Staying High and Dry: Considerations of Landlords and Tenants in Floods

While landlords and their tenants in areas like New York City continue to recover from flooding in the wake of Hurricane Sandy, landlords and tenants of one of Washington, D.C.’s premier waterfront destinations are still reeling from the after effects of a 2011 storm that caused severe flooding in the nation’s capital.

According to the Washington Business Journal, a group of about 40 retail and restaurant employees from the Washington Harbour development in Georgetown are suing MRP Realty for $5,000,000 in lost wages resulting from an April 2011 flood that forced several of the businesses there to close for several months. The employees allege that MRP received flood warnings in sufficient time to raise flood walls which would have prevented the flood waters from infiltrating the complex. The Washington Post reports that the lawyers for the employees encouraged business and retailers who also lost revenue during this catastrophic event; however, no tenants ultimately decided to get involved. This is not the first lawsuit to result from the April 2011 flood. Earlier this year, one Washington Harbour tenant, Farmers & Fishers LLC, sued its insurance broker, Meltzer-Karlin Property & Casualty Inc., seeking at least $3,000,000 because the brokers allegedly failed to obtain flood insurance coverage.

It will be very interesting to see what types of lawsuits arise from Hurricane Sandy and how D.C. Superior Court Judge Erik Christian rules on the threshold issue of whether MRP owed a duty to the employees of its tenants. Meanwhile, landlords and tenants should take the time to consider what steps they can take to avoid or mitigate more traditional losses and claims in the event of future floods.

Loss and claims mitigation begins with clearly setting forth the proper insurance requirements in a lease and then ensuring that the required insurance has been obtained. Both landlords and tenants should seek the guidance of qualified insurance advisers and attorneys who can review their specific needs and circumstances and recommend the proper insurance which should be put in place. In particular, commercial property policies should be reviewed to determine whether they would respond to a significant water event and what sub-limits, if any, would be applicable. Landlords and tenants whose property is located in flood zones should review their coverage provided under the National Flood Insurance Program. Landlords in particular should monitor tenants to confirm evidence that the required insurance under the terms a lease has indeed been obtained, that the landlord is named as an additional insured and that the policies in place allow for the waiver of subrogation (something that was offered as a matter of course in the recent past, but may require negotiation currently). Additionally, landlords should insist on lease language in which the tenant waives any rights to pursue landlords for damage caused by events that are insured by insurance or would have been covered by insurance if the tenant had properly obtained the insurance required by the lease. Landlords may also consider requiring their tenants to obtain business interruption insurance, properly tailored to each tenant’s specific risk profile. Tenants not otherwise required to carry business interruption insurance should nevertheless strongly consider it.

Of course, not even the best insurance package will act as a complete shield from lawsuits, just as no insurance can prevent damage that is the inevitable result of flooding. Accordingly, those who own and develop property in areas susceptible to flooding should, to the extent they can, implement proper plans and procedures to protect their property from flood damage. Proper planning can help with damage mitigation by, for example, building with water resistant materials, raising electrical system and HVAC components, anchoring fuel tanks, and installing sewer backflow valves. As recent events have reminded us, when it comes to flood events, an ounce of prevention is worth a pound of cure.

Related topics: Insurance, Landlords, Risk Management, Tenant