New York Federal Court Grants Insurer's Cross-Motion for Summary Judgment Regarding United Airlines' Alleged Business Interruption Loss Stemming from September 11, 2001 Terrorist Attacks
September, 2005
NEW YORK FEDERAL COURT GRANTS INSURER’S CROSS-MOTION FOR SUMMARY JUDGMENT
REGARDING UNITED AIRLINES’ ALLEGED BUSINESS INTERRUPTION LOSS STEMMING FROM SEPTEMBER 11, 2001 TERRORIST ATTACKS
by Mindy M. Medley
mmedley@clausen.com
The U.S. District Court for the Southern District of New York held that the policy issued by the Insurance Company of the State of Pennsylvania (“ISOP”) to United Airlines (“UAL”) did not provide coverage for UAL’s claimed business interruption expenses allegedly caused by a “system-wide loss of revenue resulting from the September 11, 2001 terrorist attacks at the World Trade Center (‘WTC’) and the Pentagon.…” United Airlines, Inc. v. Insurance Co. of the State of Pennsylvania, slip op., No. 03 Civ. 5189(RMB), 2005 WL 756883 (S.D.N.Y., 2005).
The tragic events of September 11, 2001 caused catastrophic property damage and personal injuries in four locations in the United States, and prompted the Federal Aviation Administration (“FAA”) to issue a Notice to Airmen order, closing all operations at all airports nationwide. The FAA’s Notice to Airmen order was lifted on September 14, 2001, but Reagan National Airport remained closed until October 4, 2001.
As a result of the events of September 11, 2001 and the FAA’s order, UAL submitted a claim for property damage and business interruption expenses to ISOP in the amount of approximately $1.2 billion. UAL claimed it was entitled to coverage for damage related to the destruction of its ticket counter that was in the WTC, and for ash and debris removal that accumulated at its gates at Reagan National Airport, as well as significant business interruption expenses. “On September 25, 2003, ISOP issued a letter to UAL disputing ‘UAL’s interpretation of the Policy insofar as UAL claimed that it was entitled to reimbursement for loss not directly related to the destruction of the ticket kiosk in the World Trade Center.’” Litigation ensued.
“On June 1, 2004, UAL moved for summary judgment . . . as to all claims . . . and counterclaims one through five filed by ISOP…. On July 9, 2004, ISOP opposed UAL’s Motion and cross-moved for summary judgment on all claims, including counterclaims six and seven….” Although various claims and counterclaims were at issue, the Southern District of New York narrowed the disputed issues to three:
(A) whether ‘physical damage’ is a prerequisite for business interruption coverage under the Policy . . . ;
(B) whether (i) destruction of UAL’s ticket counter at the WTC and/or (ii) an ‘accumulation of ash’ at UAL’s Reagan Airport gates entitle UAL to system-wide business interruption coverage . . . ; and
(C) whether the Pentagon is an ‘adjacent premises’ to Reagan Airport under the Civil Authority provision of the Policy….
The Southern District of New York denied UAL’s motion for summary judgment and granted ISOP’s cross-motion for summary judgment on these three issues by primarily applying the longstanding standard principles of contract interpretation.
UAL claimed that nothing in the Policy’s Insuring Agreement expressly required physical damage to occur at insured locations for business interruption coverage to be triggered. Specifically, UAL argued that because the Policy’s Insuring Agreement used only the unqualified word “damage” -- “without any adjective -- and no relevant exclusion,” that physical damage is not necessary to trigger business interruption coverage. ISOP responded that the plain and ordinary meaning of “damage” contemplates only physical damage: “. . . despite UAL’s contention, the word ‘physical’ need not precede the word damage to convey that meaning.” ISOP further responded that the Policy’s Civil Authority provision would be rendered inexplicable and/or useless if “damage” did not mean “physical damage.” The Policy’s Civil Authority provision is an extension of coverage which provided coverage in certain circumstances when the insured is prohibited access to an insured location because of damage to an adjacent location. “. . . [I]f, as UAL argues, it were able to recover for business interruption losses in the absence of any physical damage to an Insured Location, there would be no need to ‘specifically extend’ coverage to cases involving ‘damage to an adjacent location.’” The court agreed with ISOP.
UAL further argued that even if physical damage is necessary for business interruption coverage to be triggered, that UAL “manifestly and indisputably” suffered physical damage when its WTC ticket counter was destroyed, and when its Reagan National gates were “impacted” by ash and debris. ISOP did not dispute that UAL’s WTC ticket counter was destroyed, and instead offered to indemnify UAL for any business interruption losses it could attribute to the loss of the ticket counter. However, ISOP argued that “‘damage to that one ticket counter . . . did not cause the ground stop order or the denial of access to UAL’s airport facilities and, thus, . . . UAL is not entitled to system-wide loss of gross earnings based on this claim.” ISOP also responded that the ash and debris at UAL’s Reagan National gates played no role in the suspension of flights at Reagan National or any other airport to which United flew. The court agreed with ISOP:
UAL’s position that destruction of its ticket counter in the WTC and/or an ‘accumulation of ash’ at Reagan Airport triggers coverage for system-wide business interruption losses approaching $1.2 billion is untenable because the amount of recovery sought bears no relation to the actual damage suffered at the WTC Insured Location…. Nor does the Policy support the conclusion that UAL is entitled to Reagan Airport business interruption losses as a result of an ‘accumulation of ash at the United gates.’ *** The Policy covers business interruption losses ‘for only such length of time as would be required . . . to rebuild, repair or replace such part of the Insured Location(s) as has been damaged or destroyed.’ There is nothing in the record presented by Plaintiff [UAL] to indicate that UAL’s gates required rebuilding, repair or replacement and, if so, for what period of time.
Finally, the Southern District of New York considered whether the Policy’s Civil Authority provision provided coverage for UAL’s Reagan National related losses. The Policy’s Civil Authority provision provided coverage when access was prohibited to an insured location because of damage to an adjacent location. Resolution of this issue turned on whether the Pentagon was “adjacent” to Reagan National. Once again, the court agreed with ISOP.
The Southern District of New York held that it could not “reasonably find that the Pentagon and Reagan Airport are ‘adjacent.’ Among other things, the Pentagon is (at least) 3.4 miles away by car from Reagan Airport and the two facilities are separated by several intervening structures and properties (that do not appear to have suffered any physical damage).” The court applied the plain meaning of “adjacent,” and ruled in favor of ISOP.
Learning Point: The Southern District of New York primarily applied longstanding principles of contract interpretation to resolve a coverage dispute involving a recent tragedy with significant impact.?•
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