The Owner's Perspective On Dealing With Natural Disasters, Security Risks And Catastrophic Loss: Legal And Practical Strategies

Saturday, July 1, 2006 - 01:00

The program was titled "Hurricane Katrina: Lesson Learned in Preparedness Planning, Risk Management, Insurance, Property Operations, and Legal Issues" and examined the lessons learned from Hurricane Katrina and 9/11 as well as recent developments in the insurance industry, Federal Terrorism Risk Insurance Act (TRIA) and the Emergency Action Plan requirements implemented under New York City's Local Law 26.

The lessons learned were summed up at the program as follows:

1. Know Your Insurance Program. Insurance purchases are not made with catastrophe in mind and to make matters worse, large real estate owners most often have not read the fine print of the policies and are not fully aware of whether the right coverages are in place.

Issues such as whether insurance coverage adequately covers floods (which it probably does not) and whether there may be an exclusion for flood damage, while covering hurricane and wind damage, are details which most often remain unknown until after disaster hits.

It is clear that the practical end of insurance planning did not contemplate Katrina. As pointed out by Brian Palumbo of the Fiel Organization, "In our shopping centers, no rents were collected and the mortgagees were not nice or friendly after Katrina. The most the mortgagees would offer, after Katrina, was a one-month hiatus in payment. They simply expected that we would promptly pay principal and interest every month as scheduled."

In the event that the property owner does not rebuild, there will be an argument with the insurance company whether replacement value will be paid to the insured. It would be far better to review and weigh these issues as the insurance coverage is being procured.

According to Brian Palumbo, "There are all sorts of issues on flood insurance versus hurricane/wind coverage. It is important to get in early and take pictures and put the claim into coverage 'buckets' under which you can argue for coverage."

As Sharon Emek points out, "The market is the problem. There is a national conversation as to whether there should be Federal backstop coverage; or as the Federal Government sees it, a subsidy. It is recognized that reinsurance treaties are becoming more expensive and significant weather changes are being recognized that threaten water surges in the event of a hurricane, nationally, in areas like Long Island. Without Federal Flood Insurance, there will be none."

2. Know Your Mortgage Provisions. When reviewing mortgage provisions, the borrower most often does not consider potential catastrophic events. It is clear, however, that obscure provisions can lead to potential liability to the lender in the event a property is damaged by catastrophe. "An example of this," as pointed out by Brian Palumbo, "Is that if the borrower elects to pay off the mortgage on a property, there will be a pre-payment penalty, and this penalty can amount to hundreds of thousands of dollars. However, if the pay off of the mortgage comes from the insurance company directly, there is not a pre-payment penalty. "

3. Know Your Lease Terms. "Many leases do not provide the right on the part of the landlord to terminate the lease in the event of a casualty like Katrina and the landlord would be obligated to rebuild," according to Brian Palumbo.

4. Know Evacuation Requirements. According to Richard Hudak, "Our biggest challenges came in communications and in some of the basics of how our building worked. Loews was able to get its New Orleans hotel back. But we had a very hard time reaching our personnel to make sure they had evacuated or were safe. Vehicles were commandeered and satellite phones were used."

New York City has recently passed requirements that each building that is at least 6 stories or 75 feet tall must have an emergency action coordinator and an emergency action plan. The real estate community in New York is concerned with potential liability for either premature or delayed evacuation. On the bigger picture, there is no way to avoid potential liability, and it appears that the key will be to effectively train emergency action plan coordinators, property owners and tenants and not to set prescriptive rules designed to fit all potential catastrophes. By effective training, safety will be maximized and liability will be limited, although not wholly eliminated.

5. Know the Local Government's Program for Limiting Access to Damaged Buildings Once Disaster Strikes. There is a dilemma in instances where the local government, in order to prevent dangerous conditions or vandalism and looting, sets up a system in which no one other than essential personnel are permitted in the area designated by disaster. The New York City program is called CEAS.

6. Know the Unique Vulnerabilities and Conditions that Affect Your Buildings. Significantly, each building needs its own uniquely tailored emergency action plan because each building is different. For example, air intake vulnerability and flood damage susceptibility is different for each building.

As Sharon Emek points out, "The culture of the owner of the building must establish emergency action planning as a priority. The owner must encourage its own employees and managers and the tenants in the building to take training in emergency preparedness from a qualified provider. There must be encouragement to follow the recommended procedures. It has to be understood, however, that even if you carry out extensive training, you still cannot assure that the culture of the building management and the tenants will be committed to being proactive in keeping building occupants and tenants safe."

7. Exercise a Higher Level of Due Diligence Before Leasing or Purchasing Property. There is no doubt that the building's location affects its susceptibility to flood damage in the event of a hurricane. As has happened with earthquake preparedness, government regulations and insurance requirements have begun to evolve. Local laws have made it more difficult to rebuild in New Orleans post Katrina. A heightened level of awareness and a major public awareness program has been developed by local governments, as with the New York City Office of Emergency Management's hurricane preparedness initiative.

8. Develop a Shelter-in-Place Program. According to Richard Hudak, "Evacuation is not always the answer. It is important to make sure that you have the ability to shelter in place and to have meals, water and a method of communicating with the outside world. In Loews' New Orleans experience, we needed water, food, bathroom facilities and to get rid of perished foods to allow us to stay in the hotel and do what we needed to do to take moisture out through air conditioning to avoid losing the building to mold."

"In the face of terrorism or a bomb threat, evacuating into the parking lot may play into the hand of a car bomber, and put your tenants or guests at even greater peril than if you had left them in the building," observed Mr. Hudak.

9. Know How to Secure Your Building from Vandalism and Looting. From a strictly law enforcement perspective, avoiding vandalism and looting after a hurricane or other disaster is a large challenge. Evacuations have taken place, electronic means of protection are no longer effective, and power is off.

"Once emergency generators brought the power back on in the hotel, we needed to go into each room to make sure that no one was there and that the hotel guests' possessions were left in tact. Once the building turned into a construction renovation site, this presented another set of problems, with numerous construction personnel coming and going. This is a difficult problem," said Richard Hudak.

10. Know How to Get Supplies, Labor and Triage Services to Protect Your Building. "It is essential to know where you will turn if you need emergency help with construction, mold abatement or in assisting evacuation. We turned to contractors from out of the region to help us get the building back into shape and to police from Alabama and Texas to help us with evacuation of our personnel," Richard Hudak observed.

Conclusion

It is essential to plan in advance for catastrophe. It is human nature not to plan. It is also human nature to resist learning from the most unpleasant experiences of the past. Forgetting those experiences is less painful than adopting the lessons learned.

John E. Osborn is a Partner of the New York City and Westchester construction litigation and environmental law firm of John E. Osborn PC. Mr. Osborn is the General Counsel of the Greater New York Construction User Council and on the Board of Directors of the Building Owners' and Managers' Association of New York.

On May 17, the Building Owners' and Managers' Association of New York (BOMA New York) presented a seminar focusing on consequences to large property owners in the aftermath of Hurricane Katrina in New Orleans and the lessons learned. From the perspective of my law practice representing large property owners on construction and environmental issues, I served as the program's moderator. The speakers were: Brian Palumbo, General Counsel of the Feil Organization, Inc. The Feil Organization is the owner, developer and manager of 6 million square feet of shopping center and mall property throughout the country, nearly 11 million square feet of prime office space in New York, Boston, Chicago and Louisiana. Feil's properties include shopping centers and office buildings in New Orleans. Richard Hudak, Director of Corporate Security, Loews Corporation. One of the Loews Corporation's hotels is in New Orleans. Mr. Hudak participated in preventing the loss of the hotel from hurricane damage, post Katrina. Mr. Hudak speaks from his experience protecting Loews' properties from risk and from his worldwide security experience with ITT/Sheraton, and as an expert witness in security risk cases. Sharon H. Emek, Partner, CBS Coverage Group, Inc., a full-service insurance agency. Sharon has been instrumental in promoting Congressional passage of the Terrorism Risk Insurance Act and has been integrally involved with the insurance industry's national catastrophe planning efforts.