avoid the system altogether by using a so-called
“Agreed Value Endorsement” which waives the coinsurance clause and
replaces it with an ironclad agreement on what the value of the building
 is, regardless of the on the ground reality. The insured and insurer
reset these Agreed Value Endorsements each year.

Where a landlord is requiring insurance of a tenant, the landlord
should always insist upon an Agreed Value Endorsement with waiver of the
 coinsurance penalty.

Court Cases Presenting Additional Flood Insurance Issues

As stated above in brief, since 1968, protection against flood
damage, for “business properties which are owned or leased and operated
by small business concerns,” has been covered primarily under the
federal National Flood Insurance Program (NFIP). ^[57]  The
Federal Emergency Management Agency (FEMA) administers NFIP which was
established to make flood insurance mandatory for those properties
located in areas of special flood hazard,  i.e., any area subject to a
one percent or greater chance of flooding in any given year as
determined by FEMA. Over the years, the NFIP has been amended several
times to extend the program for relatively short periods of time.  On
December 21, 2018, Congress reauthorized the NFIP through May 31, 2019. 
 On June 6, 2019, the President signed legislation extending the NFIP to
 September 30, 2019, and on September 27, 2019, the President again
signed legislation extending the NFIP to November 21, 2019. While there
is a desire to enact legislation extending the program for a longer
duration, Congress has lacked the collective will to achieve that goal.

More specifically, flood zones are land areas categorized by FEMA
according to their degree of risk of flooding. Based on the flood risk,
zones are classified as A (100-year flood risk), V (100-year flood risk
with additional hazards associated with storm-induced waves), Coastal A
(an area landward of a V zone, or landward of an open coast without
mapped V zones, where the principal source of flooding will be
astronomical tides, storm surges, seiches, or tsunamis, but not riverine
 flooding), and Shaded X (an area that has an 0.2% probability of
flooding every year. Zone A is an area not subject to high velocity
waves, but subject to flooding for a 1% chance per year.

Under NFIP, commercial property owners and businesses are eligible for flood insurance coverage up to $500,000. ^[58]  Flood
 insurance is also available from private insurers who can offer higher
levels of coverage. Claims for both property losses and business income
losses may result from a flood catastrophe. Flood insurance exclusions
need to be carefully scrutinized, as they are often ambiguous and lead
to litigation over what coverage was intended. ^[59] 

As noted in the discussion above regarding La Casa Di Arturo, Inc. d/b/a Arturo’s v. Tower Group, Inc., ^[60]   the
 policy in that case expressly excluded coverage for damage caused by
water, and the resulting damage the restaurant suffered from flood
waters generated by Hurricane Sandy was not covered.

Sandy generated many possible causes of loss: wind, wind-driven rain,
 storm surge, flooding, power outages, orders by civil authority, and
looting. In some cases, more than one of these conditions were
associated with an insured’s losses.

The definition of “flood” in policies may vary significantly from
insurer to insurer and from policy to policy. One policy may define
“flood” as meaning “rising water, surface water, waves, tidal water,
tidal wave, or tsunami; rising, overflowing or any breach of streams,
rivers, lakes, reservoirs, or other bodies of water; or spray from any
of the foregoing, all whether driven by wind or not.” Some policies may
not include the phrase “whether driven by wind or not.” In addition,
some policies may include a definition for “high hazard flood zones.”

Other unique issues arose from Sandy’s devastation. In Pietrangelo v. S&E Customize It Auto Corp., ^[61]  the
 plaintiff had left her car at defendant’s motor vehicle repair shop
before Sandy hit the New York City area. The defendant’s carrier
disclaimed liability for damage to the car that was “totaled” as a
result of significant flooding of the defendant’s repair shop. The
plaintiff’s auto liability carrier paid the plaintiff the total value of
 the car, less a $1,000 deductible. The defendant refused to pay the
$1,000 differential to plaintiff and plaintiff sued defendant in Small
Claims Court. The issue the Court ruled upon was whether defendant had
been negligent in not procuring flood insurance. The Court ruled that
the law of bailments applied to the case, and that “it is not negligence
 for a bailee such as defendant to fail to carry insurance to cover the
bailor’s property.” The Court further ruled that, in the absence of
liability under the law of bailments, it was still defendant’s burden
under the common law to establish a non-negligent cause for the damage
to plaintiff’s property, and the Court ruled that Sandy, a
“hurricane/superstorm” was an “act of nature” that relieved defendant of
 any liability.

National studies have shown that it is common for persons to go
without flood insurance. For example, with Hurricane Harvey, that
number, with regard to homeowners, is estimated at about 80% of the
victims not having been insured. ^[62] 

Elite Catering Company, Inc. v. National Specialty Insurance Co., ^[63]  involved
 a similar situation, where the plaintiff catering company suffered
extensive property damage, food spoilage, and loss of business income
from the impact of Hurricane Sandy. Plaintiff alleged that when its
principals returned to the premises on the day after the storm, they
found the restaurant filled with refuse from a sewer backup that
occurred during the storm. A claim was filed but was denied by the
insurer-defendant on the ground that all the alleged damages were the
result of “flooding,” a circumstance expressly excluded from coverage
under the policy. Plaintiff sued. The issue that arose was whether the
special additional rider plaintiff had purchased, as protection for
sewer back-up, was overridden by the policy provision that excluded
coverage “for covered losses if those losses were occasioned, even in
part, by uncovered causes, i.e., that damages caused by a combination of uncovered losses (e.g., flood) and covered losses (e.g., a sewer back-up) rendered the entire loss non-compensable.”

The Court concluded that it was unable to find, as a matter of law,

[w]hether the facial inconsistency in policy language . . . i.e., where the terms of a separately-purchased rider providing additional coverage for damages by, e.g.,
 a sewer back-up, and the “anti-concurrent causation” exclusion upon
which [insurer] relies, is subject to “no other reasonable
interpretation, when read together [with the failure to purchase flood
insurance], other than to exclude coverage for all losses caused by any
combination of covered and non-covered occurrences”, or represents, e.g.,
 a trap into which an “average insured” might fall as a result of the
purchase of additional coverage specifically written to cover sewer and
drain back-ups.” (Emphasis added).

When the Covered Person and the Purchaser of the Insurance Are Not the Same Person

Leases have various ways of reducing the insurance expense the
landlord will bear. These include clauses prohibiting the tenant from
taking actions that will increase the landlord’s insurance expense, a
clause which receives relatively rare enforcement, compared to the other
 insurance clauses one finds in leases. By far, the more important
clauses are those in which the lease obliges the tenant to procure
insurance at the tenant’s expense that will, in some manner either pay
the landlord directly for losses suffered during a casualty or provide
funding for the tenant’s compulsory repair of the casualty. Obviously,
the landlord is least secured by any scheme by which the tenant gets the
 funds and is merely obliged to spend them on the repairs.

Further, there can be allocation issues where the tenant’s insurance
covers more than one location, sustains a loss at both, but the landlord
 is only the owner of one of those locations.

The first level of protection the landlord must write into the lease
is that the insurance must be for replacement cost rather than for
current actual value.  Such lease should not allow such a policy to have
 anything more than a minimal deductible. Further, the policy must name
the landlord as an additional insured and loss payee.

Where the tenant is purchasing the insurance, the policy will, at
most, name the landlord as an additional insured and loss payee.
However, some tenants bargain for giving the landlord only the status of
 additional insured.

All of these entail risks for the landlord as, in spite of the fact
that the lease has a do-nothing-to-hurt-the-insurance clause, if the
tenant does do something to hurt the insurance, this will likely only
come to light after sustaining a loss and it is cold comfort to the
landlord who could have evicted for the breach. The whole reason to
insist on the insurance in the first place was the probably justified
belief that the tenant itself would not have sufficient financial
resources to cover the landlord’s loss. While there are proofs that the
tenant acquired the insurance, generally landlords do not receive
notification that that insurance is canceled or worse, that the
insurance is in effect, but useless because the tenant is out of
compliance with its requirements. However, in ISO form CP 12 18 10 12
insurers undertake to inform the loss payee of cancellation of the
insurance policy with a ten day notice if the reason for cancellation is
 nonpayment and a thirty day notice if the reason for cancellation is
anything else. That same form also indicates that the insurance company
will pay the claims to the landlord and the tenant, “as interests may
appear.” This is, of course, an invitation to litigation, but it does at
 least allow for the ongoing question about the tenant recovering for
what it has physically invested in the property itself. The landlord and
 tenant may, however, resolve their differences about how their
interests appear by a contract defining such, meaning normally, within
the lease itself.

The ISO form for additional insureds, CP 12 19 06 07, contains only
one operative sentence. It reads, “The building owner identified in this
 endorsement is a Named Insured, but only with respect to the coverage
provided under this Coverage Part or Policy for direct physical loss or
damage to the building(s) described in the Schedule.” Note that it does
not call for the additional insured to be informed of any lapses in
coverage. As we have noted, it does not call for much at all, and the
rights it confers on the landlord are skeletal at best.

Proof of Insurance and Securing Important Documents and Contracts

The most common “proof” of insurance is also the most useless and,
one could argue, worse than useless, as laypersons and sophisticated
business and building owners alike treat Certificates of Insurance as if
 they mean something. The forms in question are the ubiquitous ACORD
forms 25 and 27, respectively the Certificate of Liability Insurance and
 the Evidence of Property Insurance. On their faces, they state that
they do not bind the insurance company. The first sentence of each form
states, “This (document) is issued as a matter of information only and
confers no rights upon the certificate holder.” Indeed, in common
practice, the lowest level of clerk in an insurance brokerage issues
these forms and anecdotes abound of these forms being issued without any
 actual policy in place behind them. A landlord looking for genuine
proof should settle for nothing less than a certified copy of the
complete policies.

Further, these documents make no undertaking that the landlord will
be informed of cancellations. Only the actual policy can do that, reason
 enough for the landlord to want to see a certified copy of the actual
policy, together with all of its endorsements.  When casualty hits it
may become very difficult to find the original documents that exist in a
 perfect world.  But a few precautions should be taken.  An original of
all insurance policies, leases, maintenance contracts and any other
important information should be placed in a safe deposit box far away
from the property being protected.  Also, these documents should also be
 placed in the internet hemisphere, backed up so they can be reached
despite the destruction or loss of documents as a result of casualty. 
With this information in the safe deposit box, in another office, and
the internet hemisphere along with a list of contact people to contact
from the insurance broker to your lawyer to the landlord listed on paper
 assuming that the internet does not work, you have started a
preparation process that should be continuous added to as your client’s
business and the world changes.

Conclusion

The life of a human, the life of a building, the life of a society is
 an endless concatenation of discrete events, many of which, in their
own right are highly unlikely events. The unexpected will occur; no one
 will experience a life made up solely of utterly predictable events.
The vagaries of the weather are, for most human beings, mere metaphors
for the utterly predictable nature of an unpredictable life. But for
businesses and building owners, the weather along with tectonic forces,
rebellions, insurrections, and acts of terror are of the very fabric of
events for which citizens must be prepared, but rather for which
they have written the mechanisms that already demonstrate the
preparations in place, ready predictably to spring into action when the
unpredictable actually happens. Documents must be clear and concise,
giving absolute certainty in enabling your business and property to cope
 with omnipresent uncertainty.

Cities and states that build better structures, have stronger
building codes, and are governed by stronger documents, when suffering
catastrophic losses, more rapidly get back on their feet. Haiti and
Puerto Rico are unfortunate examples of everything that can go wrong
both in superstructure and infrastructure. New York City, by contrast,
rose from the challenges of weather and terror to create a modernized
gleaming downtown financial district. It owes its success to the
preparations made in the wake of earlier disaster. Our duty as citizens
serving the nation and protecting our society as a whole is to support
the physical structures with strong preparation and knowledge, as legal
dikes against the storms of adversity.

* Adam Leitman Bailey is the Founding Partner and Messrs. Desiderio
and Treiman are partners, Mr. Desiderio chairing the Real Estate
Litigation Group and Mr. Treiman chairing the Landlord-Tenant Group in
New York City based real estate law firm, Adam Leitman Bailey, P.C. The
authors wish to acknowledge the invaluable contributions in research for
 this article by former New York Law School extern, summer associate and
 now associate with the firm, William Pekarsky.

[1] See “2018 – An Assessment of Residential Building Code and
 Enforcement Systems for Life Safety and Property Protection in
Hurricace-Prone Regions.” (Atlantic and Gulf States, Insurance Institute
 for Business & Home Safety, March 2018).

[2] Kelley Shinn, Message From a Proud Island: ‘We Need Your Help,’  N.Y. Times, Sept. 28, 2019, https://www.nytimes.com/2019/09/28/opinion/sunday/dorian-hurricane-ocracoke-island.html.

[3] See Id.

[4] Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 NY2d 130, 661 NE2d 694, 637 NYS2d 964 (1995). The case was argued by Adam Leitman Bailey, P.C. partner, Jeffrey R. Metz.

[5] Top 10 Costliest Catastrophes, United States (Figure), Insurance Information Institute, .

[6] 3 Misc. 3d 440 *; 776 N.Y.S.2d 713  (Supreme Court, NY County 2004)

[7] Citing to Palsgraf v. Long Island Railroad Co., 248 N.Y.
339, 162 N.E. 99 (1928). This case is used in nearly every law school in
 the United States of America to teach about whether a plaintiff is in
the zone that the defendant is required to protect. However, it also
tells a far-fetched story of how it was that the plaintiff happened to
be standing in the wrong place at the wrong time so as to be injured by
something the defendant could never have predicted..

[8] See also In re World Trade Center Bombing Litigation,
 3 Misc.3d 440, 776 NYS2d 713 (Sup. Ct., NY Co., 2004)(held: the record
before the court was not sufficient for summary judgment on the issue of
 foreseeability); In re World Trade Center Bombing Litigation, 17
 NY3d 426 (2011)(held: the Port Authority’s liability for failing to
secure the parking garage against terrorist attack predominantly derived
 from a failed allocation of police resources and was protected by
governmental immunity).

[9] See Basso v. Miller, 40 NY2d 233, 352 (1976).

[10] See Nellan v. Helmsley-Spear, Inc., 50 NY2d 507, 519-520 (1980).

[11] 865 F.Supp.2d 370 (2011).

[12] 737 F.3d 166, 179 *; 2013 U.S. App. LEXIS 24101 **; 2013 WL 6246275 (2013).

[13] See, for example, Boyd v Manhattan & Bronx Surface Tr. Operating Auth.,
 9 N.Y.3d 89, 876 N.E.2d 1197, 845 N.Y.S.2d 781, 2007 N.Y. Slip Op.
07770 (2007) (“It follows from Bethel that a common carrier, like any
other defendant, is not an insurer of the safety of its equipment; it
can be held liable for defects in the equipment only if it knew, or with
 reasonable care should have known, that the equipment was defective.”)

[14] 47 NY2d 316, 418 NYS2d 310.

[15] Id.

[16] Hooters of Manhattan, Ltd. v. 211 W. 56 Assoc., 51 A.D.3d 410, 857 N.Y.S.2d 112 (1st Dept. 2008).

[17] 2013 N.Y. Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013).
Authors Adam Leitman Bailey and Dov Treiman represented the winning
landlord is this case.

[18] It is also one of the most readily curable lease defaults and one of the most frequent sources of “Yellowstone” litigation
 in State Supreme Court where the tenant-plaintiff gets additional time
to cure the lease default before suffering eviction. First Natl. Stores v Yellowstone Shopping Ctr., 21 NY2d 630.

[19] To be distinguished from net leases, double net leases, and triple net leases.

[20] 57 A.D.2d 920, 395 N.Y.S.2d 51.

[21] New York Real Property Law §235-b.

[22] See infra.

[23] New York is in the minority in adhering to this rule. See discussion in Eastside Exhibition Corp. v. 210 East 86th Street Corp., 18 N.Y.3d 617 (2012).

[24] Fifth Ave. Bldg. Co. v. Kernochan, 221 N.Y. 370.

[25] Eastside Exhibition Corp. v. 210 East 86th Street Corp., 18 N.Y.3d 617 (2012).

[26] 26 NY2d 77 (1970).

[27] 76 A.D.3d 167 (2010).

[28] The operators of the World Trade Center, being in control of
their own basement parking ramps, could have taken steps to avoid the
1993 terrorist attack. Not having control of the skies, they could not
be held liable for failing to prevent the attacks of 2001. Liability in
the original design of the buildings to survive airplane attacks remains
 an unanswered question.

[29] 2013 WL 373327

[30] The drafter might be well advised to name the statute by title and section number.

[31] Lincoln Plaza Tenants Corp. v. MDS Properties Development Corp., 169 A.D.2d 509, 564 N.Y.S.2d 729 (1st Dept. 1991).

[32] supra.

[33] supra.

[34] https://www.irmi.com/term/insurance-definitions/insurance-services-office-inc.

[35] https://www.propertyinsurancecoveragelaw.com/files/2017/05/CP00101012.pdf.

[36] http://pacificcoastes.com/assets/COLBasicForm1.pdf.

[37] http://pacificcoastes.com/assets/COLBroadForm1.pdf.

[38] http://pacificcoastes.com/assets/COLSpecialForm1.pdf.

[39] David W. Dunlap, “A Modern Flood Barrier Aims to Protect
Verizon’s Landmark Building,”
https://www.nytimes.com/2013/10/31/nyregion/a-modern-flood-barrier-aims-to-protect-verizons-landmark-building.html.

[40] Id.

[41] Pub. L. 114-1, 129 Stat. 3.

[42] See TRIPRA, Section 102(7).

[43] See TRIPRA, Section 103(e)(1)(A); TRIPRA, Section 103(e)(1)(B).

[44] See TRIPRA, Section 103(e)(1)(A).

[45] See TRIPRA, Section 103(e)(1)(B).

[46] Home Insurance Company v. American Insurance Company, 147 AD2d 353, 354, 537 NYS2d 516 (1st Dept. 1989). (Internal quotation marks omitted).

[47] Kula v. State farm Fire & Casualty Co., 212 Ad2d 16, 628 NYS2d 988 (4th Dept. 1995).

[48] 49 Misc.3d 1209(A) (Sup. Ct., New York Co., 2015).

[49] Howard Stores Corp. v. Foremost Insurance Co., 82 AD2d 398, 400, 441 NYS2d 674, 676 (1st Dept. 1981) (Internal citations omitted), affirmed 56 NY2d 991 (1982).

[50] See, e.g., Newman, Myers, Kreines, Gross, P.C. v. Great Northern Insurance Co., U.S. Dist. LEXIS 57338, No. 13 Civ. 2177 (PAE) (SDNY 2014).

[51] Broad Street LLC v. Gulf Insurance Company, 37 AD3d 126, 132, 832 NYS2d 1 (1st Dept. 2006) (citations omitted).

[52] 279 F. Supp.2d 235 (SDNY 2003).

[53] 33 AD3d 392, 393, 822 NYS2d 268, 269 (1st Dept. 2006).

[54] 54th Street Ltd Partners, L.P. v. Fidelity and Guarantee Insurance Company, 306 AD2d 67, 763 NYS2d 243, 244 (1st Dept. 2003). See also Bamundo, Zwal & Schermerhorn, LLP. v. Sentinel Insurance Company, Ltd., 2015 U.S. Dist. LEXIS 39409, No. 13–CIV-6672 (RJS) (SDNY 2015).

[55] 345 F3d 154, 180 (2d Cir. 2003).

[56] 467 F. 3d 107 (2d Cir 2006).

[57] See 42 USC §4012(a).

[58] See 42 U.S.C. §4013(b)(4).

[59] See, e.g., XL Insurance America, Inc. v. Howard Hughes Corp., 154 AD3d 505, 61 NYS3d 497 (1st Dept. 2017).

[60] 49 Misc.3d 1209(A) (Sup. Ct., New York Co., 2015).

[61] 39 Misc.3d 1239 (a), 972 NYS2d 146 (Civil. Ct., New York Co., 2013).

[62] Bernard Condon and Ken Sweet, About 80% of Hurricane Harvey victims do not have flood insurance, face big bills, USA Today, Aug. 29, 2017, available at: ; Jackie Wattles, Hurricane Harvey: 70% of Home Damage Costs Aren’t Covered by Insurance, CNN Money, Sept. 1, 2017,.

[63] 54 Misc.3d 1210 (A), 52 NYS3d 346 (Sup. Ct., Richmond Co., 2017).