It is official—in a case of first impression in New York,1 the appellate court will decide if a policy flood aggregate limit will apply to “downstream” financial losses such as delay in completion. The policyholder has filed the appellate brief on December 3rd requesting the appellate court to review the trial court’s ruling of first impression we discussed in: Delay in Completion Losses Under a Builders Risk Policy – Part 2.
Back in June, 2014, the New York trial court issued an order in a case involving delay in completion coverage under a builders risk policy where damage was sustained during Hurricane Sandy. The determination at the trial court level was that the policyholder was entitled to recover the total of $5 million for flood damages, physical damages and the economic delay in completion losses sustained in Sandy, since they stemmed from the flood. The court ruled that the flood deductible was also applicable to the loss. We knew the case would likely proceed through the appellate court system and it is embarking on that journey.
By brief background, the policy contained a limit of $115 million in coverage with sub-limits of $108 million for physical damage and $7 million for delay in completion. The policy had an aggregate limit of $5 million for flood losses subject to its own deductible of the greater of $250,000 or 5% of the loss. The issue involved whether the Delay in Completion damages were limited to the flood aggregate limit of $5 million and it’s deductible. The policyholder argued that the flood limit of $5 million only applied to physical damages from flood and not "downstream" financial losses like delay in completion. Zurich argued that if flood causes delay in completion, like what happened in the case, the policyholder can only recover the $5 million flood aggregate limit. The court held that since the policy defines flood as "all loss or damage arising during flood," it did not exclude non-physical losses like delay in completion from the flood aggregate limit. The court noted that the delay in completion endorsement stated that it does not alter the sub-limits in the policy. The court was of the opinion that a loss that would not have occurred but for a flood and it is subject to the $5 million aggregate limit without regard to the type of loss suffered. The court also noted in its holding that no portion of the delay in completion endorsement states that the delay in completion sublimit of $7 million is not subject to the flood $5 million aggregate limit.
El-Ad argued in its opening brief that the trial court’s interpretation conflicts with the intended scope of the limit on flood coverage in the underlying policy, and that the $7 million cap for delay in completion losses should have been applied:
The very nature of the builders risk policy is to protect direct physical loss. Consequently, the delay in completion policy’s purely economic coverages for losses occurring after the builders risk policy’s expiration are not contemplated within the construct of the builders risk policy or its flood limit.
The property involved in the case is one that has reportedly sustained damages of more than $20 million from Sandy and had plans to convert an 11-story office building into a 12-story condominium by the end of 2012.
We will continue to monitor this case and provide updates on this interesting and important issue of first impression in New York.
1 El-Ad 250 West LLC v. Zurich American Insurance Co., case number 653965/13, in the Appellate Division of the New York Supreme Court, First Department.