The Aftermath of 9/11: Courts Reject Policyholders' Attempts to Circumvent the Plain Meaning of Business Interruption Coverage

Shortly after 9/11, Streamline relocated its business to a location occupied by a competitor. Because of the competitor's presence, Streamline informed Hartford that this location was unacceptable on an extended basis. Hartford advanced an initial payment to Streamline, but the insured requested additional amounts it believed were owed to secure a more suitable location to restart its business. While urging Hartford to make these additional payments, Streamline allegedly found suitable commercial space, but Hartford's alleged delay in providing additional monies resulted in the loss of this prospective location.

Hartford made an additional payment related to Streamline's business income loss. However, Hartford determined the period of restoration was approximately 5-months long. Streamline asserted Hartford's alleged delay in payment increased the time needed to acquire the space and, therefore, the period of restoration was increased. In addition, Streamline argued that because the restoration period would last until the World Trade Center towers are rebuilt, the period must be the policy maximum of 12 months and 30 days.

Streamline filed a complaint in the U.S. District Court for the Southern District of New York, seeking additional business income payments, as well as consequential damages for financing costs and the loss of business Hartford allegedly caused by failing to promptly pay its claims. Streamline also alleged that Hartford violated its duty of good faith and fair dealing and that it was, therefore, entitled to extra-contractual damages, including punitive damages, interest and attorneys' fees.

The court dismissed Streamline's claim for extra-contractual damages, recognizing that an independent tort action for a bad faith denial of coverage is not recognized under New York law. The court further dismissed Streamline's claim for consequential damages. Under New York law, to recover consequential damages the damages “must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.” Streamline Capital, 2003 WL 22004888 at *4 (citations omitted). The court reasoned that the complaint did not even allege that, at the time the policy was issued, the parties contemplated that Streamline would incur additional harm from financing costs and loss of business in the event Hartford breached its contract. The court further noted that the policy contained a provision specifically disclaiming liability for “consequential loss.”

Lastly, Streamline argued that it was entitled to the maximum period of restoration under the policy, 12 months plus 30 days. The policy stated that the period of restoration “ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.” Streamline contended that the phrase “property at the described premises” meant the real and personal property at the World Trade Center site, whether owned by the plaintiff or not, and that consequently the period of restoration should last until One World Trade Center (the building the insured occupied) was rebuilt. Hartford argued that the phrase meant property belonging to plaintiff in the plaintiff's offices and thus the period of restoration concluded by the time plaintiff should have been able to reestablish its operations, either at the World Trade Center site or in some other location.

The court held that construing the words “described premises” to mean Streamline's suites of offices in One World Trade Center is a “far more reasonable construction than taking those words to mean either One World Trade Center or the World Trade Center site as a whole.” Id. at *8. The court noted that the policy provided coverage for direct physical loss of or damage to covered property at the premises described in the declarations page. The declarations page described an office suite. For this reason, the court concluded that the term “premises” in the coverage provision, which applies to covered property at the premises described in the declarations page, is clearly an office suite. Thus, the court concluded that “premises” has the same meaning in the period of restoration provision. The only reasonable construction of “property” is Streamline's own personal property such as computers, desks, chairs, etc.

According to the court, this interpretation is logical in light of the fact that the policy's business income coverage provides for “the actual loss of business income you sustained due to the necessary suspension of your operations during the period of restoration.” The condition that the business income coverage applies to the suspension of the plaintiff's “operations” indicates that it is dependent only on replacing what is necessary to resume those operations, mainly Streamline's personal property, not a specific office at a specific location. Therefore, the court concluded:

“Such a construction makes logical sense. It is wholly unreasonable to think that the period of restoration should be tied to the rebuilding of real property over which neither the insured nor the insurer had any control, instead of tying it to a process that the plaintiff controlled: the acquisition of replacement office space and the installation of the plaintiff's personal property in that space.” Id. at *8.

In Zurich American Ins. Co. v. ABM Industries, Inc., 265 F.Supp.2d 302 (S.D.N.Y. May 29, 2003), ABM provided janitorial, lighting and engineering services at the World Trade Center prior to and on 9/11. After the destruction of the World Trade Center, ABM sought recovery from Zurich, its commercial property carrier, for the value of personal property that had been destroyed and for lost income. Zurich did not dispute coverage for the value of ABM's destroyed property and contingent business interruption up to the $10 million policy sublimit.

However, ABM claimed additional coverage under the policy's conventional business interruption provisions and extra expense coverage. The policy provided coverage for loss to ABM's real and personal property, including: (a) “property owned, controlled, used, leased or intended for use” by ABM; (b) loss resulting directly from the interruption of ABM's business caused by direct physical loss or damage to insured property at an insured location; (c) extra expense incurred as a result of loss to ABM's real or personal property; and (d) losses due to other specified ways, including off-premises utilities, impounded water, “leader property,” interruption by civil or military authority and “ingress/egress.”

ABM first asserted that it “used,” “controlled” or “operated” the World Trade Center in connection with the services it provided at the facility. For example, ABM argued that it “used” the common areas and tenanted premises of the World Trade Center to perform its operations and generate income. The ABM court noted that the plain meaning of “use” means to “carry out a purpose or action by means of.” Therefore, ABM could carry out its purpose of cleaning its customers' premises by means of a mop, broom, or other cleaning tool, and could carry out its purpose of generating income by means of the work it performed. The court held, however, that ABM did not accomplish any purpose “by means of” the property at issue, meaning the physical premises occupied by tenants or open to the general public. The World Trade Center was the location of ABM's acts, not the means through which the acts were accomplished.

ABM also argued that it somehow “controlled” the premises at the World Trade Center. The court held that, while no one questions the importance of janitorial services in modern urban society, “the notion that by providing such services to a building's owner or tenants the janitor thereby controls the building is the functional equivalent of saying that the ground crew controls Yankee Stadium. This umpire is not persuaded.” ABM, 265 F.Supp.2d at 307. ABM also sought coverage for various extra expenses, namely increased employee costs, employee termination costs, employee wages and expenses and increased unemployment costs resulting from the destruction of the tenanted premises and common areas ABM serviced. The court noted that the policy provided coverage for extra expenses resulting from the loss, damage or destruction of real or personal property. Because ABM did not own, control, use or lease the tenanted areas or common areas, the court concluded that these claims failed as a matter of law.

ABM also sought coverage for claims relating to off-premises utilities, impounded water, interruption by civil or military authority and ingress/egress. The court held that ABM was not entitled to coverage because such losses did not result from the conditions identified in the applicable policy provisions. Rather, the premises of ABM's customers were no longer available to be served. In addition, ABM also sought coverage against loss or damage to a “leader property,” meaning a property the insured does not own or operate, but located in the same vicinity as the insured, which attracts business to the insured. The court held that the World Trade Center was not a “leader property” to ABM because the World Trade Center was the site and source of ABM's business: “This is not a case, for example, where a related business located near a ballpark might suffer a loss if the ballpark were destroyed. Here, rather, the destruction of the World Trade Center caused loss to ABM's business by destroying the tenanted premises and common areas where ABM supplied its services.” Id. In addition, the losses allegedly due to off-premises utility lines, lack of water supply, actions of civil authority and prevention of ingress/egress were not covered because, assuming these losses did not occur, ABM would still have lost its entire business in the World Trade Center as a result of the total destruction of its customers' premises.

Lastly, the court dismissed ABM's claim for consequential damages arising from Zurich's alleged breach of contract because ABM failed to specify the nature of the consequential damages or set forth competent evidence showing, as required for any such claim, that the consequential damages “were foreseeable and within the contemplation of the parties at the time the contract was made.” ABM, 265 F.Supp.2d at 309 (citing Martin v. Metro Property & Cas. Ins. Co., 238 A.D.2d 389, 656 N.Y.S.2d 318, 318-19 (2d Dep't. 1997)).

The well-reasoned rulings in Streamline Capital and ABM are important in several respects. First, the Streamline Capital court correctly concluded that the “property” in the period of restoration clause is the property owned by the insured and, in that case, meant the property located in the insured's World Trade Center offices. To interpret “property” to mean all real and personal property at the World Trade Center would dramatically affect the scope and effect of business interruption coverage beyond the reasonable contemplation of the parties. Accepting Streamline's argument, the period of restoration would then be dependent on circumstances beyond the control or influence of the insured: here, the various local, state and national interests effecting the development of the World Trade Center.

Second, the Streamline Capital and ABM courts both rejected the insureds' claims for consequential damages. In New York and in most jurisdictions, recovery for consequential damages may be permitted only if the damages were within the contemplation of the parties at the time the policy was issued. Thus, in most circumstances, a policyholder should not be able to recover any type of consequential damages associated with an alleged breach of contract because it would not be able to effectively claim that the parties contemplated such damages when the policy was issued. See also Continental Information Systems Corp. v. Federal Insurance Co., No. 02 Civ. 4168, 2003 WL 145561 (S.D.N.Y. Jan. 17, 2003) (mere purchase of business interruption insurance does not show that losses due to alleged failure to pay claims was within contemplation of the parties at the time of contracting).

Third, the ABM decision is important because it correctly controls the scope of business interruption and extra expense coverage associated with service industry insureds. ABM establishes that insureds generally do not “use” or “control” properties that utilize the insured's services. Likewise, the properties that are the focal point of the insured's services typically are not “leader properties” because they are the site and source of the insured's business.

As the Streamline Capital and ABM cases illustrate, insureds suffering losses as a result of 9/11 frequently argue that receiving the value of their property is inadequate. While many of these claims are legitimate, insurance practitioners should be careful to scrutinize the wording of the business interruption coverage to make sure the policyholders are not seeking more than they are entitled to under the policy. The cases cited above are just two examples of insureds overreaching, and of courts rejecting these arguments in favor of applying the plain meaning of the business interruption coverage.

Michael Hamilton is a senior member in the Insurance Litigation Department of Cozen O' Connor. His practice areas include an emphasis in insurance coverage and bad faith litigation and commercial litigation. He lectures frequently on insurance matters for local, state and national organizations. He is also a member of the Defense Research Institute and its Insurance Law Committee, where he serves as a co-editor of the Covered Events newsletter.

The terrorist attack on the World Trade Center resulted in a large number of business interruption claims. Stated simply, business interruption coverage is intended to pay the financial losses incurred by an insured during the period necessary to repair the damage caused by an insured loss. Typical business interruption provisions allow for reimbursement of income lost and payment of fixed and continuing expenses. However, business interruption claims are still governed by the general maxim of insurance law: Recovery of insurance proceeds is not intended to place the insured in a better position than it would have been without the loss. Nevertheless, many policyholders are turning to their insurance companies to reimburse them in ways never contemplated by the parties or their insurance contracts. A prime example is the unwarranted attempts to expand the parameters of business interruption coverage in the wake of 9/11.

Recently, two NY courts have specifically rejected policyholders' arguments that the scope of their business interruption coverage should be stretched beyond the plain meaning of its terms and conditions. See Streamline Capital LLC. v. Hartford Casualty Ins. Co., No. 02 Civ. 8123, 2003 WL 22004888 (S.D.N.Y. Aug. 25, 2003); Zurich American Ins. Co. v. ABM Industries, Inc., 265 F.Supp.2d 302 (S.D.N.Y. May 29, 2003). While both decisions are from the U.S. District Court for the Southern District of New York, their holdings have national implications for insurance practitioners. This article will discuss these two decisions and their impact on business interruption claims arising from 9/11.

In Streamline Capital, the former headquarters of Streamline was located in the World Trade Center and was destroyed in the 9/11 terrorist attack. Streamline filed various claims with Hartford Casualty Insurance Company, its property insurer, for physical loss and damage to property, loss of business income and extra expenses. Under the business interruption coverage, business income payments are limited to loss of income occurring within 12 consecutive months after the insured loss. The insured also purchased extended business income coverage, entitling Streamline to additional income coverage up to a maximum of 30 days after the date the property is actually repaired or replaced.

Shortly after 9/11, Streamline relocated its business to a location occupied by a competitor. Because of the competitor's presence, Streamline informed Hartford that this location was unacceptable on an extended basis. Hartford advanced an initial payment to Streamline, but the insured requested additional amounts it believed were owed to secure a more suitable location to restart its business. While urging Hartford to make these additional payments, Streamline allegedly found suitable commercial space, but Hartford's alleged delay in providing additional monies resulted in the loss of this prospective location.

Hartford made an additional payment related to Streamline's business income loss. However, Hartford determined the period of restoration was approximately 5-months long. Streamline asserted Hartford's alleged delay in payment increased the time needed to acquire the space and, therefore, the period of restoration was increased. In addition, Streamline argued that because the restoration period would last until the World Trade Center towers are rebuilt, the period must be the policy maximum of 12 months and 30 days.

Streamline filed a complaint in the U.S. District Court for the Southern District of New York, seeking additional business income payments, as well as consequential damages for financing costs and the loss of business Hartford allegedly caused by failing to promptly pay its claims. Streamline also alleged that Hartford violated its duty of good faith and fair dealing and that it was, therefore, entitled to extra-contractual damages, including punitive damages, interest and attorneys' fees.

The court dismissed Streamline's claim for extra-contractual damages, recognizing that an independent tort action for a bad faith denial of coverage is not recognized under New York law. The court further dismissed Streamline's claim for consequential damages. Under New York law, to recover consequential damages the damages “must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.” Streamline Capital, 2003 WL 22004888 at *4 (citations omitted). The court reasoned that the complaint did not even allege that, at the time the policy was issued, the parties contemplated that Streamline would incur additional harm from financing costs and loss of business in the event Hartford breached its contract. The court further noted that the policy contained a provision specifically disclaiming liability for “consequential loss.”

Lastly, Streamline argued that it was entitled to the maximum period of restoration under the policy, 12 months plus 30 days. The policy stated that the period of restoration “ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.” Streamline contended that the phrase “property at the described premises” meant the real and personal property at the World Trade Center site, whether owned by the plaintiff or not, and that consequently the period of restoration should last until One World Trade Center (the building the insured occupied) was rebuilt. Hartford argued that the phrase meant property belonging to plaintiff in the plaintiff's offices and thus the period of restoration concluded by the time plaintiff should have been able to reestablish its operations, either at the World Trade Center site or in some other location.

The court held that construing the words “described premises” to mean Streamline's suites of offices in One World Trade Center is a “far more reasonable construction than taking those words to mean either One World Trade Center or the World Trade Center site as a whole.” Id. at *8. The court noted that the policy provided coverage for direct physical loss of or damage to covered property at the premises described in the declarations page. The declarations page described an office suite. For this reason, the court concluded that the term “premises” in the coverage provision, which applies to covered property at the premises described in the declarations page, is clearly an office suite. Thus, the court concluded that “premises” has the same meaning in the period of restoration provision. The only reasonable construction of “property” is Streamline's own personal property such as computers, desks, chairs, etc.

According to the court, this interpretation is logical in light of the fact that the policy's business income coverage provides for “the actual loss of business income you sustained due to the necessary suspension of your operations during the period of restoration.” The condition that the business income coverage applies to the suspension of the plaintiff's “operations” indicates that it is dependent only on replacing what is necessary to resume those operations, mainly Streamline's personal property, not a specific office at a specific location. Therefore, the court concluded:

“Such a construction makes logical sense. It is wholly unreasonable to think that the period of restoration should be tied to the rebuilding of real property over which neither the insured nor the insurer had any control, instead of tying it to a process that the plaintiff controlled: the acquisition of replacement office space and the installation of the plaintiff's personal property in that space.” Id. at *8.

In Zurich American Ins. Co. v. ABM Industries, Inc., 265 F.Supp.2d 302 (S.D.N.Y. May 29, 2003), ABM provided janitorial, lighting and engineering services at the World Trade Center prior to and on 9/11. After the destruction of the World Trade Center, ABM sought recovery from Zurich, its commercial property carrier, for the value of personal property that had been destroyed and for lost income. Zurich did not dispute coverage for the value of ABM's destroyed property and contingent business interruption up to the $10 million policy sublimit.

However, ABM claimed additional coverage under the policy's conventional business interruption provisions and extra expense coverage. The policy provided coverage for loss to ABM's real and personal property, including: (a) “property owned, controlled, used, leased or intended for use” by ABM; (b) loss resulting directly from the interruption of ABM's business caused by direct physical loss or damage to insured property at an insured location; (c) extra expense incurred as a result of loss to ABM's real or personal property; and (d) losses due to other specified ways, including off-premises utilities, impounded water, “leader property,” interruption by civil or military authority and “ingress/egress.”

ABM first asserted that it “used,” “controlled” or “operated” the World Trade Center in connection with the services it provided at the facility. For example, ABM argued that it “used” the common areas and tenanted premises of the World Trade Center to perform its operations and generate income. The ABM court noted that the plain meaning of “use” means to “carry out a purpose or action by means of.” Therefore, ABM could carry out its purpose of cleaning its customers' premises by means of a mop, broom, or other cleaning tool, and could carry out its purpose of generating income by means of the work it performed. The court held, however, that ABM did not accomplish any purpose “by means of” the property at issue, meaning the physical premises occupied by tenants or open to the general public. The World Trade Center was the location of ABM's acts, not the means through which the acts were accomplished.

ABM also argued that it somehow “controlled” the premises at the World Trade Center. The court held that, while no one questions the importance of janitorial services in modern urban society, “the notion that by providing such services to a building's owner or tenants the janitor thereby controls the building is the functional equivalent of saying that the ground crew controls Yankee Stadium. This umpire is not persuaded.” ABM, 265 F.Supp.2d at 307. ABM also sought coverage for various extra expenses, namely increased employee costs, employee termination costs, employee wages and expenses and increased unemployment costs resulting from the destruction of the tenanted premises and common areas ABM serviced. The court noted that the policy provided coverage for extra expenses resulting from the loss, damage or destruction of real or personal property. Because ABM did not own, control, use or lease the tenanted areas or common areas, the court concluded that these claims failed as a matter of law.

ABM also sought coverage for claims relating to off-premises utilities, impounded water, interruption by civil or military authority and ingress/egress. The court held that ABM was not entitled to coverage because such losses did not result from the conditions identified in the applicable policy provisions. Rather, the premises of ABM's customers were no longer available to be served. In addition, ABM also sought coverage against loss or damage to a “leader property,” meaning a property the insured does not own or operate, but located in the same vicinity as the insured, which attracts business to the insured. The court held that the World Trade Center was not a “leader property” to ABM because the World Trade Center was the site and source of ABM's business: “This is not a case, for example, where a related business located near a ballpark might suffer a loss if the ballpark were destroyed. Here, rather, the destruction of the World Trade Center caused loss to ABM's business by destroying the tenanted premises and common areas where ABM supplied its services.” Id. In addition, the losses allegedly due to off-premises utility lines, lack of water supply, actions of civil authority and prevention of ingress/egress were not covered because, assuming these losses did not occur, ABM would still have lost its entire business in the World Trade Center as a result of the total destruction of its customers' premises.

Lastly, the court dismissed ABM's claim for consequential damages arising from Zurich's alleged breach of contract because ABM failed to specify the nature of the consequential damages or set forth competent evidence showing, as required for any such claim, that the consequential damages “were foreseeable and within the contemplation of the parties at the time the contract was made.” ABM, 265 F.Supp.2d at 309 (citing Martin v. Metro Property & Cas. Ins. Co., 238 A.D.2d 389, 656 N.Y.S.2d 318, 318-19 (2d Dep't. 1997)).

The well-reasoned rulings in Streamline Capital and ABM are important in several respects. First, the Streamline Capital court correctly concluded that the “property” in the period of restoration clause is the property owned by the insured and, in that case, meant the property located in the insured's World Trade Center offices. To interpret “property” to mean all real and personal property at the World Trade Center would dramatically affect the scope and effect of business interruption coverage beyond the reasonable contemplation of the parties. Accepting Streamline's argument, the period of restoration would then be dependent on circumstances beyond the control or influence of the insured: here, the various local, state and national interests effecting the development of the World Trade Center.

Second, the Streamline Capital and ABM courts both rejected the insureds' claims for consequential damages. In New York and in most jurisdictions, recovery for consequential damages may be permitted only if the damages were within the contemplation of the parties at the time the policy was issued. Thus, in most circumstances, a policyholder should not be able to recover any type of consequential damages associated with an alleged breach of contract because it would not be able to effectively claim that the parties contemplated such damages when the policy was issued. See also Continental Information Systems Corp. v. Federal Insurance Co., No. 02 Civ. 4168, 2003 WL 145561 (S.D.N.Y. Jan. 17, 2003) (mere purchase of business interruption insurance does not show that losses due to alleged failure to pay claims was within contemplation of the parties at the time of contracting).

Third, the ABM decision is important because it correctly controls the scope of business interruption and extra expense coverage associated with service industry insureds. ABM establishes that insureds generally do not “use” or “control” properties that utilize the insured's services. Likewise, the properties that are the focal point of the insured's services typically are not “leader properties” because they are the site and source of the insured's business.

As the Streamline Capital and ABM cases illustrate, insureds suffering losses as a result of 9/11 frequently argue that receiving the value of their property is inadequate. While many of these claims are legitimate, insurance practitioners should be careful to scrutinize the wording of the business interruption coverage to make sure the policyholders are not seeking more than they are entitled to under the policy. The cases cited above are just two examples of insureds overreaching, and of courts rejecting these arguments in favor of applying the plain meaning of the business interruption coverage.

Michael Hamilton is a senior member in the Insurance Litigation Department of Cozen O' Connor. His practice areas include an emphasis in insurance coverage and bad faith litigation and commercial litigation. He lectures frequently on insurance matters for local, state and national organizations. He is also a member of the Defense Research Institute and its Insurance Law Committee, where he serves as a co-editor of the Covered Events newsletter.