Why an Insurer Denied a Claim For a Storm-Battered Crane
More than four years after Superstorm Sandy mangled a tower crane in New York City, attorneys for a developer, a construction manager and Zurich American Insurance Co. took their places in a courtroom in Albany last winter to argue before a panel of judges, the last appeal in an improbable lawsuit involving the crane. Although equipment and tools are not covered by a builders-risk policy, the developer and CM were trying to collect a payout for the crane damage at the 74-story One 57 luxury condominium tower in New York City.
State of New York Court of Appeals judges in February ruled in favor of Zurich.
The case, which took three court decisions to resolve, may offer important lessons at a time when contractors, developers and insurers are pondering a trail of hurricane destruction and damage totaling well into the tens of billions of dollars, from Puerto Rico to Texas, including three high-profile crane collapses in Miami. One lesson may be the importance of endorsing damage to a tower crane into a builders-risk policy, especially in areas where high winds are possible. Another lesson may be about skimping on insurance for a tower crane in times of unpredictable weather.
“They are fishing,” suggests Jeffrey Haynes, National Heavy Construction equipment practice leader for broker USI Insurance Services. He was referring to the failed claim by Extell Development and construction manager Lend Lease (US) Construction LMB. He adds, “But they are fishing for a reason.” Extell’s staff counsel disagrees, saying that the developer’s arguments were sound and that it nearly prevailed in the first level of appeal.
“It has raised awareness, without a doubt,” added Steven A. Coombs, principal of consultant Risk Resources, La Grange Park, Ill., and the author of a book on builders-risk insurance, of the years-long insurance battle between Extell-Lend Lease and Zurich.
At the heart of the dispute was the quest by Extell and Lend Lease to convince the New York courts to force Zurich, the lead insurer for the $700-million builders-risk policy, to make a payout (ACE, XL Insurance, Travelers and AXIS also were named as defendants). Pinnacle Industries provided to the project two tower cranes, one of which became a symbol of the destruction and havoc wreaked by Sandy.
The storm’s high winds caused the boom of the 750-ft-tall crane to collapse and dangle precariously, making the “crisis … a riveting symbol of the city’s wounded infrastructure,” the appeals-court judges’ decision noted, quoting The New York Times. The boom caused “catastrophic damage” to the tower’s upper works and “substantial damage” to its lower floors.
The day after the storm, Extell and Lend Lease notified Zurich and other insurers that they would be filing for damage to the crane and the tower.
Lend Lease filed six claims worth $4.5 million; several months later, Extell submitted its own claim for $6.5 million.
Led by Zurich, the project’s insurers in March 2013 rejected the first set of claims, citing an exclusion in the builders-risk policy for contractor’s equipment.
Extell and Lend Lease filed suit in New York state Supreme Court in September 2013, seeking to force Zurich to provide millions of dollars in coverage for the crane damage.
The developer and its contractor based their claims on the builders-risk policy’s language, which extended coverage not just to the tower but also to “temporary works” involved in its construction. The tower crane, Lend Lease attorney Matthew Lodge argued to the state Court of Appeals, is a temporary structure covered under the policy language as “temporary works.”
In addition, parts of the crane were to be incorporated into the tower itself after the machine was dismantled, bolstering the argument that it should be included in the coverage. These parts included beams cast into the floor slab and a mast tied to the “reinforced structural floor slabs every seven floors,” according to a description in the court record.
For good measure, Extell has given the insurers a detailed tally of the value of the crane provided by Pinnacle and the work the crane would perform, pegging the value at $89 million, the developer argued.
The insurers, in turn, included the $89-million figure for the crane as part of the $700-million overall value of the tower project to be covered by the builders-risk policy, lawyers for Extell and Lend Lease argued.
Lawyers for Zurich and its fellow insurers fired back, filing in April 2014 a detailed rebuttal in which they expressed some clear displeasure over what it argued is a baseless claim.
Zurich’s lawyers took aim at what they characterized as Extell’s and Lend Lease’s “spurious claims,” attaching what they called the “insertion of non-existent terms in a contrived effort to bring an excluded loss within coverage.”
The developer’s and CM’s claims of coverage are trumped by an exclusion in the builders-risk policy for machinery and equipment, said the insurers’ legal team. Philip Silverberg, attorney for Zurich at the state Court of Appeals in Albany, argued that the “temporary works” provision enumerates specific items, and the crane “is very different.” In other arguments, the insurer also questioned the motives for seeking coverage for the crane, saying it raised the question of whether the crane was adequately insured.
If the case dragged on, Zurich threatened that it would petition the court to obtain records from Lend Lease in a discovery process that would get to the bottom of whether the crane was properly insured. “Information concerning these issues is entirely within the knowledge of Lend Lease and Extell. Accordingly, should the Court deny the Insurers’ Cross-Motions for Summary Judgment, it should direct that discovery proceed,” Zurich’s lawyers noted.
The whole issue could have been avoided had Extell and Lend Lease paid for an endorsement that would have specifically included the tower crane in the builders-risk policy, the insurer argued. USI Insurance Services’ Haynes said Extell and Lend Lease’s argument that the tower crane should be included in the builders-risk policy is unusual because cranes are not typically included in basic builders-risk coverage. One possibility is that the crane was underinsured, Haynes speculated.
Cost of Crane Insurance
The cost of insuring a million-dollar crane comes to about 20¢ per $100 dollars, or about $40,000, he said. That cost, while not insignificant, is a bargain compared to the hundreds of thousands of dollar it would cost to remove a damaged crane.
However, given its high profile and the headlines it has generated over the past year, the case may spur changes in the way developers and contractors insure their projects. The concern is not just for the damage a crane collapse can cause but also for the project delays that would ensue. Project owners or prime contractors can add an endorsement for the crane as well as delay insurance. Coombs said there is a precedent for adding cranes to the builders-risk coverage: Today, tunnel-boring machines typically are covered by such policies.
Henry Daar, head of national property claims at Willis Towers Watson, said it is common for crane-leasing companies to insist that developers and contractors have insurance coverage that can be accessed if there is damage to the machine. Without that coverage, the developer could have been on the hook for a big payment to the crane owner, Daar and Haynes speculate. Neither Lend Lease nor Zurich responded to requests for comments.
“If there was an intent for the crane to be covered, it needed to be dealt with up front.,” Daar said. “You never want to go into a situation where there is a crane loss and you are saying, ‘I meant to cover it.’ There is no ‘meant to cover it’ clause in the policy. It is either there or not.”
Not everyone sees the Lend Lease claim as an insubstantial, long-shot attempt. Kenneth Rubinstein, co-chair of the construction law group at PretiFlaherty, noted that, in the lower-court decision by a state Appellate Division panel of judges, two justices dissented, seeming to be at least open to Extell-Lend Lease’s arguments. “I don’t think it was a spurious argument,” Rubinstein said. “I don’t think it was an inherently flawed argument.”
Extell, too, defends its arguments and attempts to collect from Zurich as sound and logical. “It was a very, very close case,” said Ahuva Genack, corporate counsel for Extell. She argued that the dissent in the first level of appeal was originally written as the majority and only later switched. The switch made the state Appellate Division panel’s 3-2 decision for Zurich.
“The court never got to the issue of whether the crane, although not itemized, was included in the policy anyway under the contract with Pinnacle,” said Ahuva. The case involved “legitimate differences of opinion,” she said.
Of course, if Extell and Lend Lease had insisted on the crane being specifically mentioned in the category of “temporary works,” the claim would not have been a problem. But that didn’t happen. Lend Lease and Extell tried the lawsuit, almost prevailed in one appeal and in the end came up short.