INSURANCE ADVOCATE - May 1998
INSURANCE LAW REVIEW
N.Y. Appellate Court Rules City Order to Vacate Fire-Damaged Building Not a Cause of A Business Interruption Loss
A defense offered by an insurance company in support of the "ordinance or law" exclusion in a business owners' policy, that a vacate order by the Department of Buildings was the cause of the business interruption loss, was rejected by the New York Supreme Court, Appellate Division, First Department. Examining all of the circumstances surrounding the claim, the unanimous four judge appellate panel sustained the June 1996 summary judgement finding of the Supreme Court, Judge Douglas McKeon in Bronx County, that because of a fire in adjoining structures that had already made the premises of the insured unsafe for occupancy, the vacate order was not a cause of the loss.
The actual loss was triggered on May 20, 1991, when a tank truck, owned by a third party, collided with another vehicle causing a spill of 1,500 gallons of gasoline. The gasoline ignited and caused a conflagration resulting in five deaths and the destruction of three of six stores located in a building in the east Bronx. The insured, Throgs Neck Bagels, Inc., store in the building was not consumed in the blaze, even though it suffered smoke and water damage.
The city's Department of Buildings immediately issued a "Preemptory Vacate Order" to all owners, lessees, tenants and occupants of the building, that they vacate forthwith until declared safe for re-entry. Ten days after issuance of that order, the building's landlord notified the tenants that their leases had been canceled and that they were required to vacate the premises. The bagel shop-insured did so and ceased doing business. The insured then filed a claim under its BOP alleging loss caused by fire and its effects. It asked for approximately $127,500 including property damage from the smoke and water, cost of removal of undamaged equipment, reimbursement for improvements and betterments that were not removable and $100,000 for business interruption.
Judge Betty Weinberg Ellerin, who wrote the decision for the unanimous appellate court panel, said initially that the question the court had to decide appeared to be one of first impression. She said it involves the "scope and import of the 'enforcement of ordinance or law exclusion' in a business owners' insurance policy that provides underlying coverage for losses to property due to specified perils including fire or explosion."
The insurer, GA Insurance Company of New York, offered the sum of $13,622.75, which it said represented the actual damage to the insured's stock, supplies, furniture, fixtures and equipment. It rejected the business interruption claim citing its "B Exclusions" in the policy, and specifically the language of a. Ordinance or Law. The enforcement or any ordinance or law: (1) Regulating the construction, use or repair of any property; or (2) Requiring the tearing down of any property, including the cost of removing its debris."
While both parties moved for summary judgment on the trial court level, the insured's motion was granted on the ground that the damage or loss was due to the fire and explosion and that the ordinance or law exclusion did not apply to such sudden or unforeseen events. The insurance company appealed.
Judge Ellerin noted in her decision that there was no prior appellate authority on the precise issue being examined. In essence she concluded based on a prior court decision that "the touchstone for interpreting insurance contracts, as with other contracts is the reasonable expectation of the parties."
Based on this premise, the judge turned to the key question of whether the bagel shop's losses were caused by a covered event. The judge said that the question of whether the covered event was sufficiently proximate to the loss to require the insurer compensate the insured, will depend on whether it was the dominant and efficient cause. Here, citing a variety of prior cases she quoted language defining "proximate cause" [that it] "does not necessarily refer to the cause nearest in point of time to the loss. But the true meaning of that maxim is, that it refers to that cause which is most nearly and essentially connected with the loss as its efficient cause," When applied to insurance specifically, Judge Ellerin added, again quoting from prior decision, it "is a limited one---[and] the causation inquiry stops at the efficient physical cause of the loss; it does not trace events back to metaphysical beginnings."
Quoting from Couch, Insurance [2d ed.] the judge offered a definition of "loss of fire within the policy's coverage." That includes the language: "This follows from the fact that the fair and reasonable interpretation of a policy of insurance against loss by fire will include within the obligation of the insurer every loss which necessarily follow from the occurrence of the fire, to the amount of the actual injury to subject of the risk, or necessarily from incidental and surrounding circumstances, the operation and influence of which could not be avoided."
In the bagel store case, Judge Ellerin said, "there is here no issue of fact that, in the first instance, the fire was the efficient cause of all the losses for which plaintiff seeks coverage in this action."
Judge Ellerin said that the insured had met its burden of showing that a valid insurance policy was in full force and effect and that incurred a presumptively covered loss. The burden then shifts to the insurer to demonstrate that an exclusion contained in the policy defeats the claim.
In its effort to do that, the insurer argued that it does not matter whether the fire was, in the first instance, the efficient cause of the losses since the policy excludes coverage for losses caused either directly or indirectly by ordinance or law and does so "regardless of any other cause or event that contributes concurrently or in any sequence to the loss." Judge Ellerin rejected the position, asserting that the insurer "failed to meet its burden of establishing that such was the case." She said that the Building Department order was "served merely as a confirmation of the circumstances regarding the actual cause of the loss, i.e., the fact that the premises had been rendered structurally unsound and unfit for continued use as a result of the fire." Further, she said: "It cannot logically be claimed that plaintiff would not have vacated a building rendered structurally unsound but for an order from the Department of Buildings."
The judge summed it up on a prospective basis, asserting that "to construe the exclusion in the manner urged by defendant insurer would be to render the underlying coverage nugatory in a host of cases where it would reasonably be expected to apply. The Department of Buildings or other governmental agency could be expected to frequently issue various orders and decrees in response to the consequences of any catastrophic event affecting public safety, and an insurer could avoid coverage by simply claiming that such an order was one of the 'causes' of the loss."