Opinion ID: 789143
Heading Depth: 2
Heading Rank: 5

Heading: Contingent Business Interruption Coverage

Text: 40 In ascertaining the extent of an insured's coverage under an insurance policy, we look to the entire contract to determine its purpose and effect and the apparent intent of the parties. Maryland Cas. Co. v. Cont'l Cas. Co., 332 F.3d 145, 161 (2d Cir.2003). While the meaning of a term or provision may be clear when read in isolation, its interaction with other parts of the policy may infuse it with ambiguity. Accordingly, it is necessary to address whether the operation of other provisions in the policy cast doubt upon ABM's BI coverage. Zurich's position is that the Contingent Business Interruption provision at § 7.F(2) of the policy, rather than the BI provision, covers ABM's lost income up to its $10 million sublimit. The insurer urges that because the CBI provision extends the scope of coverage beyond that provided by the BI provision, property covered by the former falls outside the scope of the latter. While we agree that the CBI provision is an extension of the BI coverage, we disagree that it applies to the circumstances here. 41 CBI coverage is a relatively recent development in insurance law and its scope has not yet been fully delineated by the courts. Entities that rely on third parties sometimes purchase CBI coverage as a policy extension in case their income is disrupted by damage to third party property. Gavin Souter, Risks From Supply Chain Also Demand Attention, Bus. Ins. 26 (May 15, 2000). These provisions typically provide coverage to enumerated dependent properties such as those who supply materials for the insured, purchase the insured's goods, or attract customers to the insured's business. Paula B. Tarr, Where Have All The Customers Gone? Business Interruption Coverage For Off-Premises Events, 30 The Brief 20, 29 (Winter 2001); see Archer Daniels Midland Co. v. Hartford Fire Ins. Co., 243 F.3d 369, 371 (7th Cir.2001) (Regular business-interruption insurance replaces profits lost as a result of physical damage to the insured's plant or other equipment; contingent business-interruption coverage goes further, protecting the insured against the consequences of suppliers' problems.). 42 By its express terms, the CBI provision of the policy covers business interruption due to loss or damage to properties not operated by the Insured, that is to say, it insures against events that prevent entities from supplying goods to, or receiving goods from, the insured. The relevant inquiry, then, is whether ABM operated the properties at issue in this action. We hold that through its operation of the infrastructure of the WTC, appellant also operated the physical spaces occupied by itself and other tenants as well as those shared with the public. 43 The transitive verb to operate has the following meanings: 1: to cause to occur, ... 2 a: to cause to function usu[ally] by direct personal effort, ... b: to manage and put or keep in operation whether with personal effort or not. Webster's Third New Int'l Dictionary of the English Language (Unabridged) 1581 (2002). Among its many activities at the WTC, ABM directed and maintained the HVAC system and freight elevators. It effectively ran the entire physical plant. Appellant handled the upkeep and maintenance of the infrastructure itself, including the leased premises of other tenants and the common areas. Any work done in or on the tenants' premises had to be cleared through ABM. Moreover, ABM developed and executed new technologies that ensured that the complex ran smoothly. Using these direct efforts, appellant caused the properties at issue in the WTC to function. In this respect, the insured effectively served as a management company for the WTC, partnered with other entities responsible for the complex's finances. It is true that ABM did not operate the businesses that leased space at the WTC, nor did it dictate the usage of the common areas. But the policy requires only that ABM operated the physical structures themselves, a hurdle it clearly meets through its extensive involvement with the property. 44 Further, ABM's operation of the WTC need not be exclusive. The word `operate' has varying meanings according to the context.... One may operate singly with [one's] own hands, or jointly with another, or through one or more agents. State Farm Mut. Auto. Ins. Co. v. Coughran, 303 U.S. 485, 491, 58 S.Ct. 670, 82 L.Ed. 970 (1938). In Coughran, the Court held that the term operated could refer not only to the actions of a motor vehicle owner's wife, who was riding in and responsible for the vehicle, but also to those of a 13- year-old girl, who was driving under the wife's direction and guidance. Id. at 491-92, 58 S.Ct. 670. Here, ABM ran the physical aspects of the complex, including the upkeep and maintenance of the common areas and tenanted spaces. Although it did so through contracts with the Port Authority, Silverstein Properties, and other tenants, under Coughran, the presence of these other entities and the joint decision-making involved did not detract from ABM's operation of the property. See Potts v. Cont'l Cas. Co., 453 F.2d 276, 278 (9th Cir.1971) (holding that an insurance policy provision, which excluded coverage when the insured was flying on an airplane operated by his employer, applied even though the airplane was owned by another entity and on a short-term lease to the employer). 45 We cannot adopt Zurich's contention that if ABM is said to operate its customers' premises and the common areas, then there would never be an instance in which ABM would need CBI coverage. Outside of the present situation, there exists a host of scenarios where CBI coverage would benefit ABM, including damage to the property of ABM's suppliers, its intermediaries, or its customers outside of the complex. We recognize that CBI coverage usually encompasses destroyed property of the insured's customers, and the tenants here were direct receiver[s] of .... services from the Insured as contemplated under the CBI provision in § 7.F(2). Yet the case before us involves a unique set of circumstances where the insured's customers occupied a building that the insured itself operated, thus rendering the CBI provision inapplicable. III Other Relevant Policy Provisions 46 We turn now to analyze other relevant provisions of the policy. A. Extra Expense Coverage 47 Section 7.C insures against certain costs incurred from the loss, damage, or destruction of property as described in the Insurable Interest provision. ABM sought reimbursement under this provision for extra expenses that it contends resulted from the destruction of the WTC, such as increased employee costs related to seniority displacements of employees in other buildings, state unemployment obligations, and employee termination costs. 48 The scope of the Extra Expense provision is limited to that of the Insurable Interest provision, and § 7.C(1) states that extra expenses must result from damage or destruction to real or personal property as described in Clause 7.A. The district court held that ABM could not claim coverage under the Extra Expense provision because the extra expenses incurred by ABM resulted from the destruction of property that was not `owned, controlled, used, leased or intended for use' by ABM. Zurich, 265 F.Supp.2d at 307. We disagree with the district court's interpretation and application of the Insurable Interest provision in regard to the BI issue for the reasons stated above, and accordingly disagree with its Extra Expense holding. We concluded a moment ago that ABM used and controlled the damaged property to the extent required by the policy and New York law. Thus, we cannot uphold the district court's award of summary judgment to Zurich on these grounds. 49 Nonetheless, Zurich insists that even if ABM has suffered a loss as described in § 7.A, the expenses claimed by it are still not covered under the Extra Expense provision. Zurich argues that the provision limits coverage to expenses from  continuing operations that were made more costly as a result of damage to the insured's property rather than loss of income resulting from the suspension of business operations. The language of the provision in the policy has no such limitation. Its terms require only that the extra expense relate to the operation of the Insured's business over and above the costs normally incurred by the business, not that the insured resume operations identical to those prior to the loss. Nor does the contract provision limit coverage to losses stemming directly from the location that sustained damage. Inasmuch as the provision is not otherwise limited, we think it applies when continuation of the business occurs at a substitute location. 50 It is not clear at this point, however, that summary judgment in ABM's favor is appropriate on the Extra Expense issue because there is no finding as to the causation requirement. The policy language requires that extra expenses result[] from a covered incident. A causation requirement is a fundamental aspect of an insurance policy because it allows an insurer to have a reasonably defined universe of possibilities to which it can apply its risk analysis methods ... and determine a premium. Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 101:40 (3d ed.1998). Hence, on remand, we direct the district court to make findings as to whether the extra expenses claimed by ABM were proximately caused by the peril insured against. B. Civil Authority Coverage 51 Appellant has also made claims for its losses of business income resulting from the issuance of civil authority orders that, it argues, prevented it from operating at its numerous downtown locations. The Civil Authority section of the policy, § 7.F(5), cover[s] the loss sustained during the period of time when access to real or personal property is impaired by order or action of civil or military authority issued in connection with or following a peril insured against. 52 The district court denied Civil Authority coverage on the ground that the insured's loss of business income was caused by the destruction of the WTC, and thus would have occurred even if no orders of civil authorities prohibited access to the WTC. Zurich, 265 F.Supp.2d at 309. We are unable to agree with this reasoning because the loss of income that appellant seeks under this provision is from its interruption of business at its 34 non-WTC locations. As a consequence, the destruction of the WTC, unaccompanied by the orders, would not have resulted in the loss of income for which ABM seeks reimbursement under the Civil Authority provision. 53 Nonetheless, a factual dispute remains with respect to whether the civil orders or ABM's own company policies impaired its access to the properties it serviced. The issue of Civil Authority coverage must therefore be remanded to the district court for further consideration. C. Leader Property Coverage 54 Lastly, ABM asserts that if BI coverage is unavailable, then alternatively its losses of business income from the destruction of the WTC are covered by the Leader Property provision which applies to losses to property not owned or operated by the Insured, located in the same vicinity as the Insured, which attracts business to the Insured. We affirm the district court's grant of summary judgment to Zurich on the issue of Leader Property coverage, although on different grounds than it relied upon. The trial court ruled the WTC was not a `leader property' in the `vicinity' of ABM which `attracts business' to ABM, but rather is itself the site and source of the ABM business here at issue. Zurich, 265 F.Supp.2d at 308. We reject the notion that a property cannot attract business to another entity at the same site, or adjacent to it. The district court's refutation of this possibility rests on an overly literal interpretation of the word attracts. Economic forces need not act in the same physical fashion as does a magnet attracting metal. Indeed, it was the interconnectedness of the WTC complex that attracted its tenants to ABM's services by providing an opportunity for ABM to exploit economies of scale. 55 Nonetheless, we conclude that Leader Property coverage is inappropriate in this case. As discussed above, ABM operated the infrastructure of the complex, including the common areas and tenanted premises. As such, the situation here does not fall within the language of § 7.F(4) of the policy which covers properties not owned or operated by the insured. Accordingly, the award of summary judgment to Zurich on this issue must be affirmed. IV Zurich's Motion to Exclude Evidence 56 Finally, in addition to challenging the award of summary judgment to Zurich, ABM also contends that the district court erred in excluding evidence that supported a two-occurrence claim. Evidentiary rulings ordinarily will not be overturned absent an abuse of discretion. See Am. Fed. Group, Ltd. v. Rothenberg, 136 F.3d 897, 904 (2d Cir.1998); In re Martin-Trigona, 760 F.2d 1334, 1344 (2d Cir.1985) (evidentiary rulings generally not to be disturbed unless `manifestly erroneous') ( quoting Salem v. United States Lines Co., 370 U.S. 31, 35, 82 S.Ct. 1119, 8 L.Ed.2d 313 (1962)). Even an erroneous ruling will not lead to reversal unless affirmance appears to the Court to be inconsistent with substantial justice, Fed.R.Civ.P. 61, or the exclusion affects a substantial right of the party. Fed.R.Evid. 103(a). 57 We affirm the district court's grant of Zurich's motion in limine to bar ABM from asserting a two-occurrence theory and agree with the reasons the district court gave during the evidentiary hearing. Because Zurich proceeded on a theory of one occurrence in its original and amended complaints, the trial court reasoned that the burden to contest this theory shifted to ABM. 58 ABM relies on Gaetan v. Firemen's Ins. Co., 264 A.D.2d 806, 808, 695 N.Y.S.2d 608 (2d Dep't 1999), for the proposition that the insurance company bears the burden of proving exclusionary language. However, per-occurrence limitations define the scope of coverage and are not policy exclusions. See Worcester Ins. Co. v. Bettenhauser, 95 N.Y.2d 185, 189, 712 N.Y.S.2d 433, 734 N.E.2d 745 (2000) (noting the line drawn by New York courts between a lack of coverage in the first instance and a lack of coverage based on an exclusion). Further, Gaetan is inapplicable to the case at hand because it only addresses the question of who has the burden of proof rather than the burden of raising the issue. Even if Zurich has the burden of raising the issue, it has met this burden by invoking the per-occurrence limits. Zurich's complaint presumed one occurrence by explicitly stating that it was seeking a declaration that liability was limited to $10 million. The burden then shifted to ABM to contest the number of occurrences. 59 Moreover, it was not an abuse of the trial court's discretion for it to rule that ABM failed to contest the one-occurrence exclusion in a way that would give fair and timely notice to Zurich. Appellant did not raise the issue in its responsive pleadings even though its counterclaim refers to the $10 million per-occurrence sublimit. In fact, a witness for ABM stated that ABM had not yet taken a position on the issue because it thought its limits were adequate. Additionally, in its damage computations, ABM did not assert that its damages were premised on a two-occurrence claim. ABM now argues that it raised the issue in its motion papers for partial summary judgment, but these motions only included a footnote stating that ABM would be entitled to $10 million for each occurrence. This footnoted mention of the sublimit does not sufficiently raise the issue. See United States v. Restrepo, 986 F.2d 1462, 1463 (2d Cir.1993) (holding that an argument noted only in a footnote is not preserved for appellate review). 60 The district court was unpersuaded by ABM's argument that the claim should be permitted, even if untimely, because no prejudice would result from allowing the claim. Rule 403 of the Federal Rules of Evidence states in part that evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice. Fed.R.Evid. 403. The trial court has broad discretion in determining whether proffered evidence should be admitted. See United States v. Robinson, 560 F.2d 507, 514-15 (2d Cir.1977) (en banc). Even if the occurrence issue is a matter of law, the determination of the harm flowing from each occurrence would require considerable discovery. Because discovery was closed and trial was approaching, the district court could reasonably conclude that Zurich would be substantially prejudiced by the introduction of the new claim and did not abuse its discretion in refusing to consider it.