In a decision earlier this month, the United States District Court for the Southern District of New York, applying New York law, issued a ruling addressing the extent to which recovery of insurance proceeds bars the ability to seek damages from the tortfeasor causing the loss.  World Trade Center Properties LLC. et al. v. American Airlines, Inc. et al., --- F.Supp.2d ----, No. 08 Civ. 3722, 2012 WL 6115938 (S.D.N.Y., Dec. 5, 2012).

The Plaintiff in the case has a long-term lease in a building adjacent to the World Trade Center in Manhattan.  Its building collapsed after the north tower fell following the September 11th terrorists attacks.  Plaintiff subsequently recovered approximately $831 million from its insurer for the damage sustained and to cover costs for rebuilding, which it is required to do under its lease contract.  Plaintiff then sued the airlines which operated the hijacked flights, alleging that its building would have not been damaged but for the airlines’ negligence.  The airlines moved for summary judgment, contending that under New York’s collateral setoff rule, Plaintiff’s insurance recovery fully compensated it for any possible tort recovery against them.  Under this rule, a plaintiff who has been compensated for an economic loss by a collateral source, such as insurance, cannot recover compensation for that economic loss again from the tortfeasor.  N.Y. C.P.L.R. § 4545. 

However, “[r]eduction [in recovery] is authorized only when the collateral source payment represents reimbursement for a particular category of loss that corresponds to a category of loss for which damages were awarded.”  See Oden v. Chemung County Indus. Dev. Agency, 87 N.Y.2d 81, 84 (N.Y.1995).  In responding to the airlines’ motion, Plaintiff argued that its insurance recovery does not offset the airlines’ potential tort liability because there is incomplete correspondence between the categories of insurance recovery and the categories of tort damage.  Specifically, Plaintiff claimed that the destruction of its building caused it to suffer a $959 million diminution in the fair market value of its leasehold and over $600 million in consequential damages and personal property losses, which it believes it is entitled to recover from the airlines.  On the other hand, the airlines argued that all of Plaintiff’s insurance recovery was for replacement costs and business interruption, and thus fully corresponds to the airlines’ potential tort liability. 

Considering these arguments, the court ultimately denied the airlines’ motion for summary judgment, concluding that whether there is correspondence between the categories of insurance recovery and tort damage presents factual issues requiring a trial.  In particular, the court noted that Plaintiff’s insurance recovery was not only compensation for lost property value, but also compensation for Plaintiff’s contractual obligation to rebuild the property.  The court explained, “Because Aviation Defendants are not liable in tort for [Plaintiff]’s contractual obligation to rebuild, [Plaintiff]’s insurance recovery does not perfectly correspond to Aviation Defendants' potential tort liability.”  The court ruled that the extent of the overlap between the Plaintiff’s insurance recovery and the damages it sought from the airlines could only be determined with further factual development.

This decision and others involving collateral setoff provisions provide a useful lesson for insurance practitioners.  Where the categories and amounts of insurance recovery are not clearly identified, policyholders may be able to recover both under their insurance policies and again from tortfeasors.