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Duane Reade, Inc. v. St. Paul Fire and Marine Insurance Co.

August 28, 2007

DUANE READE, INC., PLAINTIFF,
v.
ST. PAUL FIRE AND MARINE INSURANCE CO., DEFENDANT.



The opinion of the court was delivered by: Jed S. Rakoff, U.S.D.J.

OPINION AND ORDER

By Order dated July 25, 2007, the Court granted the motion of defendant St. Paul Fire and Marine Insurance Company ("St. Paul") for summary judgment and denied the motion of plaintiff Duane Reade, Inc. ("Duane Reade") for summary judgment. This Opinion and Order states the reasons for those rulings, deals with other outstanding issues,*fn1 and directs the entry of final judgment.

This is the second case before the Court concerning an insurance policy (the "Policy") issued by St. Paul covering, inter alia, a Duane Reade drugstore located in the World Trade Center (the "WTC Store") that was destroyed during the terrorist attacks of September 11, 2001. See affidavit of James W.B. Benkard sworn to April 30, 2007 ("Benkard. Aff."), Ex. C. In 2002, St. Paul initially paid Duane Reade $9,863,853 for losses related to the destruction of the WTC Store. See Defendant's 56.1 Statement ("Def. 56.1") ¶ 3; Plaintiff's Response 56.1 ("Pl. Resp. 56.1") ¶ 3. This was prior to the loss appraisal mandated by the Policy. A lawsuit, 02 Civ. 7676, was then commenced to determine certain questions concerning scope of coverage and to determine whether St. Paul's payment satisfied in full its obligation under the Policy, thereby rendering the appraisal unnecessary.

The Court issued a Memorandum Order in the prior action on August 20, 2003, construing, inter alia, the scope of coverage under the Policy's "business interruption" provision. See Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d 235 (S.D.N.Y. 2003). Among other things, that Memorandum Order referred to the time limits placed on the business interruption coverage by the "Restoration Period" clause, which provides, that:

The measure of recovery or period of indemnity shall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace such property that has been destroyed or damaged, and shall commence with the date of such destruction or damage and shall not be limited by the date of expiration of this policy.

Policy (Benkard Aff., Ex. C) at 17-18. The Policy, however, also includes an Extended Recovery Period provision, as follows:

This policy is extended to cover the Actual Loss Sustained by the Assured resulting from interruption of business for such additional length of time as would be required with the exercise of due diligence and dispatch to restore the Assured's business to the condition that would have existed had no loss occurred, commencing with the latter of the following dates:

a) the date on which liability of the Company of loss resulting from interruption of business would terminate if the clause had not been attached to this policy or

b) the date on which repair, replacement, or rebuilding of such part of the property as has been damaged is actually replaced; but in no event for more than twelve months from said later commencement date.

Id. at 21.

In the Memorandum Order of August 20, 2003, the Court held that the Restoration Period clause, with its subjunctive language ("as would be required"), provides coverage, in the context of the destruction of the World Trade Center, for a "hypothetical or constructive" period for rebuilding:

[W]hat is to be hypothesized is the time it would take to rebuild, repair, or replace the WTC store itself, not the entire complex that once surrounded it. . . . Once Duane Reade could resume functionally equivalent operations in the location where its WTC store once stood, the Restoration Period would be at an end. . . . Any losses continuing beyond that point would be addressed by the "Extended Recovery Period" provision in the Policy . . . not by the Restoration Period clause.

Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F.Supp.2d at 239. On June 22, 2005, the Second Circuit modified and affirmed this determination, upholding the finding that the Restoration Period depends on a hypothetical or constructive period of time but altering the definition to eliminate the requirement of functionally equivalent "operations" and the requirement that the replaced store be "where [the] WTC store once stood." Instead, the Court of Appeals measured the Restoration Period by the hypothetical time that it would take Duane Reade to rebuild, repair or replace "the functional equivalent of the store Duane Reade lost." See Duane Reade, Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384, 392-399 (2d Cir. 2005). This was because "any discrepancies between the new building and the WTC [Store] in terms of benefits and advantages are exclusively accounted for under [another clause,] the Leasehold Interest clause." Id. at 398. As for losses that continued beyond the Restoration Period, the Second Circuit agreed with the District Court that they would be covered, if at all, "by the 'Extended Recovery Period' provision in the Policy, not by the Restoration Period clause." Id. at 399.

Meanwhile, the parties proceeded with appraisal, as required under the Policy. Following the Second Circuit's decision, the appraisal panel, by letter dated June 5, 2006 (the ...


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