Opinion ID: 790588
Heading Depth: 3
Heading Rank: 1

Heading: Functionally Equivalent Operations

Text: 40 St. Paul contends that the district court's declaration that the Restoration Period ends at the point Duane Reade could resume functionally equivalent operations effectively rewrites the policy by superseding and enlarging upon the more limited coverage provided by the policy's Extended Recovery Period clause. We agree. 3 41 The Restoration Period clause establishes that BI coverage lasts only for the reasonable amount of time it would take Duane Reade exercis[ing] ... due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged. Courts have consistently construed this or similar language as entitling the insured to continue to recover its lost profits until it can build a reasonably equivalent store in a reasonably equivalent location. See, e.g., Lee R. Russ, 12 Couch on Insurance §§ 183:55, 185:7 (3d ed. 1998 & Supp.2003); Beautytuft, Inc. v. Factory Ins. Ass'n, 431 F.2d 1122, 1128 (6th Cir.1970) (holding that insured's resumption of partial operations in inferior, temporary premises did not terminate business interruption coverage); see also Anchor Toy Corp. v. Am. Eagle Fire Ins. Co., 4 Misc.2d 364, 155 N.Y.S.2d 600, 603 (N.Y.Sup.Ct.1956) (holding that insured was entitled to modernize premises upon rebuilding). The rationale behind such holdings has generally been that insureds would lack any incentive to resume partial operations in temporary locations or under other inferior circumstances in order to mitigate damages if such actions would terminate their BI coverage. See Couch on Insurance §§ 183:55, 185:7. By contrast, we have found no case ruling that an insured is entitled to BI coverage until it can resume functionally equivalent operations. 42 The fact that the district court incorporated novel terminology in order to determine the scope of coverage under such unusual circumstances is not, in and of itself, what proves fatal. Rather, it is that the novel terminology the district court chose conflicts with the coverage provided by the Extended Recovery Period clause, which provides: 43 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: 44 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 45 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. 46 The purpose of the Extended Recovery Period is to provide additional coverage for the likely event that Duane Reade will continue to suffer losses due to its business interruption after it reopens the WTC store. The Extended Recovery Period guarantees Duane Reade its pre-9/11 profits until the earlier of when Duane Reade can restore business at its WTC store to the condition it would have been in had the WTC not been destroyed or twelve months after the Restoration Period ends. 4 47 Although the district court plainly recognized the relationship between the Restoration Period and the Extended Recovery Period, see Duane Reade II, 279 F.Supp.2d at 239 (Any losses continuing beyond th[e] point [that Duane Reade could resume functionally equivalent operations] would be addressed by the `Extended Recovery Period' provision in the Policy, not by the Restoration Period clause.) (internal citation omitted), its use of functionally equivalent to enhance the level of operations that will terminate the Restoration Period leaves no room for the Extended Recovery Period to operate. If Duane Reade achieves functionally equivalent operations within twelve months of resuming operations, the Restoration Period will terminate, but the Extended Recovery Period will not be triggered because Duane Reade will already have met the criteria for terminating that coverage. More important, if Duane Reade requires more than twelve months to achieve functionally equivalent operations, it will continue to receive business interruption coverage after the Extended Recovery Period coverage expires. As a result, the district court not only rendered the Extended Recovery Period provision superfluous, it nullified the express time constraints the parties agreed to place on such recovery, thereby effectively rewriting the policy to increase Duane Reade's coverage. 48 Because the district court's interpretation of the Restoration Period cannot be reconciled with the policy's other provisions, particularly the Extended Recovery Period, it must be modified to eliminate functionally equivalent to define the type of operations that will terminate the Restoration Period. 49