Daily Development for Monday, December 13, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri

Today’s DD is another Jack Murray contribution.

INSURANCE; TERRORISM INSURANCE; REQUIRED COVERAGE; "ALL RISK": New York appellate court rules that a mortgagor is obligated to obtain additional terrorism insurance coverage and that the mortgagee had properly obtained such coverage at the mortgagor's expense.

BFP 245 Park Co. v. GMAC Commercial Mortgage Corp., 2004 N.Y. App. Div. LEXIS 14394 (Nov. 30, 2004).
In February 2001, BFP 245 Park Co. ("BFP") obtained a $500 million mortgage on 245 Park Avenue, a commercial building near Grand Central Terminal in Manhattan, from GMAC Commercial Mortgage Corporation ("GMAC"). The mortgage provided that BFP was obligated to obtain and maintain insurance for the property against "any peril now or hereafter included within the classification 'All Risk' or 'Special Perils,' in each case . . . in an amount equal to 100% of 'Full Replacement Cost.' " A separate mortgage provision required BFP to obtain "such other insurance . . . as Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against" for other comparable properties in Manhattan. The mortgage further provided that GMAC was entitled to protect its interest by obtaining, without notice to plaintiff, such insurance coverage as "in its reasonable discretion" it deemed appropriate consistent with the mortgage, at BFP's e!

The appellate court upheld the ruling of the trial court, which ruled in July 2004 (in an unpublished opinion) that the "unambiguous" language in the mortgage clearly provided, as a matter of law, that BFP was required to obtain terrorism coverage under either the "all risks" provision or the "other insurance" provision in the mortgage. The appellate court found that the trial court had correctly distinguished the "all risks" provision in this mortgage from that in Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 307 F.Supp. 2d 534 (SD NY 2004), because the "now or hereafter" language contained in the GMAC mortgage (which was not contained in the Wells Fargo mortgage) "contemplated a flexible obligation subject to change as the marketplace recognized new insurable risks."
The appellate court rejected BFP's contention that the "other insurance" provision rendered the "all risks" provision meaningless, approving the trial court's finding that "the 'other insurance' provision also applied to other types of insurance required under the mortgage provision. The appellate court also distinguished its holding in Four Times Sq. Assocs., LLC v. Cigna Invs., Inc., 74 N.Y.S. 2d 1 (2003), in which it enjoined a forced placement of terrorism insurance coverage by the lender, because in that case it had merely held that although there was a prima facie likelihood of success on the merits of the borrower's claim, it expressly stated that the contractual rights of the parties were not being determined and, in any event, the grant of a preliminary injunction had no preclusive effect.

The appellate court also ruled that GMAC's position (including its "forced placement" of the coverage) was justified based on the "all risks" provision alone, and that BFP was obligated to obtain the additional coverage requested by GMAC under the "other insurance" provision "notwithstanding the possible flaws in the coverage ultimately obtained by [GMAC], the lesser demands made by other lenders and the high cost of such coverage." The appellate court reasoned that it was not even a condition precedent to GMAC's request for the additional coverage that the risk be "commonly insured against," and that in any event it had in fact demonstrated that the terrorism risk was commonly insured against (even though not "universally" insured against and some commercial buildings in Manhattan did not have terrorism coverage).

Reporter’s Comment 1: Apparently Brookfield Properties (the equity holder of the BFP LLC) had taken out terrorism insurance for its entire portfolio, but GMAC, which acted as agent for bondholders, asked for more and bought the insurance itself. Brookfield then sued over the cost of the insurance, claiming it was not required under the mortgage or its own policy.

Reporter’s Comment 2: In the Omni Berkshire case cited by the New York appellate court, which case was decided in March 2004, the Federal District Court for the Southern District of New York held that the applicable loan agreement was ambiguous because it did not define "all risk" or "comprehensive all risk insurance." The court stated that, "In fact, the term 'all risk' is a misnomer, for an 'all risk' policy does not cover 'all risks' but only risks that are not specifically excluded. The Agreement does not spell out the parameters of the required 'all risk' insurance, and the Agreement itself makes no reference terrorism or terrorism insurance." But the court also noted that "[i]t was commonly understood that the standard 'all risk' policy had evolved over time and that it would continue to evolve over time," referring to risks such as Y2K, mold, and terrorism exclusions that did not exist until recently. Id. at 540. The court in Omni Berkshire reasoned that when the part!
ies wa
nted to deviate from the standard "all risk" policy to include coverage for risks traditionally excluded (such as flood and earthquake) they explicitly added language to that effect. Therefore, the court held, the parties did not intend the borrower to forever maintain "all risk" coverage precisely as it existed in 1998 (when the loan agreement was entered into), and the borrower was not required to purchase a separate terrorism insurance policy. (Note that the court in the GMAC case distinguished this holding on the basis that the applicable mortgage provision in the GMAC mortgage required the borrower to obtain coverage against any peril "now or hereafter" included within the "all risk" classification.) But the court in the Omni Berkshire case did rule that the lender (actually, the servicing agent for the lender) acted reasonably in requesting additional terrorism insurance coverage pursuant to the "other reasonable insurance" clause in the loan agreement.

Editor's Comment: The editor agreed with the Omni Berkshire case and agrees that case is distinguishable from the one at hand. The "now or hereafter language makes all the difference to the Editor.

Reporter Jack Murray is with First American Title Insurance Company, Chicago office.

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