No Business Loss Coverage Based On Nearby Collapse
February 17, 2010
In a case of possible nationwide significance, the Arizona Court of Appeals recently held that no first-party interruption-of-business coverage was available to an insured hotel operator whose business operations were adversely affected by the partial collapse of a nearby structure under construction, where the insured's hotel did not sustain any physical damage. Aztar Corp. v. U.S. Fire Insurance Co., 2010 WL 334549 (Ariz. Ct. App. Jan. 28, 2010).
The insured, Aztar, was represented by David Goodwin of Covington & Burling, San Francisco. Melinda S. Kollross, Edward M. Kay, Andrew C. Jacobson, Celeste A. Hill, and Courtney E. Murphy of Clausen, Miller P.C., Chicago, represented U.S. Fire and other excess insurers. Two other excess insurers, Hartford and Zurich, were represented by, respectively, Scott Salmon of the Cavanagh Law Firm, Phoenix, and Philip Silverberg of Mound, Cotton, Wollan & Greengrass, New York.
Aztar owned a resort hotel and casino in Atlantic City, and began construction on a 27-story expansion at an adjacent site in 2002. The expansion was scheduled for completion in April 2004. In 2003, six floors of the expansion collapsed, and it took Aztar until November 2004 to clean up the debris. The collapse caused a seven-month delay in utilizing the expansion.
Due to the collapse, New Jersey government authorities temporarily shut down the main entry street to Aztar's existing hotel, a parking structure, and certain other access ways. The hotel itself, however, did not sustain any physical damage and remained fully operational. In following months the hotel nevertheless experienced a decrease in patronage due to psychological and other collapse-related factors, resulting in a $105 million business loss.
Lexington Insurance Co. issued Aztar's primary layer of property insurance. U.S. Fire, Hartford, Zurich, and other insurers provided excess coverage and incorporated the terms of the Lexington policy. Upon Aztar's submission of business interruption claims to Lexington and the excess insurers, Lexington accepted certain claims but denied coverage for others. The excess insurers denied coverage, taking the position that their policies provided coverage only if the hotel itself sustained damage or otherwise had to shut down.
Aztar brought suit, and eventually Lexington agreed to pay its $5 million policy limit, a portion of which covered the loss from the government closure of the main entry street and other access ways. Aztar and the excess insurers then filed cross-summary judgment motions, and the trial court held for the insurers, finding that the business interruption coverage did not apply absent damage to the hotel or an inability to operate at full capacity. Aztar took this appeal.
In an opinion by Judge Daniel Barker, the Arizona Court of Appeals affirmed, but on different grounds. Barker initially addressed whether the business interruption coverage applied to decreased patronage where the covered property suffering the lost business was not damaged and was physically able to function at full capacity.
He focused on the business interruption policy language in Part II ¶1 of the policy, which stated in part:
"This policy insures against loss resulting directly from necessary interruption of business, whether total or partial, caused by damage to or destruction of all real or personal property … by the peril(s) insured against . …"
He noted that the phrase "total or partial" contemplated coverage even if the insured's entire business were not impacted.
Barker then considered whether the term "interruption of business" referred only to an inability to use one's premises to produce products or make services available, or whether it also referred to an inability to sell goods or services for other reasons.
He analogized the situation to an ice cream factory that housed cows for milk production in one building, produced ice cream in a second building, and provided parking facilities for customers in a third building. If the building housing cows partially burned down, causing the factory to cut its ice cream production in half, the factory, according to Barker, would be entitled to coverage because its "business" was interrupted.
By the same token, said Barker, if the parking facility were partially destroyed, impeding customer access to the facility, the business would suffer a similar business interruption even though it had the ability to produce the same amount of ice cream. In his view, so long as the three structures were mutually dependent, the result for the insured would be the same, and coverage should be provided, whether damage were to occur to the supply-related structure or the demand-related structure.
He therefore concluded that the trial court's holding that there was no business interruption coverage because the hotel still had the same operational capacity, was in error.
Notwithstanding this conclusion, Barker examined in greater detail the two types of loss for which Aztar was seeking coverage. One was for "contingent business interruption" due to a decrease in anticipated patronage from new customers who would have stayed at the expansion facility over a sevenmonth period.
Aztar sought coverage for contingent business interruption principally under policy language extending coverage for business interruption beyond Part II ¶1, quoted above, to include "contributing … properties of the insured."
Barker, however, construed the term "contributing property" to mean property presently in operation at the time of the loss. Since the expansion collapsed before it was completed and opened for business, it could not be viewed as "contributing."
Aztar also argued that it was entitled to contingent business interruption coverage under the more generalized language of Part II ¶1, which applied to business interruption caused by damage to "real or personal property" of the insured.
Barker, however, said this argument was misplaced because the "contributing property" provision set forth the particularized conditions under which coverage might exist for damage to the extension, and those conditions were not here met.
The second type of loss for which Aztar sought coverage was for the decrease in existing patronage at the hotel due to psychological and other factors. Relying again on Part II ¶1, Aztar contended that the policy did not require damage to or destruction of covered property for business interruption coverage to apply, while the insurers took the position that the reference to "real or personal property" necessarily contemplated damage to covered property.
Barker agreed with the insurers, noting that under Aztar's interpretation, damage to any real or personal property located anywhere in the United States could potentially trigger coverage — an unreasonable interpretation of the policy.
Moreover, said Barker, the expansion was not covered property at the time of the collapse in 2003. Aztar argued to the contrary, but Barker construed policy language referring to April 1, 2004, as being the date on which the expansion project would be endorsed onto the property, as the commencement of coverage for the expansion. Accordingly, Aztar's claim based on a decrease in existing patronage was not a covered loss.
Barker also rejected Aztar's argument that the excess insurers were liable for business interruption due to impaired access to its hotel caused by New Jersey governmental authorities. Express policy language covered civil-authority access impairment loss for a 30-day period. The 30-day loss, however, was compensated by Lexington under its primary policy, and Barker found that a generalized 365-day extension period, relied on by Aztar, was not applicable.
The court therefore affirmed summary judgment in favor of the excess insurers.
