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By Richard Lewis, Partner, Reed Smith LLP
In Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co., the United States Court of Appeals for the Second Circuit ended a protracted dispute between an insurance company and a policyholder seeking to recover loss of profits at its drug store which was destroyed by the attacks of September 11, 2001. The Court of Appeals had previously concluded that the policyholder was not entitled to Business Income for a Period of Restoration equivalent to the time needed to rebuild the World Trade Center (“WTC”), but only the time needed to resume operations at a new location.
This decision drove decisions in a host of other cases involving policyholders seeking Business Income coverage for loss when their businesses at the WTC were destroyed; most of these decisions did not give the policyholder the benefit of their location but capped them at the time needed, hypothetically, to replace their property elsewhere. Further, insurance companies nationwide have used this decision to avoid paying for the value of location.
At issue in the decision discussed in this commentary was the policyholder’s right to claim loss not only for a Period of Restoration equivalent to the time needed to relocate, but for a year’s worth of loss in the Extended Period of Restoration. Specifically, an appraisal panel had awarded the policyholder two years of loss in the Period of Restoration, and then an additional year of loss in the Extended Period of Restoration. The Court of Appeals, however, rejected an appraisal panel’s award of a year’s worth of loss in the Extended Period of Restoration because the policyholder had not, in fact, reopened at the WTC.
Taken together, these decisions will work great mischief for policyholders. Specifically, insurance companies will use these decisions to ensure that Business Income insurance does not perform its stated purpose: to do for the policyholder what it would have done had there been no loss.
For analysis on business interruption insurance, see New Appleman Insurance Law Practice Guide, Chapter 31: UNDERSTANDING COMMERCIAL PROPERTY INSURANCE.
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Richard Lewis is a partner in the New York office of Reed Smith LLP. He has experience litigating a wide variety of first- and third-party insurance coverage issues. Along with John Ellison, Richard secured one of the most important policyholder decisions from the WTC attacks, a reversal of summary judgment, and grant of summary judgment, by the Second Circuit in Zurich American Insurance Co. v. ABM Industries, Inc., 397 F.3d 158 (2d Cir. 2005). Richard is the author of the treatise Business Income Insurance Disputes (Aspen 2006), which he supplements on an annual basis by reading and reviewing all time-element cases decided in the previous year, along with relevant briefing and commentary.