DD 10/7/08: Excluding Terrorism as a covered risk under Fire and Extended Coverage policy is against public policy in New York.

Daily Development for Tuesday, October 7, 2008 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Husch Blackwell Sanders Kansas City, Missouri dirt@umkc.edu INSURANCE; TERRORISM INSURANCE: 1989 ground lease requiring standard extended coverage insurance does not allow ground tenant obtaining renewal policy in 2003 to purchase coverage that excludes the risk of terrorism. TAG 380 v ComMet 380, 890 N.E.2d 195 (New York 2008) TAG's 25 year ground lease with its lessor ComMet for a building at 380 Madison Avenue in New York, executed in 1989, required it to maintain insurance against all risks "included under the standard Extended Coverage Endorsement as presently adopted". In 2003, when TAG's old insurance policy expired, it purchased a new policy, which specifically excluded terrorism. (This new policy also appeared to undervalue the building, but TAG had privately purchased an additional policy that appears to have covered the full value of the property and did not exclude terrorism; why this was not disclosed to the ground lessor is not explained in the decision Upon learning of the apparent insurance shortfall, ComMet sent a notice of default to TAG. TAG responded by filing this action for declaratory relief as to its insurance obligations (a "Yellowstone" injunction in New York). Supreme Court (the trial court) held that TAG was in breach for lacking terrorism coverage, but the Appellate Division reversed and held that TAG had no such duty. However, the Court of Appeals agreed with the trial court, and held that the insurance TAG had obtained violated state insurance law as well as its obligations under its ground lease. In 1989, when the ground lease was executed, the insurance coverage that was required under it did not exclude terrorism. The replacement policy that TAG ostensibly obtained (i.e., the one known to ComMet) clearly did exclude that risk, and therefore violated the terms of the lease. Furthermore, New York Insurance Law §3404 prohibits the issuance of policies that exclude particular risks that are otherwise included in a standard policy. (And the Superintendent of Insurance has declared that terrorism exclusions are against the state's public policy and are therefore prohibited.) Because ComMet had not been informed as to the additional coverage that TAG had purchased, ComMet was entitled under the lease to purchase such coverage itself and to recover that cost as damages from TAG, as well as attorney's fees. (In a footnote, the court mentioned that the trial court had also held that ComMet was obliged - under its mortgage with GMAC Commercial Mortgage Corp. - to provide such insurance coverage itself pursuant to its loan agreement. This holding apparently was not further appealed.) Comment 1: The case turns in large part on the definition of “fire and extended coverage insurance” as described in New York insurance law. That law requires that when a fire insurance policy must contain no less than the coverage set forth in the statutory standard form policy, and that “if a policy contains a less favorable term, it is enforceable as if it conformed with the statutory standard. The court here did not attempt to read the policy obtained by TAG as necessarily including terrorist coverage, since it specifically and categorically precluded such coverage. The court simply held that such a fire policy was illegal in New York. It was not necessary for the court to redefine the insurance provided under the policy because it also concluded that TAG had not satisfied the lease provisions requiring coverage equivalent to that provided by a fire and extended coverage policy as such policy existed at the time of the execution of the lease. Since terrorism was not excluded at the time of lease execution, a policy that excluded terrorism did not satisfy the insurance requirement of the lease, and therefore landlord was justified in buying substitute insurance (which it did) and charging the cost to the tenant. Comment 2: The editor flagged this case in part because of the notion that New York has held insurance exclusion of terrorism coverage invalid as against state policy. This happened after the operative facts of this case, but obviously in the future will render moot arguments about whether the fire and extended coverage required by the policy can exclude fire or other casualties caused by terrorism. Also see: Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 02 Civ. 7378 ( S. D. N.Y. 2/25/04) (the DIRT DD for 12/13/04) The court there first ruled that a requirement in mortgage instrument that mortgagor acquire all risk” policy does not obligate the mortgagor to acquire all of the coverage available under an “all risk” policy at the time of the mortgage, but only to acquire insurance generally regarded as the equivalent of the “all risk” policy as traded in the marketplace at the time for acquisition of the insurance coverage. But the court took away the mortgagor’s victory by then holding that the mortgagee could require the mortgagor to obtain terrorism insurance under the provision requiring mortgagor to acquire such other insurance as lender “reasonably may request.” Requirement for terrorism coverage was not unreasonable, despite the fact that the $300,000 annual cost for that item alone exceeded the total insurance budget from prior years. Readers are encouraged to respond to or criticize this posting. 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