By Adam Leitman Bailey
April 1st, 2014
Most buildings in flood zone areas already maintained flood insurance as a result of lender requirements and therefore were covered by Sandy. The biggest surprise was those persons who use their homes as home offices or the building rents out office space and maintained business interruption insurance only to find out that business insurance only kicks in only when involving a covered peril such as a direct hit from a flood. For example, a unit owner is without utilities for several weeks and cannot work. Because the unit owner’s office is high in the sky it never occurred to him or her to obtain any insurance beyond the basics. During and after Sandy, most insurance companies denied any coverage as a result of the loss of utilities as business interruption insurance requires that a direct hit or covered event before business interruption applies. So those that lost their utilities because the utility companies’ lines were cut before the storm were out of luck.
Learning from the hundreds of buildings we counseled, it turns out that insurers have many extremely inexpensive or free riders to the policy to cover the next calamity. One such example is anti-concurrent-causation coverage. If wind and water hit the building at the same time and only wind is covered by the policy, anti-concurrent-causation coverage will allow coverage even if the water could have caused the damage as well as the wind.
Although none of these cases directly involve cooperatives or condominiums, there are, in total, five reported real estate decisions that have come down in the aftermath of Superstorm Sandy, two of them landlord-tenant, one of them regarding negligence liability for a fallen crane, one for utility liability for failed power, and one for construction of an insurance policy. Additionally there are some seven complaints on file, six of them construing insurance policies and one suing a landlord for alleged negligence. These suits, both completed and pending, can provide useful instruction for the kinds of actions a building owner must take to prepare for the next natural or civil disaster to afflict New York City. It’s useful for landlords and building owners to consider these issues because of the nature of storm damage.
Claiming Constructive Eviction in a Condo or Co-op
In Maiden Lane Properties v. Just Salad Partners, the tenant sought to have the rent abated by reason of “constructive eviction,” a situation in which the landlord’s upkeep of the premises is so badly performed that the tenant is compelled to abandon all or part of the premises. Key to the concept of constructive eviction, however, is fault on the part of the landlord. Mere happenstance is not fault. In Barash v. Pennsylvania Terminal Real Estate Corp., the Court of Appeals set the standard for constructive eviction, writing, “On the other hand, constructive eviction exists where, although there has been no physical expulsion or exclusion of the tenant, the landlord’s wrongful acts substantially and materially deprive the tenant of the beneficial use and enjoyment of the premises.”
Thus, for a tenant to claim constructive eviction, mere casualty to the premises is insufficient. There must also be proof of the landlord’s wrongful acts. Thus, the Just Salad court saw no need even to mention constructive eviction in its decision.
Reasonable Preparation for Storm by Property Owner
While there have been no Sandy-related decisions that have come down on what a building owner should do to prepare for a storm, one complaint that has been filed shows the kind of claims that landlords have to face on the subject.
In Manfra, Tordella & Brookes, Inc. v. 90 Broad Owner, LLC, Plaintiff-tenant’s theory is that the landlord was liable for neglecting to take supposedly reasonable precautions against flooding caused by Superstorm Sandy such as window boarding and sandbagging.
Among the allegations of the complaint were:
32. “Because of its history of flooding and location in low lying Zone A, Defendant was well aware that 90 Broad in general, and MTB’s offices in particular, were highly susceptible to flooding and would likely experience severe flooding in the event of a major storm, such as Hurricane Sandy.”
37. Defendant was thus fully aware, and warned of the potential flooding that would occur as soon as Sandy made landfall. Despite this knowledge, and expectation of storm-related flooding, defendant’s email did not include any information regarding any steps said defendant took or would take to prevent or at the very least, mitigate, the potential damage to the building from storm-related flooding.
Some of the preparations our clients have made or are in the process of making include would be to move facilities higher, encapsulate utilities and lines with waterproof materials, and upgrade their facilities to be more storm resistant or build a barrier preventing water from entering the building. Of course, all of this has been accomplished as a result of Sandy. Cooperative and condominium buildings will need to take measures not only to physically secure their buildings but ward off lawsuits for negligence for not making adequate preparations.
In every eventuality, it is impossible to know precisely what the risks will be. Attorneys, therefore, drafting the necessary documents must use both the experience of the past and imaginings of the future to prepare for the worst.
For the landlord, long term preparation for a storm of any kind must include careful drafting of the lease so as to allocate the risks of the storm to the tenant. For the tenant who typically must accept most of the lease as written, the chief corresponding preparation is getting appropriate insurance policies, covering both the costs of doing physical repairs to the premises and the loss of business that can be occasioned by forces entirely exterior to the premises such as loss of electricity, Internet, or potable water.