In Tag 380, LLC v. ComMet 380 , the lease contained the following requirement:
"insurance on the building against loss or damage by fire and against loss or damage by other risks included under the standard Extended Coverage Endorsement as presently adopted for use with the New York Standard Fire Insurance Policy in an amount not less than the then full insurable value of the Building, with a deductible of not more than $50,000."
The Extended Coverage Endorsement ("ECE"), in effect in 1989 (when the lease was executed), "included causes of loss resulting from hazards in addition to fire, such as smoke, explosion, riot and civil commotion and "actual physical contact of an aircraft or vehicle with the property." Excluded were such hazards as nuclear reaction and radioactive contamination, war (including insurrection or civil war) and "hostile and warlike action" undertaken "by any government or sovereign power (de jure or de facto) or by any authority maintaining or using military, naval or air forces," including action "by an agent of any such government, power, authority or forces."
Back in 2002, a question arose as to whether the acts of "loosely structured" terrorists, unassociated with any particular government or military force, were encompassed or excluded events.
While the excluded risks included "acts of war," such as hostility by a sovereign nation or by a "standing military force," the ECE did not address "ad hoc paramilitary action" by individuals unaffiliated with an organized military. Nor did the language encompass autonomous political or religious factions. Plainly and simply, the endorsement didn't address terrorists acts.
As a result, Tag 380 started a case in the New York County Supreme Court positing that it was not obligated to maintain terrorism coverage under its lease. The building's landlord countered that such an obligation did exist and also sought compensatory damages together with attorneys' fees incurred in defending the action. The Supreme Court found that Tag 380 had a duty to obtain insurance that included terrorism coverage and awarded the owner damages for the premiums it paid for such coverage, as well as attorney's fees. The court reasoned that "unless specifically enumerated in the exclusions section of the policy," a fire insurance policy must cover all losses that result from fire, "even if such losses are caused by terrorism."
On appeal the Appellate Division, First Department, modified the outcome, finding that the ECE only encompassed the enumerated perils, and not their underlying causes, and that the lower court had erroneously conflated the two concepts.
While the ECE may have afforded protection for a particular kind of loss associated with terrorism (such as an aircraft striking a building), that did not support the lower court's conclusion that coverage for all types of terrorist acts was intended, regardless of the precipitating cause, and that to find otherwise would violate the "venerable principle" that contracting parties should not be liable for obligations "not reasonably within their contemplation at the time of contract."
TAG!
(You're it!)
To download a copy of the Appellate Division's decision, please use this link: Tag 380, LLC v. ComMet 380