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The tenant of a commercial building in Manhattan violated its lease by acquiring insurance that provided coverage for damage due to many typical acts of terrorists but which expressly carried a binder stating that “terrorism is excluded,” a unanimous New York Court of Appeals decided Tuesday. The insurance case, TAG 380 LLC v. ComMet 380 Inc., 79, was a direct result of the Sept. 11, 2001, terror attacks on the World Trade Center and of subsequent concerns by commercial property owners that occupants carry proper insurance against potential future attacks. TAG 380, a company managed by real estate developer Sheldon H. Solow, has a lease with the owner of a Manhattan commercial building at 380 Madison Ave. The lease requires TAG 380 to carry full insurance against damage caused by, among other things, windstorm, hail, smoke, riot, “civil commotion” and contact with the building by an airplane. The 25-year lease, which is set to expire in 2014, does not specifically require coverage for acts of terrorism. TAG 380 renewed its insurance policy in 2002, during a period in which insurers began to deny coverage for damage resulting from terrorist acts. TAG 380′s policy explicitly said, “TERRORISM IS EXCLUDED.” A few months later, building owner ComMet 380 Inc. informed TAG 380 it was in default on its lease because of insufficient insurance coverage. TAG 380 sued. “ComMet contends that ‘terrorism’ includes actions taken by individuals who may use any of the enumerated perils to cause damage to the building,” Judge Carmen Beauchamp Ciparick wrote Tuesday for the Court of Appeals. “TAG, on the other hand, contends that the insurance it procured provided coverage for any of the named perils and thus it met its obligations under the lease, even though its policy excluded ‘terrorism.’ TAG is mistaken.” The tenant’s policy violates Insurance Law §3404, which codified New York’s standard fire insurance policy against all “direct loss” caused by fire and lightning and set a minimum level of coverage, the court concluded. By providing coverage for many kinds of damage caused by terrorists, but by specifically excluding coverage for terrorism, other sorts of mayhem will not be insured against and the minimum coverage requirements of Insurance Law §3404 are being violated, the court decided. The term terrorism “is not limited to a specific cause of harm (e.g., a fire, explosion, collision with an aircraft), but rather it can also describe individuals, with a common purpose, who may potentially utilize any of the lease’s named perils to cause damage to the building,” Ciparick wrote. “Thus, by purchasing a policy that excludes from coverage all methods potentially used by terrorists, including the named perils in the lease, TAG breached its lease.” The court granted ComMet’s request for damages for the cost of additional insurance coverage it acquired because it believed TAG 380 was underinsured starting in 2002, plus attorney fees. Tuesday’s ruling reversed a 5-0 determination by an Appellate Division, 1st Department, panel. In Tag 380 LLC v. ComMet 380, Inc., 40 AD3d 1 (2007), the panel held that because a policy covered some terrorist acts, it should not be construed as covering all terrorist acts. The judges concluded that TAG 380 did not have a duty to maintain terrorism insurance on the Madison Avenue building. The court Tuesday reinstated the decision of Manhattan Supreme Court Justice Marcy S. Friedman. Bruce G. Paulsen of Seward & Kissel, attorney for ComMet, called Tuesday’s decision a “great” one. “It clarifies the Insurance Law, it defines terrorist acts and it makes clear that the Courts’ prior precedents, as well as the New York Insurance Law, mandated that the coverage required in our lease does not exclude terrorism,” Paulson said in an interview. Paulson said New York’s standard fire insurance policy is used widely throughout the country. Tuesday’s decision holds that “any such exclusion [of terrorist acts] would be violative of New York public policy, as well as the Insurance Law,” according to Paulson. In 2002, subsequent to TAG 380′s purchase of its disputed policy, the Insurance Department issued a circular letter to insurers in which it ruled that terrorism exclusions are against the public policy of New York and barred under the state’s standard fire insurance policy. Warren A. Estis of Rosenberg & Estis represented TAG 380. “We are extremely disappointed that the Court of Appeals did not follow the tenant’s position or the Appellate Division’s ruling concerning the interpretation of the language of the lease,” Estis said. He estimated that TAG 380 faces about $130,000 for the cost of additional insurance ComMet purchased for the building starting in 2002. But Estis said the cost of legal fees the court ruled TAG 380 must pay are likely to be “significantly” higher than the insurance costs.

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