Adam Leitman Bailey, P.C.

1. Seminar 7
When Tragedy Strikes: A Roadmap for Post-Casualty
Protocols and Processes
Thursday, October 29, 2015
9:00 – 10:15 AM
Joe Nuñez, Esq.
Vantage Law Group, PLLC
Minneapolis, MN
Dorothy Bolinsky, Esq.
Drinker Biddle & Reath LLP
Princeton, NJ
Adam Leitman Bailey, Esq.
Adam Leitman Bailey, P.C.
New York, New York

2. What is a Casualty?
• A casualty can have a number of definitions.
• It can be limited to naturally-occurring disasters,
or be widened to include acts of war or terrorism.
• The governing definition will be the one used in
a particular contract, and the lease or policy will
only extend so far as that definition allows.

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

4. Hurricane Katrina
August 23 – August 31, 2005
• $150 Billion in US Economic damage
• $108 Billion in Property damage – largest
single insurance loss event ever
• $41.1 Billion in Insured Losses plus
• $16.1 Billion in FEMA claims plus
• $3 Billion in off shore energy facility losses

5. Super Storm Sandy
October 22 – November 2, 2012
• Impacted 24 US States
• $65 Billion in US Economic damage
• $68 Billion Overall Economic damage
• $50 Billion in Property damage
• $28.2 Billion in Insured Losses
• $18.75 Billion in Insured Property Losses
(excluding FEMA claims)

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

10. Manfra, Tordella & Brookes, Inc. V. 90 Broad Owner, LLC, 2013 WL 373327
Plaintiff-tenant’s theory is that the landlord was liable for neglecting to take
supposedly reasonable precautions against flooding caused by Superstorm Sandy
such as window boarding and sandbagging.
Amongst the allegations of the complaint were:
32. "Because of its history of flooding and location in low lying Zone A,
Defendant was well aware that 90 Broad in general, and MTB's offices in
Particular, were highly susceptible to flooding and would likely experience
severe flooding in the event of a major storm, such as Hurricane Sandy."
37. Defendant was thus fully aware, and warned of the potential flooding that
would occur as soon as Sandy made landfall. Despite this knowledge, and
expectation of storm related flooding, Ms. Arce's email did not include any
information regarding any steps Defendant took or would take to prevent or
at the very least, mitigate, the potential damage to the Building from storm
related flooding.

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

13. • When a casualty originates in a landlord’s own
building, the effects may spread beyond the
premises, subjecting the owner to litigation by
nearby building owners, tenants, and others.
• While the owner may be responsible for physical
damage ensuing from the casualty, courts have
held that the landlord typically is not responsible
for the purely economic harm caused by a
casualty.
Issues in Tort: Can a Landlord be Liable for Damaging a Neighborhood?

14. 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr.,
Inc., 96 N.Y.2d 280, 750 N.E.2d 1097 (2001)
• The accident, from construction on a single building,
damaged other buildings and required the closure of
15 heavily-trafficked blocks in midtown Manhattan
for at least two weeks. Multiple plaintiffs sued the
owner and managing agent of the building where
the construction was being done, including a
proposed class action covering all businesses within
30 square blocks of midtown Manhattan. The case
centered on whether the defendant owner could be
found liable for purely economic damages to the
nearby affected businesses.

15. • In analyzing a tort claim against the owner, the New York Court of
Appeals held that a landowner who engages in activities that may
cause injury to persons on adjoining premises owes those persons a
duty to take reasonable precautions to avoid injuring them, but such
a landowner does not owe a duty to protect an entire urban
neighborhood against purely economic losses.
532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr.,
Inc., 96 N.Y.2d 280, 750 N.E.2d 1097 (2001)

16. Drafting a Better
Casualty Lease Clause

17. Carefully Define “Casualty”
• Definition should specify whether it is
limited to natural disasters: earthquakes,
wind and fire, or includes acts of god, war,
terrorism, negligence, etc.
• Definition should include a provision
apportioning liability to tenant for any
casualty caused by tenant, its agents, or
customers.
Drafting a Better Casualty Lease Clause

18. • Provides proportional rent abatement
based on amount of unusable space
– Limited to the time between the casualty to
the earlier of the substantial completion date
(which must be defined)
– The date at which the tenant or subtenant
retakes possession of the space.
Drafting a Better Casualty Lease Clause

19. • Requires tenant’s notification to landlord of
casualty and/or intent to cease rent payments due
to casualty.
• Requires landlord’s notification to tenant of
substantial completion of repairs and restoration,
or alternatively, establishes circumstances under
which landlord can terminate the lease.
Establish Notice Requirements
Drafting a Better Casualty Lease Clause

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

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

22. Maiden Lane Props., LLC v. Just Salad Partners LLC, 2013
N.Y. Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013)
Maiden Lane Properties v. Just Salad Partners, 056312/13, NYLJ
1202598292879,
At *1 (Civ NY Schecter).
• Tenant did not give notice as required by lease, but still claimed the
benefits of rent abatement allowances.
• Tenant’s claim was entirely based on loss of electricity, which was
tenant’s exclusive responsibility under the lease, and other in which
the damage to the premises themselves was light, but the weeks of no
public utility provided electricity inspired the tenant to claim an
abatement of the rent.
The court in Just Salad wrote:
• Theses terms establish that loss of electricity was a contingency that was
anticipated and accounted for by the parties and not, under the
circumstances, a type of casualty damage subject to section nine.

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

24. N.Y. R.P.L. § 227
• “Where any building, which is leased or occupied, is
destroyed or so injured by the elements, or any other cause
as to be untenantable, and unfit for occupancy, and no
express agreement to the contrary has been made in writing,
the lessee or occupant may, if the destruction or injury
occurred without his or her fault or neglect, quit and surrender
possession of the leasehold premises, and of the land so
leased or occupied; and he or she is not liable to pay to the
lessor or owner, rent for the time subsequent to the surrender.
Any rent paid in advance or which may have accrued by the
terms of a lease or any other hiring shall be adjusted to the
date of such surrender.”

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

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

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

28. Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d
835 (6th Cir. 2000)
• Plaintiff is the insurer of the
landlord of a shopping mall, and
covered the landlord for both
property damage and business
interruption. Defendant is a
commercial tenant in the mall.
• A fire was started by a customer
in Defendant’s store, causing
extensive damage and requiring
approximately $1 million in
payments from the plaintiff
insurer to the landlord.

29. Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d
835 (6th Cir. 2000)
• The lease required Defendant tenant to:
– Indemnify the landlord against “any and all claims and
demands,” including for personal injury, loss of life, or
property damage, if the injury or damage occurred within
the demised premises and arose out of the tenant’s use
of the premises.
• The court found that there were no “claims and
demands” here, and so that indemnification
provision did not apply.

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

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

32. Protecting Your Client
Through Casualty Insurance

33. Market Value Rider
• A market value rider to an insurance policy ensures that
the maximum coverage provided under the policy will be
the fair market value of the property rather than the
original purchase price.
– In the event that the insured property increases in
value, the insurance will still cover the full value of the
property in case of casualty.

34. • Code upgrade coverage applies to extra costs
incurred as a result of rebuilding property under
codes or ordinances which have been updated
since the original construction of the premises.
• These new requirements can be from local,
state, or federal law.
– For example, local building code might require
changes to the construction of older buildings in order
to be accessible.
Code Upgrade Coverage

35. Importance of Type of Policy
and Policy Language
• A policy can be a “named perils
policy” which covers only the perils
expressly listed or an “all risk” policy,
which covers all perils except those
explicitly excluded.

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

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

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

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

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

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

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

43. Cashew Holdings, LLC v. Canopius U.S. Ins., Inc., No. 13-CV-
4528 ERK SMG, 2013 WL 4735645 (E.D.N.Y. Sept. 3, 2013)
The relevant exclusion in the policy provided
“Exclusions
1. We will not pay for loss or damage caused directly or indirectly by any of the following.
Such loss or damage is excluded regardless of any other cause or event that contributes
concurrently or in any sequence to the loss.
• g. Water
• (1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their
spray, all whether driven by wind or not;
• (2) Mudslide or mudflow;
• (3) Water that backs up or overflows from a sewer, drain or sump; or
• (4) Water under the ground surface pressing on, or flowing or seeping through:
– (a) Foundations, walls, floors or paved surfaces;
– (b) Basements, whether paved or not; or
– (c) Doors, windows or other openings
• But if Water, as described in g.(1) through g.(4) above, results in fire,
explosion or sprinkler leakage, we will pay for the loss or damage caused by
that fire, explosion or sprinkler leakage.”

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

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

46. Flood or Explosion
Lester Schwab v. Great Northern, Index #: 652708/2013
The Plaintiff argues that the Defendant is legally bound to indemnify the Plaintiff for its losses
because the damage that resulted from Hurricane Sandy is a “covered peril.” Specifically, the
Plaintiff argues that its loss of utilities that prevented it from carrying out regular business
activities was caused by an explosion (and not by a flood) to Con Edison’s transformer which is
a covered peril under the policy. In the alternative, the Plaintiff makes clear that it purchased an
additional “Flood Endorsement” policy through the Defendant which provides an additional
avenue for coverage if it is discovered that the flood, and not the explosion, caused the loss of
utilities.
The Defendant disclaimed coverage and argues that the Plaintiff’s loss of utilities (which
ultimately led to its inability to carry out regular business operations on the premises) was
caused directly by flood damage to the underground utility infrastructure and not by an
explosion. Since flood damage does not suffice as a “covered peril,” the Defendant refuses to
indemnify the Plaintiff. Further, the Defendant argues that because the state of New York did
not order an evacuation of Plaintiff’s offices, there was no legal inability to ingress and egress
from the premises. The Defendant takes the position that the Plaintiff’s employees technically
could have carried on its regular business activities and, therefore, is under no legal obligation
to indemnify the Plaintiff for its losses.

47. Flood or Explosion

48. Require Tenant Insurance
• Property insurance at minimum, but
possibly general commercial liability
insurance and/or business interruption
insurance
Drafting a Better Casualty Lease Clause

49. The End