United States: Shifting Business Interruption Risk Allocation In A Post-Sandy World

Landlords hit by insurance exclusions in the aftermath of Hurricane Sandy are hitting back by requiring tenants to use the proceeds of business interruption insurance to pay rent.

Before Hurricane Sandy hit the United States in October 2012, in the event of a casualty adversely affecting a tenant's ability to operate its business or access its premises, casualty provisions in commercial leases in New York City typically provided for an abatement of rent in proportion to the affected area of the premises. As a separate stand-alone covenant, tenants were often required to maintain business interruption insurance, which was usually equal to a fixed dollar amount or the sum of a predetermined number of monthly rent payments.

Notwithstanding the obligation for tenants to maintain business interruption insurance, there was no corresponding lease obligation requiring tenants to use business interruption insurance proceeds to pay rent to their landlord in the event of a casualty. In addition, landlords did not negotiate the specific terms of such policies. This meant they had no control over whether or not the business interruption insurance was paid to them and were unable to limit or restrict exclusions from coverage limiting a tenant's ability to collect on a claim. Instead, landlords maintained rent-loss coverage to protect against loss of income.


Hurricane Sandy caused landlords and tenants to reassess the application of business interruption policies in commercial leases. As a result of catastrophic flooding and the cessation of public utilities, in many parts of Manhattan, particularly lower Manhattan and the Financial District, hundreds of buildings and dozens of streets were closed.

Landlords and tenants expected that they would be made whole by business interruption insurance policies (for tenants) and rent loss insurance policies (for landlords). Unbeknownst to both parties, however, many business interruption and rent loss insurance policies included numerous and broad exclusions limiting recovery for certain events including, without limitation, damages resulting from flooding, acts of God, natural disasters, unavailability of public utilities, the closure of an entire building, and the closure of the premises or building by governmental authorities.

Facing US$ billions in insurance claims, insurers exploited these exclusions and denied claims. For example, if a policy contained an exclusion for flood damage, the damage and loss was classified as being caused by a flood; if a policy contained an exclusion for natural disasters, the damage and loss was classified as being caused by a natural disaster. These exclusions enabled insurers to reject or limit otherwise legitimate claims.

Most landlords were unaware that their leases permitted, or did not expressly prohibit, exclusions from coverage, as certificates of insurance only provide broad overviews of the type and amount of coverage. They do not specify exclusions or limitations that would impact an insured's ability to collect following a casualty event. Even if a lease required that a tenant pay business interruption insurance proceeds to a landlord, which before Sandy was atypical, a landlord would remain exposed unless the casualty abatement was specifically conditioned upon a tenant collecting on business interruption insurance proceeds and paying them to the landlord. Effectively, in these circumstances, landlords would unintentionally secondarily insure tenants' business interruption policies and backstop tenants' loss of income as a result of a claim being rejected owing to specific exclusions from coverage. In these instances, tenants would receive an abatement of rent regardless of whether or not their landlord received the benefit of rent-loss or business interruption coverage.

To the extent that tenants were not required to pay their landlord their business interruption insurance proceeds as rent, landlords were forced to make a claim on their own rent loss policies, many of which were insured on a portfolio-wide basis with insurance limits equal to a fraction of the exposure caused by a building-wide catastrophe. Many landlords did not anticipate, or did not want to pay the premium to cover, the interruption of rental income for an entire building, and were thus under-insured and suffered significant losses.


In the aftermath of Hurricane Sandy, some landlords have sought to mitigate their casualty exposure and "move the market" by shifting the allocation of risk for tenant business interruption insurance policies actually paying out in the event of a casualty. New York landlords still require tenants to maintain business interruption coverage, but in some leases landlords condition casualty rent abatements upon the viability of a tenant's business interruption insurance policy. For example, if a business interruption insurance policy does not pay out because of an insurer enforcing an exclusion from coverage, there will be no abatement of rent.

Post-Hurricane Sandy, one prominent New York landlord now requires new tenants to assign proceeds of business interruption insurance to the benefit of the landlord under the following provision:

Notwithstanding anything to the contrary contained in this Article xx, (x) if Landlord or any mortgagee of the Building shall be unable to collect insurance proceeds (including rent insurance proceeds) for any reason other than a negligent act of Landlord, its employees, contractors or agents, there shall be no abatement of Fixed Rent or Additional Charges, and (y) Tenant's right to an abatement of Fixed Rent and/or Additional Charges shall only be enforceable if (i) such casualty renders the Premises partially or wholly unusable for a period in excess of twelve (12) months and (ii) Tenant has collected on (and paid to Landlord) Business Interruption Insurance proceeds for the twelve (12) months subsequent to the date of such casualty. For the avoidance of doubt, it is the intent of the parties that any proceeds available under Business Interruption Insurance must be exhausted prior to Tenant receiving any abatement for damage or other casualty to the Premises under this Lease.

This shift in allocation of risk means that a tenant may now be responsible for any gaps in coverage to the extent that an insurer refuses to honour a business interruption policy, on the basis that a tenant is in the best position to negotiate and understand specific exclusions to their coverage. As a result, in these instances exclusions will now be the responsibility of a tenant rather than the landlord, and if a policy does not provide sufficient coverage, or contains too many exclusions, a tenant can elect to pay an additional premium to eliminate those exclusions.

As most tenants are not in the insurance business, and most tenant's lawyers are averse to changes in what is considered "market", this paradigm shift in risk allocation has faced vociferous opposition from tenants and their counsel. Some landlords are, however, aggressively seeking to frame the risk allocation issue in terms of which party is better suited to backstop a rejected claim and act as the secondary insurer of a business interruption policy. Landlords that are successful in this pursuit will be in a much stronger position to weather the storm and protect vital streams of rental income following a major casualty event.

Shifting Business Interruption Risk Allocation In A Post-Sandy World

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
Strasburger & Price, L.L.P.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
Strasburger & Price, L.L.P.
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions