Risk Management

Judge: Insurer Must Pay Trade Center Janitor

A recent court decision entitles the World Trade Center's janitor to business-interruption insurance coverage for the time it would take to rebuild...
David KatzMay 24, 2006

You don’t have to be a property owner to get paid back for business losses covered by property-insurance policies, according to a recent court ruling in favor of the janitorial company that served the World Trade Center and its tenants.

In his May 10 ruling in the U.S. District Court States District Court for the Southern District of New York, Judge Jed Rakoff held that ABM Industries Inc. is entitled to payment for losses over the time that it would take to rebuild the WTC. At issue is business-interruption coverage under a $127 million property-insurance policy.

In contrast to the ruling, Zurich American Insurance Company, ABM’s insurer, had argued that the janitorial company was entitled to coverage for business losses only until WTC tenant businesses could relocate — a period of roughly three months.

Under the insurance policy cited in the judge’s decision, an insured company could be reimbursed for income losses resulting from the destruction of property that it “owned, controlled, used, leased, or [had] intended for use.” Zurich and ABM disagreed about whether the company controlled or used WTC property enough to get the business-interruption coverage.

The significance of the case for corporations is that it affirms “that you don’t have to be a property owner or tenant to have business income” for the purposes of such coverage, says John Ellison, an attorney representing ABM, which had about 800 employees on the site. “A services provider might have some damages that [prevent it] from engaging in their business,” he adds, thus entitling it to coverage as if it did own or lease the property. A Zurich spokesperson said the insurer couldn’t comment on the case.

The message for corporate risk managers and finance executives is that they should handle property-rights issues upfront in their negotiations with insurance companies, says Ellison, an attorney with Anderson Kill & Olick, a law firm that represents insurance policyholders. “I think insurers will accept the scope of the claim and not challenge it as vigorously,” he explains, noting that being clear from the outset gives an insurance buyer the ability to argue, “look, these guys knew exactly what they were selling and here is the policy that proves it.”

ABM, which was provided with office and storage space under its contracts with the complex’s owners before September 11, 2001, had filed a “loss of income” insurance claim arising from the attacks. The ruling favoring ABM was part of a summary judgment requested by Zurich to determine its liability in the case.

The company had provided janitorial, lighting, and engineering services in the common areas of the WTC. As a result of its work in the common areas, ABM had gained contracts with practically all of the buildings’ tenants to perform janitorial work.

Judge Rakoff ruled that ABM couldn’t simply relocate to another building when its WTC clients moved, noting that ABM’s business was “fundamentally connected to its use of the World Trade Center.”

That finding differed from a prior ruling by the judge. Previously, he had decided in favor of Zurich’s request for partial summary judgment, finding that ABM’s coverage was limited to losses stemming from the destruction of property “not operated” by ABM but rather by ABM’s customers.

For its part, ABM contended that it was entitled to payment for business losses covered by property that it “used” or “controlled.” Hence its contention that it was covered until the WTC itself was rebuilt — not merely until its clients had found new offices.

In February 2005, the U.S. Appeals Court for the Second Circuit reversed Judge Rakoff’s decision, ruling that ABM was entitled to the broader coverage it had asked for and returning it to the district court to resolve other issues. In his May 10, 2006 decision, the judge, citing the appeals court’s ruling, said that ABM had “used” the property within the meaning of the insurance policy and was thus entitled to full coverage.

There are still some weighty matters to be resolved in a forthcoming trial slated for August 14. Yet to be determined, for instance, is exactly how long it would take to rebuild the WTC. Another question is whether ABM will be entitled to payments throughout the rebuilding period, since its contract with the WTC was due to expire in mid-January 20004. Ellison that he won’t be surprised if the case ends up in the court of appeals again.