United Air Lines v. Insurance Co. of Pa, Docket No. 05-2144 CV.

• Decision Date: 22 February 2006
• Docket Number: Docket No. 05-2144 CV.
• Citation: United Air Lines v. Insurance Co. of Pa, 439 F.3d 128 (2nd Cir. 2006)
• Parties: UNITED AIR LINES, INC., Plaintiff-Counter-Defendant-Appellant, v. INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, Defendant-Counterclaimant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

439 F.3d 128

UNITED AIR LINES, INC., Plaintiff-Counter-Defendant-Appellant, v. INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, Defendant-Counterclaimant-Appellee.

Docket No. 05-2144 CV.

United States Court of Appeals, Second Circuit.

Argued: January 10, 2006.

Decided: February 22, 2006.

Elliot H. Scherker, Greenberg Traurig, P.A. (Pamela A. DeBooth; Peter M. Gillon, Geoffrey J. Greeves, Simon Miller, John F. Triggs, Greenberg Traurig, LLP; of counsel), Miami, FL, for Appellant.

Jeffrey Weinstein, Mound Cotton Wollan & Greengrass (Eugene Wollan, Mark S. Katz, of counsel), New York, NY, for Appellee.

Before: WINTER, CABRANES, and SACK, Circuit Judges.

SACK, Circuit Judge.

On July 14, 2003, the plaintiff, United Air Lines, Inc., ("United") brought suit in the United States District Court for the Southern District of New York seeking a declaratory judgment and recovery in breach of contract under its $25 million "Property Terrorism & Sabotage" insurance policy with the defendant, Insurance Company of the State of Pennsylvania ("ISOP"). United sought indemnity for losses it suffered as a result of the September 11, 2001, terrorist attacks on the World Trade Center in New York City and the Pentagon in Arlington, Virginia.

United's ticket office located in the World Trade Center was destroyed. It is undisputed that United can recover from ISOP for any lost earnings that are attributable to this physical damage. Its facilities at Ronald Reagan Washington National Airport (the "Airport"), in Arlington, Virginia, suffered no significant physical damage as a result of the attack on the nearby Pentagon. The issue on this appeal is whether United can nonetheless recover for its lost earnings caused by the national disruption of flight service and the government's temporary shutdown of the Airport.¹ We agree with the district court that, because United cannot show that such lost earnings resulted from physical damage to its property or from physical damage to an adjacent property, under the unambiguous language of the insurance policy, the losses are not covered.

BACKGROUND

The first section of United's "Property Terrorism & Sabotage" insurance policy with ISOP states in pertinent part: "[ISOP] will indemnify [United] for property damage, loss of gross earnings, and extra expense in excess of the Deductible [as later defined] . . . resulting from [terrorism], and any ensuing fire damage, damage from looting, or other damage caused by an act of a lawfully constituted authority for the purpose of suppressing or minimizing the consequences of [an incident of terrorism]." Property Terrorism & Sabotage Insurance Policy between ISOP and United, set forth as Exhibit A to Aff. of Jeffrey S. Weinstein dated July 9, 2004 (the "Policy"), § I.A. A subsequent section of the Policy provides that the Policy "insures against loss resulting directly from the necessary interruption of business caused by damage to or destruction of [United's] Insured Locations [which include United's facilities at both the World Trade Center and the Airport] resulting from Terrorism." Id., § III.C.1. The Policy then states that "[t]his section is specifically extended to cover a situation when access to the Insured Locations is prohibited by order of civil authority as a direct result of damage to adjacent premises." Id.

United seeks a declaratory judgment pursuant to 28 U.S.C. § 2201(a) and an award of damages for breach of contract against ISOP. In this pursuit, it made two principal arguments to the district court to support its position that the cited provisions of the Policy entitle it to compensation for the lost earnings at issue. First, it argued that section I., quoted above, contains within it a free-standing "Suppression Damages Clause,"² which covers United's lost earnings resulting from the terrorist attacks even in the absence of physical damage to its Airport property. Second, United argued that it is entitled to recover for lost earnings arising from the post-attack shutdown of the Airport under the "Civil Authority Clause" contained in section III.C.1. of the Policy because the closure was a direct result of physical damage to the Pentagon, which was on "adjacent premises." ISOP asserts seven counterclaims and seeks a declaratory judgment that it is not obligated to reimburse United for the disputed portion of its lost earnings.

On March 31, 2005, in a thorough and thoughtful opinion, the district court (Richard M. Berman, Judge) granted ISOP's motion for summary judgment and denied United's cross-motion for summary judgment. The court concluded that the plain and unambiguous terms of the Policy did not cover the claims that United asserted. See United Airlines, Inc. v. Ins. Co. of the State of Pa., 385 F.Supp.2d 343 (S.D.N.Y. 2005).

First, the court reasoned, paragraph III. C.1. of the Policy states that the Policy covers losses from business interruption "caused by damage to or destruction of the Insured Locations." United could (as both parties agreed) therefore recover the amount of losses attributable to the destruction of its ticket office in the World Trade Center. But because the other loss of earnings was caused by the nation-wide suspension of air service rather than "damage to or destruction of [a United] Location[]," United could not recover under the Policy for earnings lost as a result of the system-wide disruption of air service. See United Airlines, 385 F.Supp.2d at 348-50.

Second, the court noted that under the Policy's "civil authority" clause in paragraph III.C.1., United would not have been required to show physical damage to its property had it been seeking to recover for damages resulting from blocked access to its Airport property as "a direct result of damage to adjacent premises." But the district court rejected United's argument that the Pentagon qualified as an "adjacent premise" to the Airport for purposes of this paragraph. The court further concluded that, even if the Pentagon were "adjacent" to the Airport, the closing of the Airport and consequent lost earnings incurred by United were not direct results of the physical damage to the Pentagon. See id. at 351-54.

United appeals.

DISCUSSION

I. Standard of Review and Governing Law

"We review a district court's grant of summary judgment de novo, construing the evidence in the light most favorable to the nonmoving party and drawing all inferences and resolving all ambiguities in favor of the nonmoving party." LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424 F.3d 195, 205 (2d Cir.2005) (internal quotation marks and citations omitted). Whether the language in an insurance contract is ambiguous is also a question of law subject to our de novo review. Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691, 695 (2d Cir.1998).

The Policy is, according to its choice-of-law provision, governed by New York law. Neither party disputes the applicability of New York law to this dispute.

II. Recovering Loss of Gross Earnings Under the "Suppression Damages Clause"

"The purpose of business interruption insurance is to indemnify the insured against losses arising from an inability to continue normal business operations and functions due to damage sustained as a result of the hazard insured against. In other words, the goal is to preserve the continuity of the insured's earnings." N.Y. Jur. Insurance § 539 (2005); see also 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 . . . .") (quoted in Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158, 168 (2d Cir.2005)). Although the Policy's business interruption clause requires that the loss of earnings stem from physical damage to United's property, a "civil authority" clause extends the Policy's coverage to instances in which United is unable to reach its property as a result of physical damage to an adjacent property. The complete provision reads:

III. VALUATION

. . . .

C. BUSINESS INTERRUPTION

1. GROSS EARNINGS

This policy insures against loss resulting directly from the necessary interruption of business caused by damage to or destruction of the Insured Locations resulting from Terrorism, Sabotage, Mutiny, Insurrection, Rebellion, or Coup d'Etat.

This section is specifically extended to cover a situation when access to the Insured Locations is prohibited by order of civil authority as a direct result of damage to adjacent premises, not exceeding, however, two (2) consecutive weeks.

Policy, § III.C.1.

To recover gross earnings under this language, United would be required to demonstrate that the business interruption at issue resulted from either 1) physical damage to property at the insured location in question, i.e., the Airport, or 2) an order of civil authority as a direct result of physical damage to property adjacent to the insured location in question, i.e., the Pentagon. As explained in part III of this opinion, United is able to show neither.

United argues, however, that a third provision of the Policy, contained in section I.A. — what it calls the "Suppression Damages Clause" — provides a separate basis upon which it may recover from ISOP its loss of gross earnings without having to establish either of the foregoing prerequisites. United's argument in this respect fails because, simply put, there is no "Suppression Damages Clause."

The first section of the Policy states:

I. INSURING AGREEMENT

A. The Company will indemnify the Insured for property damage, loss of gross earnings, and extra expense in excess of the Deductible, but not exceeding the Limit of Liability, resulting from the following incidents, and any ensuing fire damage, damage from looting, or other damage caused by an act of a lawfully constituted authority for the purpose of suppressing or minimizing the consequences of any of the following...