Business Interruption Claims and September 11
March 2006
This edition of Case of the Month actually
discusses two recent cases. Both deal with airlines' claims for business interruption
losses following September 11, 2001, but each addresses different issues.
by Kevin
Merriman
Goldberg
Segalla LLP
PMA Capital Ins. Co. v. US Airways, Inc. (Va. Mar. 3, 2006)
At issue in this appeal was US Airway's claim for compensation under an all-risk
manuscript property subscription policy for business interruption losses arising
from the September 11 terrorist attacks. The policy provided commercial property
coverage in the amount of $25 million dollars from December 1, 2000, through
December 1, 2001, of which PMA Capital, as successor to one of the original
subscribers, underwrote 10 percent of the coverage.
Following the terrorist attacks on the World Trade Center on September 11,
the Federal Aviation Administration (FAA) issued a ground stop order, ordering
all civilian aircraft to land or stay on the ground. The attack on the Pentagon
resulted in the closure of Reagan National Airport, and, while other airports
soon reopened, the FAA issued a temporary flight restriction that closed the
air space within 25 nautical miles of Reagan National Airport. This order resulted
in the closure of Reagan National Airport and restricted access to it for 2
weeks. As such, US Airways was not permitted to conduct commercial flights into
or out of Reagan National Airport from September 11 to October 4, 2001.
US Airways made a claim for business interruption losses and PMA Capital
Insurance denied coverage for the claim. US Airways then filed suit, seeking
judgment declaring that PMA was obligated to indemnify it for the losses, damages
for breach of contract, and damages for alleged bad faith. In this case, the
Virginia Supreme Court considered only one issue: whether payments received
by US Airways from the federal government pursuant to the Air Transportation
Safety and System Stabilization Act of 2001 were recoveries under the policy's
offset provision. The court concluded they were.
The policy's offset provision required that losses claimed under the policy
be reduced by "[a]ll salvages, recoveries, and payments … received prior to
a loss settlement…." Section 101 of the Air Transportation Safety and System
Stabilization Act of 2001 states:
-
(a) In General.—Notwithstanding any other provision of law, the President
shall take the following actions to compensate air carriers for losses incurred
by the air carriers as a result of the terrorist attacks on the United States
that occurred on September 11, 2001:
-
…
-
(2) Compensate air carriers in an aggregate amount equal to $5,000,000,000
for—
-
(A) direct losses incurred beginning on September 11, 2001, by air carriers
as a result of any Federal ground stop order issued by the Secretary of
Transportation or any subsequent order which continues or renews such a
stoppage; and
-
(B) the incremental losses incurred beginning September 11, 2001, and
ending 10 December 31, 2001, by air carriers as a direct result of such
attacks.
US Airways argued that Congress did not intend for the Air Transportation
Safety and System Stabilization Act of 2001 to reduce insurance proceeds, while
PMA argued that the plain language of the policy required that funds received
under the Air Transportation Safety and System Stabilization Act of 2001 should
offset any recovery under the policy. Focusing exclusively on the term "payment"
in the policy's offset provision, the trial court concluded that the term did
not contemplate proceeds from federal programs. The trial court also relied
on commentary by the Department of Transportation interpreting the Air Transportation
Safety and System Stabilization Act of 2001 to conclude that its decision was
consistent with Congressional intent.
The Virginia Supreme Court disagreed, holding that payments received by US
Airways under the Air Transportation Safety and System Stabilization Act of
2001 offset recoveries under the policy. The court reasoned that, by its plain
language, the Air Transportation Safety and System Stabilization Act of 2001
was designed to "compensate air carriers" for both "direct losses" as a result
of "any Federal ground stop order" and "incremental losses" as a "direct result
of" the September 11, 2001, terrorist attacks. The court concluded that "the
federal compensation provided by the Air Transportation Safety and System Stabilization
Act of 2001 was for the purpose of regaining or restoring the losses suffered
by US Airways as a result of the terrorist attacks." Thus, the Air Transportation
Safety and System Stabilization Act of 2001 funds were a form of "recoveries"
under the policy's offset provision.
In reaching its conclusion, the court rejected arguments that commentary
by the Department of Transportation evinced a different intent, and found that
the trial court had considered only one of three categories of payment in the
policy's offset provision—the term "payments"—in finding that the proceeds received
by US Airways were not contemplated by the policy. The court observed that "recovery"
is defined as "the regaining or restoration of something lost or taken away,"
(Black's Law Dictionary 1302 (8th ed.
2004)), and "the act of regaining or returning toward a normal or usual state"
(Webster's Third New International Dictionary 1898 (1993)), which was clearly within the purview of the statute. It was error,
held the court, for the trial court to rewrite the policy and make a new contract
between PMA and US Airways.
Finding that the policy clearly required that Air Transportation Safety and
System Stabilization Act of 2001 funds received by US Airways were to reduce
its losses under the policy, and that the $310 million received by US Airways
exceeded the $58 million in claimed losses and the $2.5 million potential liability
of PMA under the policy, judgment was entered in favor of PMA.
United Airlines, Inc. v. Insurance Co. of the State
of Pennsylvania (2nd Cir. Feb. 22, 2006)
United Airlines brought suit for coverage under its $25 million "Property
Terrorism & Sabotage" insurance policy with the Insurance Company of the State
of Pennsylvania, for losses it suffered as a result of the September 11, 2001,
terrorist attacks on the World Trade Center and the Pentagon. It was undisputed
that United's ticket office located in the World Trade Center was destroyed,
and that United was entitled to coverage for lost earnings attributable to physical
damage at this location; however, its facilities at Reagan National Airport
did not suffer physical damage as a result of the attack on the Pentagon. Therefore,
the issue on this appeal was whether United could recover for its lost earnings
caused by the national disruption of flight service and the government's temporary
shutdown of the airport, in the absence of physical damage to the property or
an adjacent premises.
The court held that, because United could not show that the lost earnings
resulted from physical damage to its property or from physical damage to an
adjacent property, the losses were not covered by the policy.
United's policy provided:
- [ISOP] will indemnify [United] for property damage, loss of gross earnings,
and extra expense in excess of the Deductible [as later defined] ... resulting
from [terrorism], and any ensuing fire damage, damage from looting, or other
damage caused by an act of a lawfully constituted authority for the purpose
of suppressing or minimizing the consequences of [an incident of terrorism].
Another section of the policy dealing specifically with loss of gross earnings
provided that the policy "insures against loss resulting directly from the necessary
interruption of business caused by damage to or destruction of [United's] Insured
Locations resulting from Terrorism." The policy then stated that "[t]his section
is specifically extended to cover a situation when access to the Insured Locations
is prohibited by order of civil authority as a direct result of damage to adjacent
premises."
To recover gross earnings under the policy, the court concluded that United
would be required to show that the business interruption resulted from either:
(1) physical damage to property at the insured location (airport); or (2) an
order of civil authority as a result of physical damage to property adjacent
to the insured location (Pentagon). United's property at the airport was not
physically damaged, and, as such, it could not recover for "damage to or destruction
of the Insured Locations resulting from Terrorism."
Nor could it recover under the civil authority clause of that section of
the policy for loss of gross earnings during the government's suspension of
flights into and out of the airport. The court held that to do so, United must
show that it was denied access to its "locations" at the airport "as a direct
result of damage to adjacent premises." Though there was some dispute whether
the airport was an "adjacent premises," the court did not reach this issue,
since United could not also demonstrate that the airport was shut down "as a
direct result of damage to" the Pentagon.
In this regard, the court found that there was a temporary halt of flights
into and out of the airport before the Pentagon was struck. Moreover, the government's
subsequent decision to halt operations at the airport was based on fear of future
attacks, which was evidenced by the airport's reopening only when it was able
to comply with safety standards. The court found that the reopening had nothing
to do with repairing, mitigating, or responding to damage. The court concluded,
therefore, that the interruption to United's business was not the "direct result"
of damage to adjacent premises.
United argued that the first section of the policy, which it referred to
as a "suppression damages clause," provided a separate basis to recover loss
of gross earnings without having to establish that the business interruption
resulted from either physical damage to property at the insured location, or
an order of civil authority as a direct result of physical damage to adjacent
premises. The clause provided:
- [ISOP] will indemnify [United] for property damage, loss of gross earnings,
and extra expense in excess of the Deductible [as later defined] ... resulting
from [terrorism], and any ensuing fire damage, damage from looting, or other
damage caused by an act of a lawfully constituted authority for the purpose
of suppressing or minimizing the consequences of [an incident of terrorism].
United argued that this clause afforded separate coverage—that when the government
closed the airport to thwart possible airborne attacks, United suffered "other
damage caused by an act of a lawfully constituted authority for the purpose
of suppressing or minimizing the consequences of [an incident of terrorism]."
The court rejected United's interpretation of the policy, concluding that
the section, when read in the context of the policy as a whole, was merely to
serve as an introduction to the policy, and that the scope of damages it could
recover for business interruption must be determined by cross-referencing that
section of the policy specifically dealing with loss of gross earnings.
The court reasoned that the policy set forth only three types of damages
covered: physical damage, loss of gross earnings, and extra expenses. The section
then listed various triggering events that may cause one or more of the these
damages, including fire, looting, or acts of a "lawfully constituted authority
for the purpose of suppressing or minimizing the consequences of terrorism."
Thus, the court concluded:
- the policy states that whenever there is an act of … terrorism—or terrorism-caused
fire, terrorism-caused looting, or an "act of a lawfully constituted authority
for the purpose of suppressing or minimizing the consequences of [an incident
of terrorism]"—then United will be indemnified for its physical damages,
loss of gross earnings, and extra expenses resulting therefrom. It does
not provide that if there is an "act of a lawfully constituted authority
for the purpose of suppressing or minimizing the consequences of [an incident
of terrorism]," United is entitled to indemnity for any and all resulting
loss, including loss of gross earnings, however caused and unlimited by
the remaining terms of the contract.
In a footnote, the court observed that United had received federal aid under
the Air Transportation Safety and System Stabilization Act of 2001, but that
it still had unreimbursed losses.
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