A federal court in New York has held that, under a first-party commercial property policy, business interruption coverage is available only for the amount of time it would theoretically take to replace the policyholder’s property, not the amount of time it would theoretically take to rebuild the equivalent of the sales environment in which the policyholder’s retail outlet had been located. Retail Brand Alliance, Inc. v. Factory Mutual Ins. Co., ___ F.Supp.2d ___, 2007 WL 1549050 (S.D.N.Y. May 30, 2007).
In Retail Brand Alliance, the policyholder had operated its three most profitable retail stores in the World Trade Center concourse and argued that the pedestrian traffic available at this location was unique and irreplaceable. Accordingly, the policyholder argued, business interruption coverage was available until a pedestrian mall with similarly unique pedestrian traffic could be rebuilt and new outlets opened in it. Following the Second Circuit’s decision in Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Company, 411 F.3d 384 (2d Cir. 2005), the district court disagreed and found that, because the policyholder’s business was not dependent on the existence of the World Trade Center complex, the period for business interruption coverage was tied to the restoration of the insured’s property, and not to the original location of that property or the surrounding sales environment.
Retail Brand Alliance (“RBA”) had operated three stores — Casual Corner, Petite Sophisticate and August Max — in the retail mall at the World Trade Center. According to RBA, the World Trade Center mall was unique in that it had a high level of foot traffic consisting largely of young career women — RBA’s primary targeted customer.
RBA was insured under a contract for firstparty property insurance which included business interruption coverage. Coverage under the policy’s business interruption provision was limited to the “Period of Liability,” which was defined in relevant part as “the period . . . starting from the time of physical loss . . . and . . . ending when . . . the building and equipment could be: (i) repaired or replaced; and (ii) made ready for operations, under the same or equivalent physical and operating conditions that existed prior to the damage . . . .”
RBA moved for partial summary judgment, seeking a ruling that business interruption coverage was available under the policy for the amount of time it would take RBA to rebuild its World Trade Center stores in an environment that provided RBA with a volume of foot traffic similar to that at the World Trade Center prior to 9/11. Because the World Trade Center was unique, however, RBA contended such foot traffic could not be replicated unless the World Trade Center was rebuilt. RBA argued, therefore, that business interruption coverage should be available for the hypothetical period necessary to recreate the World Trade Center complex itself. According to RBA, the phrase “under the same or equivalent physical and operating conditions” contained in the definition of “Period of Liability” and, in particular, the last two words, “operating conditions,” ensured that coverage would continue until the condition of its business, as opposed to the condition of its property, returned to pre-loss condition.
RBA’s insurer, Factory Mutual, disagreed, and argued in its cross motion for partial summary judgment that the Period of Liability extended only for the hypothetical period of time necessary to replace RBA’s World Trade Center stores with reasonably equivalent stores in a reasonably equivalent location.
The Court’s Decision
The court rejected RBA’s position and agreed with Factory Mutual that the plain language of the policy limited time-element coverage (including business interruption) to only that period of time necessary for RBA to build reasonably equivalent stores in reasonably equivalent locations. The court reasoned that the phrase “under the same or equivalent physical and operating conditions” modifies “building and equipment” and that, in contrast, the word “business” does not even exist in the “Period of Liability” provision. As such, the Period of Liability was tied to replacing the insured’s physical property, not the business conditions in which the property had been located.
The court further reasoned that the sales level of a business is irrelevant to determining when a damaged building and its equipment have been restored to their pre-loss condition. A business may continue to lose sales even after the building and its equipment are restored to their pre-loss condition. The court explained, however, that RBA was not without coverage for the resulting loss of sales, but that such loss would be addressed by the Extended Period of Liability under RBA’s property policy, rather than the policy’s business interruption provision. The Extended Period of Liability, the court explained, specifically affords coverage for loss of gross earnings attributable to a reduction in sales following a loss. The court likewise noted how anchor store coverage, which RBA also had under its property policy, might afford RBA a portion of its claimed lost sales to the extent an anchor store relied on by RBA to attract customers also had been damaged.
The court recognized that other decisions supported its interpretation of the Period of Liability and heavily relied on the Second Circuit’s Duane Reade decision. In Duane Reade, the insured argued under period of restoration language that business interruption coverage should be available for the period of time necessary to rebuild the insured’s World Trade Center store. Duane Reade argued that the parties intended to protect Duane Reade’s interest in the specific insured location. The Second Circuit rejected that argument, however, and found that business interruption coverage was available only for the time it would take to replace Duane Reade’s lost property at a reasonably equivalent location. The Second Circuit expressly found that such a location need not be one with the same pedestrian traffic and other business conditions in which the lost property had been located.
Retail Brand Alliance confirms that the proper calculation of the indemnity period for time-element coverage is tied to the repair or replacement of the insured’s damaged property, not the insured’s business and sales. As such, business interruption coverage may terminate even though the insured still has not returned to the level of profitability that existed before its loss. The decision also confirms that, in cases involving loss or damage to unique property or property situated in a unique physical location, the indemnity period generally will be calculated according to the amount of time it would take to replace the insured’s property, not the location at which it had been located.