Zurich American Insurance Co. v. Abm Industries, Inc.
397 F.3d 158 (2005)
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Rule of Law:
Under New York law, for business interruption insurance purposes, an insured "uses" property when that property is vital to the execution of its business purpose and is the means by which it derives its income, even if it does not own or lease the property. A sufficient "insurable interest" under N.Y. Ins. Law § 3401 requires only a lawful and substantial economic interest in the preservation of the property, not a formal property right like ownership or tenancy.
Facts:
- ABM Industries, Inc. (ABM) was a contractor providing extensive janitorial, lighting, and engineering services at the World Trade Center (WTC).
- ABM operated the entire heating, ventilating, and air-conditioning (HVAC) system for the WTC complex, essentially running its physical plant.
- Under its contracts, ABM had office and storage space, janitorial closets, and effective control over freight elevators throughout the complex.
- ABM's significant presence allowed it to secure service contracts with nearly all of the WTC's tenants, and it ran an on-site call center to dispatch employees to remedy problems.
- ABM procured an insurance policy from Zurich American Insurance Company (Zurich) that provided business interruption coverage for losses caused by physical damage 'to insured property.'
- The policy defined 'insured property' as including property 'owned, controlled, used, leased or intended for use by the Insured.'
- On September 11, 2001, terrorist attacks completely destroyed the WTC.
- As a result of the destruction, ABM lost all income it derived from its WTC operations, and government orders prevented it from accessing 34 other locations in lower Manhattan.
Procedural Posture:
- Zurich filed a declaratory judgment action against ABM in the U.S. District Court for the Southern District of New York.
- Zurich sought a declaration that ABM's losses were covered by the policy's Contingent Business Interruption (CBI) provision, which had a $10 million sublimit.
- ABM counterclaimed, arguing its losses were covered under the main Business Interruption (BI) provision, which had no applicable sublimit.
- After discovery, both parties moved for partial summary judgment.
- The district court granted Zurich's motion for partial summary judgment, holding that BI coverage only applied to the space ABM itself occupied and its own equipment because ABM did not 'use' or 'control' the common areas or tenant premises in a legally cognizable way.
- In a subsequent order, the district court eliminated the remaining coverage, finding the destruction of ABM's specific property was not the material cause of its business interruption.
- ABM appealed the final judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does an insurance policy's business interruption coverage for damage to property 'used' or 'controlled' by the insured extend to common areas and tenant premises of a building complex where the insured, a service contractor, provides comprehensive operational services but does not hold an ownership or leasehold interest?
Opinions:
Majority - Cardamone, J.
Yes. A service contractor's extensive, non-ownership-based physical integration with and operational management of a building complex constitutes sufficient 'use' to trigger business interruption coverage. The district court's interpretation of 'use' was too narrow; ABM 'used' the WTC's common areas and tenant premises because they were the essential means by which it conducted its business and derived its income. Denying coverage because ABM is a service provider that works in others' space creates an artificial distinction not found in the policy. ABM had a valid 'insurable interest' under New York law, which only requires a 'lawful and substantial economic interest' in the property's preservation, not a formal property right. Furthermore, the Contingent Business Interruption (CBI) provision did not apply because ABM's comprehensive management of the WTC's physical plant meant it 'operated' the property, placing it outside the CBI's scope for property 'not operated by the Insured.'
Analysis:
This decision significantly broadens the concept of 'use' for establishing an insurable interest in business interruption claims, particularly for service-based businesses. It rejects a narrow, property-rights-based interpretation, focusing instead on the practical economic reality of the insured's relationship to the damaged property. The decision establishes that a contractor deeply integrated into the operations of a property can claim that property as 'insured property' for business interruption purposes, even without ownership or a lease. This precedent is crucial for service providers whose business model is inextricably linked to their clients' physical premises.
