Period of Recovery for Janitors' Business Interruption Claim Held To Be the Hypothetical Period of Time Required to Rebuild the World Trade Center
August, 2006
ABM Industries Inc. (“ABM”) was the facility services contractor that provided janitorial, lighting and engineering services for the common areas of the World Trade Center (“WTC”), and approximately 97% of its tenants. In Zurich Am. Ins. Co. v. ABM Industries, Inc., 2006 U.S. Dist. LEXIS 28249; 2006 WL 1293360 (S.D.N.Y. May 11, 2006), the United States District Court for the Southern District of New York held that ABM’s appropriate period of recovery under its Business Interruption coverage was the hypothetical period of time required to rebuild the WTC.
Zurich American Insurance Co. (“Zurich”) issued a policy to ABM which provided business interruption and extra expense coverage for “loss resulting directly from the necessary interruption of [ABM’s] business caused by direct physical loss or damage . . . to insured property at an insured location,” for the period including September 11, 2001. The policy also provided coverage for loss or damage to “real and personal property,” including “property owned, controlled, used, leased, or intended for use” by ABM.
After the tragic events of September 11, 2001, Zurich brought a declaratory judgment action to determine the extent of its liability to ABM for the losses and expenses ABM incurred as a result of the destruction of the WTC. Both parties moved for partial summary judgment and the Southern District granted Zurich’s motion, holding that ABM was not entitled to coverage under the Business Interruption clause of the policy because its loss resulted from the destruction of property that was not “owned, controlled, used, leased or intended for use” by ABM. Zurich Am. Ins. Co. v. ABM Industries, Inc., 265 F.Supp.2d 302 (S.D.N.Y. 2003). The Second Circuit Court of Appeals reversed the Southern District, holding that ABM “used” the property within the meaning of the policy. Zurich Am. Ins. Co. v. ABM Industries, Inc., 397 F.3d 158 (2d Cir. 2005). The Second Circuit remanded the case back to the Southern District to determine the extent of ABM’s damages under the Business Interruption provision, as well as whether the losses claimed under the extra expense and civil authority provisions resulted from the destruction of the WTC. Id.
In order to determine the extent of ABM’s damages under the Business Interruption provision, the Southern District needed to determine ABM’s appropriate period of recovery. According to the policy: “the length of time for which loss may be claimed . . . shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace the property that has been destroyed or damaged.”
ABM argued that since the property that was destroyed was the WTC buildings, the appropriate period of recovery should be the time required with the exercise of due diligence and dispatch to rebuild or replace the WTC. Zurich Am. Ins. Co. v. ABM Industries, Inc., 2006 U.S. Dist. LEXIS 28249 at 5; 2006 WL 1293360 at 2. Zurich claimed that the period of recovery should end when ABM’s customers, the WTC tenants, relocated their business. Id. Zurich premised this argument on two cases interpreting business interruption policies issued to tenants of the WTC: Duane Reade Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384 (2d Cir. 2005) and Streamline Capital, L.L.C. v. Hartford Casualty Ins. Co., 2003 U.S. Dist. LEXIS 14677 (S.D.N.Y. 2003).
In Duane Reade and Streamline Capital, the courts held that the property insured under the policies involved in those cases was the businesses’ personal property at the WTC, not the WTC buildings themselves. Therefore, those courts held that the period of restoration should end when the businesses could resume operations at different locations, not when the construction of the WTC could theoretically be completed.
In ABM Industries, the Southern District found for ABM, holding that the appropriate period of recovery is the hypothetical length of time required to rebuild the WTC. In reaching this decision, the Court found that the nature of ABM’s business was different from those at issue in Duane Reade and Streamline Capital, in that ABM could not simply relocate to another building to carry on its business. Since ABM’s business was “fundamentally connected” to its use of the common spaces of the WTC, the Court held that restoration of the WTC itself was necessary for ABM to resume its operations. However, in light of the fact that ABM’s contract to service the WTC was due to expire in January, 2004, ABM will need to establish that its contract would have been renewed in order to recover for business interruption after that date.
Next, the Court turned to whether ABM’s extra expenses resulted from the destruction of the WTC. ABM claimed that after September 11, 2001, it incurred extra expenses for increased salary costs and increased unemployment insurance premiums, as well as costs related to the termination of its employees when ABM’s contract with Silverstein Properties was cancelled.
The Court held that summary judgment was inappropriate on this issue, since genuinely disputed issues of fact remained as to whether the claimed extra expenses resulted from the destruction of the WTC, or from various other factors, such as ABM’s contract with its union, general economic conditions in New York following the 9/11 attacks, and Silverstein’s cancellation of ABM’s contract.
Learning Point:
Upon destruction of a building, janitors, engineers and other service contractors that operate out of the common areas of that building to service the building’s tenants will experience a business income loss until the building is rebuilt, even though the insured and the insurer have no control over how long the reconstruction will take. •
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