Attorney weighs insurance issues in wake of tragegy

Real Estate Weekly, Oct 24, 2001 by Mark Schwarz

The depth of the tragedy that struck New York's citizens and assets on Sept. 11 was hardly lost on the real estate industry. The courage and spirit of the rescue program imbued the efforts of many within the industry to save businesses and jobs and set about maintaining the vitality of the markets. Hand in glove with securing the safety of New York's citizens is the need to plan for the future of the commercial markets, which were affected by the attacks.

No sooner did the recovery efforts commence than lawyers who were participating in recovery efforts began to face a myriad of questions. While most of our experience involves representation of victims seeking to conclude financings with loan agencies that help affected businesses, many victims are scrambling to analyze their leases and insurance policies to assess their chances for recovering claims. The starting point for any discussion in this area concerns the importance of immediately notifying the insurance carrier, even if the extent and nature of the claims are unknown. This is because the companies have the least leeway on this issue, disposed as they might. be to assisting their customers. Notification may take the form of a documented phone call, followed by a letter either directly to the claims office or a similar communication to the agent.

It is critical to bear in mind that precise knowledge of the claim or its magnitude is not necessary in order to give the notice, nor does it matter whether the, potential claim is beneficial or adverse, since many policies require notification if the policyholder anticipates a claim being made against it. And since price tags on medical treatment and replacement of physical assets have risen dramatically, increasing the possibility of under-coverage, it is important to review all business policies to ascertain the existence of supplemental or excess coverage and make the required notifications.

The threat of being underinsured makes an analysis of potential claims and their value of utmost importance. While lease provisions vary widely, the standard REBNY lease insurance clause provides for building coverage to be carried by the owner, with insurance of contents to be carried by the tenant. With respect to liability claims, the lease contains a broad-form assumption by the tenant of liability for personal injury claims on the part of anyone using the demised premises with the permission of the tenant. Further, the standard form requires both the landlord and the tenant to look first to their own insurance coverage, even though potential liability may exist in the case. of another party. It is nearly uniform in commercial leases that the tenant may cease the payment of rent from and after the moment the destruction renders the premises or portion thereof unfit for use.

What does all this mean? While the tenant is no longer obligated for the payment of current rent, separate and apart from needing to find replacement space, the tenant will be expected to observe the terms of the lease unless the landlord exercises his option to rebuild. This would entail continuing to maintain insurance coverage, compliance with financial covenants, and the like.

In the case of the recent events, the landlord's decision to rebuild becomes highly problematic since the landlord will have his own extensive adjustment issues to solve before a resolution on this point can be reached. While most leases limit the time the landlord has to make the determination (180 days in the REBNY form), conflagrations such as this will frequently excuse the landlord from the time limitation, thereby further undercutting the tenant's need for certainty. Another red herring is the clause limiting the landlord's obligation to restore to the availability of insurance proceeds which, while adjusted up front, may turn out to be too insufficient or too late and may also be subject to claims of the lenders. An adjunct to these concerns is the likelihood of disputes between the parties as to when the space is ready for re-occupancy and when the resumption of the obligation to pay rent becomes effective. Under these circumstances, we are advising tenants to carefully analyze their options in a mark et in flux, with a view to negotiating out of their lease commitments in buildings where restoration or rebuilding is likely to be a protracted undertaking. Even in situations where the tenants is paying premiums to the market, the landlord may be willing to pay for the flexibility that a release from the tenant will buy. The tenant in this case should obtain a written surrender and acceptance agreement, coupled with a reservation of all claims under the applicable insurance policies, and a general release from the landlord.

Implicit in almost every commercial lease is the apportionment to the tenant of the risk of loss of personal property, such as office furnishings, fixtures, and finishes. Despite landlords' extending themselves in this crisis to assist their tenants' relocation and comeback efforts, we have seen that landlords are holding firm on insisting that tenant press their claims with their insurers and not with the landlords'. Property/ casualty policies must be scrutinized to learn what coverage is available for lost revenues, rental for substitute quarters, equipment purchases, and relocation expenses.