Politics vs. Policy


In what may amount to a David-and-Goliath type fight, some restaurant operators claim they lost business because of terrorist attacks and want insurance companies to pay up. Feeling betrayed by their insurance companies, a disparate band of restaurateurs are exploring the possibility of filing lawsuits, possibly a class action, against their insurers for denying claims linked to the Sept. 11 terrorism attacks.
Operators say their fervor for a fight with their insurers was instigated by the routine rejection of business interruption claims filed to recover lost sales when guests could not or were too fearful to travel after the attacks.

The operators maintain that years of dutifully making premium payments on policies that clearly stated that if an act of government, or “civil authority” in insurance terminology, cuts off traffic to a business property – whether damaged or not – a claim is valid. Consequently, the operators contend that when President Bush declared a state of national emergency, a civil-authority claim was in order. That declaration brought commercial air traffic to a halt, closed the nation’s borders and, in the case of Washington D.C. and New York City, shut down bridges, highways, subways and train stations. The movement, essentially exploratory at the moment, is centered in Manhattan but may expand to include equally aggrieved operators in Washington, D.C., New Jersey and Florida.

Acknowledging that taking on the insurance industry could make David’s battle against Goliath pale in comparison, one of the principals in the brewing slug-fest is undaunted.

“As a little guy, I have no chance of pulling this off alone,” admits A. Jay Shaffer, chef-owner of Shaffer City Oyster Bar & Grill, a popular lunch and after-work seafood restaurant on 21st Street in the Chelsea section of Manhattan, whose claim was denied twice. “But if there was a big group of us, they’d have to sit up and listen.” That last point may be easier said than done.

A prominent multi-unit operator in Manhattan who estimates that he lost $1.5 million in sales within one week of the terrorist attacks says a top-flight law firm told him that policies might make it impossible to recover damages from insurers. He says the lawyers explained that the concentration of big insurance companies’ headquartered and related facilities in New York City and neighboring Connecticut would cause judges to be more sensitive to the awesome economic and political influence insurers exert. That may especially be true at a time of massive unemployment and recession, the restaurateur was warned. With most of his units in midtown Manhattan, the operator should “not even think about filing a claim” for business interruption, he says his adjuster told him. The angry restaurateur describes his insurance agent speaking to him “almost disrespectfully” and pointing out that because the operator kept his restaurants open and was not inconvenienced by any closed roads or property damage throughout the tragedies, he shouldn’t file a claim.

“It does not look good,” said the restaurateur, who requested anonymity. “I consulted with a very large and respected law firm, and they told me that politically a lawsuit is impossible because of the presence of so many insurance companies here and in Connecticut, and the judges won’t like it.” “I’m being told that few lawyers with or without a contingency fee, are going to want to touch this case, given the politics.”

Carolyn Gorman, a spokeswoman for the Insurance Information Institute in Washington, speculates that operators who are looking to sue their carriers might be wasting their time. She argues that undamaged businesses claiming compensation for business interruption are taking advantage of events that are basically uninsurable and unpredictable and therefore, outside the realm of policy protection.
“This was a horrible experience for everyone,” Gorman observes. “But,” she says, referring to customer traffic declines, employees’ inability to get to work and vendors who were kept from delivering goods, “these kinds of losses are not covered.” Gorman paints a grim scenario for prospective claimants. “What would happen,” she asks, “if every business in Manhattan that believed it was impacted by terrorism and that its customers were too frightened to go out to shop or eat filed a claim?” The insurance companies can easily defend their claims rejections, Gorman says.

“I said ‘You guys are crazy,’” Shaffer recalls telling his adjuster. “It doesn’t matter where I’m located. I said you’ve got to throw the book away on this one. But they said this is a precedent, the first time something like this ever happened.”

“Then I’m looking at television the next day, and there’s a commercial by them, saying they stand behind our beautiful country and will honor all claims. That’s when I got mad.” But his anger reached the boiling point when his insurance adjuster at one point suggested that Shaffer serve tuna sandwiches since his imported fish and shellfish were being held up at the Canadian border for days on end.
“My average check is about $25,” he said. “I serve oysters from Canada, shrimp from Jakarta and fish from Hawaii. And now they are telling me to serve tuna fish sandwiches? Even if I wanted to, I couldn’t do it because there was no bread in the city for four days. It was all downtown being used to feed the rescue workers.

Admitting that he lost his temper in a second conversation with the insurer, Shaffer said the agent followed up with a letter sent by certified mail. Shaffer described the letter as stern, vaguely threatening but also ambiguous in parts, in explaining why the company was denying his claim a second time.
“It was almost as if they were saying ‘You don’t like our decision? Then sue us!’” Shaffer says. “They’ve got in-house lawyers. They’ve got lawyers on retainer. They are ready to go. Me, I’m a little guy. I lost tens of thousands of dollars and actually thought of closing this place about three weeks afterward, but I got an SBA loan and some real good press reviews, and that saved this business.” Although business has been rebounding in recent weeks, Shaffer estimates that his 3-year old restaurant is about $100,000 below its sales performance of a year ago. Shaffer says he could have sought his true losses in pressing his insurance claim, “but I thought I’d be conservative and fair.”

What matters, he insists, is the language of the policy. “The fact of the matter is that some policies have language that basically says if the city, state or federal government, a civil authority, restricted traffic to your business by shutting access, even an adjourning area to your property, and you lost money as a result, you have a claim for business interruption,” our partner says. “These contracts would have to be reviewed, as some policies limit these kinds of claims to just two weeks or lost profits. But some go as long as a year if the property is damaged.”

“The question here is the precise language of the insurance policy and whether acts by President Bush, Gov. Pataki and Mayor Giuliani had an impact on the restaurant.”

“Insurance is a science based on the principle of insurable risks, or what it would cost to insure certain risks and terrorism is an unknown risk,” she explains. “This is a problem we are having in the whole industry. I’d bet not one of the people involved here can produce a policy showing that they paid a dollar in premiums for terrorism coverage. Know why? Because we don’t collect premiums for terrorism.”

But our partner who specializes in policyholder suits against insurance companies and seriously is considering helping restaurateurs – including the owner of Shaffer City Oyster Bar – argues that none of what Gorman articulated would matter in court.

“Most of these policies have the same language, and even though they may have different underwriters, it’s only a handful of major players who would be the key targets,” our partner says.

After Shaffer filed a claim for $20,000 in lost sales in the first week after the attacks – an amount he says is far below his true losses – his insurance company told him that because he was above 14th Street and sustained no property damage, it was denying his claim.

For about three weeks after the disaster, 14th Street was the line of demarcation between the rest of Manhattan and the disaster zone, where only emergency and rescue crews were allowed access.
Like others who are looking at either a class action or individual civil suits, Shaffer says his disagreement with the insurance company stems from the “civil authority” clause in the policy that can be read as calling for reimbursement when a government agency restricts access to the business. Before Sept. 11 such restrictions usually were abnormal events like the closing of a street to fight a fire or the reading of a road or the barricading of a block to clean up severe storm damage.

Depending on the policy and the circumstances, lawyers say, business interruption compensation could cover lost sales from periods as short as a week or two to periods as long as a year. But many insurers in New York City are limiting civil-authority coverage to the area south of 14th Street. Joseph Scalice, co-owner of the upscale March restaurant on 58th Street, calls that demarcation unfair. He has joined Shaffer in exploring class-action litigation against the insurance industry. Scalice argues that when President Bush declared a state of national emergency and closed the nation’s airports for two days, followed by Gov. George Pataki’s and Mayor Rudolph Guliani’s closing of the bridges and tunnels, March’s civil-authority clause was activated. Guests could not arrive, employees could not show up for work and vendors could not deliver, all because of government actions, Scalice maintains. The ramifications of those actions damaged the restaurant financially from Sept. 11 to at least Sept. 16, he says.

“I know fear might have kept some of our guests away, but government prohibited access to our premises,” Scalice insists. “So if you can’t drive in or fly in because the government ordered facilities closed, that is a civil authority.”

The operator who requested anonymity says he presented the same argument to his lawyers. He was told it makes perfect sense to interpret the policy language the way Scalice did. However, a jury or judge ultimately may have to be the ones to determine how insurance policy semantics relate to a phenomenon like a national state of emergency, the operator says.

Schwartz, Conroy & Hack is the premier disability insurance law firm in the United States. To see how we can help you, contact us.


Evan S. Schwartz
Founder of Schwartz, Conroy & Hack