(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).
New York-based drugstore chain, Duane Reade, must feel like it is Ground Hog Day every time their attorneys call to give status on their case against St. Paul Fire and Marine Insurance Company. Duane Reade, recently acquired by Walgreens, owns and operates 200 drugstores in and around New York City, including 124 in Manhattan. Duane Reade has been battling its carrier for almost 8 years in a protracted insurance coverage dispute arising from the September 11, 2001, destruction of its single most profitable store, formerly located on the main concourse of the World Trade Center. After a bench trial, four Federal District Court opinions, an appraisal and two appeals, the business interruption saga finally came to an end.
Among many other issues, Duane Reade asserted that it had the right to recover losses for the entire period actually required to rebuild the World Trade Center complex. St. Paul, in contrast, contended that Duane Reade’s recoverable losses were limited to those suffered within twenty-one months following the September 11, 2001 destruction of the store-the amount of time it calculated as reasonably necessary for Duane Reade to relocate its store and resume operations. The coverage dispute was worth millions and Duane Reade was ready to fight, but in the end, St. Paul prevailed.
The policy at issue contained the following Period of Restoration provision:
The measure of recovery or period of indemnity shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged, and shall commence with the date of such destruction or damage and shall not be limited by the date of expiration of this policy.
In Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d 235 (S.D.N.Y.2003), the trial court ruled in favor of Duane Reade by finding that the hypothetical Period of Restoration was extended until Duane Reade resumed its operations in a “functionally equivalent” manner to its pre 9-11 operations. The trial court also declared that the length of the Period of Restoration was tied to the time it would take to rebuild the drugstore at the World Trade Center site. After this ruling the trial court ordered the parties to enter into appraisal to determine the value of the claim. In accordance with the district court’s ruling, the panel appraised the value of the Business Interruption claim to be in excess of $40 million.
St. Paul appealed the declaratory ruling. The Court of Appeals disagreed with the trial court’s interpretation and held that the policy did not provide business interruption coverage until Duane Reade could resume operations in a store located at its former WTC site. Instead, it held that coverage extends only for the hypothetical time it would reasonably take Duane Reade to “repair, rebuild, or replace” its WTC store at a suitable location. In its reasoning the Court of Appeals stated that Duane Reade’s lost profits for rebuilding at a different site would probably fall under the Leasehold Interest clause of the policy rather than the Business Interruption clause and that any losses continued beyond the Period of Restoration would be covered by the Extended Recovery Period provision. Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384 (2nd Cir. 2005),
To be sure, there are few if any locations in New York City comparable to the WTC, and Duane Reade will most likely not be able to recreate the profit stream it once enjoyed there. But any discrepancies between the new building and WTC in terms of benefits and advantages are exclusively accounted for under the Leasehold Interest clause.
Id. at 386.
After this opinion, the appraisal panel revised the value of the BI loss at roughly $14 million. The appraisal panel had also awarded in excess of $4 million under the policy’s Extended Recovery provision.
I am not sure why, but Duane Reade dismissed the lawsuit and filed a new lawsuit to recovery under the Leasehold and Extended Recovery provisions in accordance with the appellate opinion. St. Paul pulled an old trick out of the hat and moved to dismiss the second lawsuit under the doctrine of res judicata and to confirm the appraisal award. The trial court agreed with St. Paul, but before kicking the case out of court forever, the Court gutted out the $4 million award under the Extended Recovery provision.
The Extended Recovery Provision read as follows:
This policy is extended to cover the Actual Loss Sustained by [Duane Reade] resulting from interruption of business for such additional length of time as would be required with the exercise of due diligence and dispatch to restore [Duane Reade]’s business to the condition that would have existed had no loss occurred, commencing with the [later] of the following dates:
a) the date on which liability of [St. Paul] of loss resulting from interruption of business would terminate if the [Extended Recovery Period] clause had not been attached to this policy or
b) the date on which repair, replacement, or rebuilding of such part of the property as has been damaged is actually replaced, but in no event for more than twelve months from said later commencement date.
Duane Reade argued that that the requirement of actual replacement should be interpreted to be satisfied when the store could have been replaced, but the court disagreed and interpreted the clause to require “actual replacement” and since Duane Reade had not replaced it was not entitled to this coverage:
Under Duane Reade’s reading, prong (b) would automatically be satisfied whenever prong (a) were satisfied. In contrast, by enforcing the requirement for actual replacement, the Court has given meaning to both requirements. For example, if Duane Reade were to delay and actually take more than the time that reasonably would be necessary to replace a protected property, prong (a) would be satisfied (and coverage under the Restoration Period would terminate) when the property could have actually been replaced, and prong (b) would be satisfied (and coverage would recommence under the Extended Recovery Period) when Duane Reade did actually replace the property.
Duane Reade, Inc. v. St. Paul, 503 F.Supp. 699, 701 (S.D.N.Y. 2007).
Duane Reade did not give up and appealed, but the Second Circuit Court of Appeals was less than sympathetic to its plight, ending the saga on March 31, 2010.