Crunching The Numbers On Sandy
Billy Gray March 5, 2013, 9 a.m.
The announcement last week that Liberty Mutual had signed a 10-year, 120,000-square-foot lease at 55 Water Street was a rare and welcome piece of good news at a building and corridor of lower Manhattan exceptionally hard-hit by Superstorm Sandy.
The 53-story Financial District skyscraper took on 32 million gallons of water following the October 29 natural disaster. A month later, 30 people were treated for injuries after the basement caught fire during electric repair work. News that Liberty Mutual would be doubling its footprint in the property no doubt came as a relief to the landlord, New Water Street Corp., as it poured $200 million worth of renovations into the ailing tower.
The woes of the building at 55 Water Street are emblematic of those afflicting Manhattan commercial properties affected by Sandy. Accounting firms working on their behalf as they seek damages are all too familiar with the sort of cascading problems wrought by the storm that require a web of insurance plans and clauses spanning wind, flood, blackout and business interruption insurance.
“The basic challenge with Sandy is that insurance companies are rephrasing the type of coverage that people had and looking for angles out of providing it by asking what qualifies as storm, hurricane and flood damage and what caused it,” said Victor Mizzaro, a partner at Citrin Cooperman. “For instance, when they mandated a blackout in lower Manhattan, is that recoverable by insurance proceeds? And what type of insurance is that?”
“One of the biggest issues with the storm is causation,” said Jaime Angarita, a consultant at Marcum LLP. “If a policy on the commercial side covers business interruption, then it usually relies on wind or flood policies. So if you don’t have flood insurance and your business was interrupted, you may be denied.”
Determining the precise reason for lost income often leads to a dead end when it comes to a claim. Assuming business was interrupted by lost power, “Was the lack of power caused by overhead power lines that went down?” said Brian Sanvidge, director of litigation fraud at Holtz Rubenstein Reminick LLP. “Because often in the policy, there is an exclusion for overhead lines coming down; you’re not covered for it.”
“Insurance companies are doing what they do,” Mr. Mizzaro said. “They’re not just willy-nilly giving money out.” But while the insurers’ behavior might be predictable, accountants agree that Sandy’s impact was unprecedented.
“It raises separate issues,” said Mr. Sanvidge, who previously worked on New York’s Disaster Preparedness Commission. “There’s the storm, the power outage and the current view of insurance companies on exposures.”
Mr. Angarita cites a dearth of case law in New York that governs issues of Sandy’s scope. “You have precedents in Louisiana, but not here yet.”
One source preferred to remain anonymous when he said that Sandy was the first instance he could recall in which insurance companies were flat-out refusing to pay. Another said that while the bigger clients were getting checks surprisingly fast, the mid-size and small companies were getting rejected or receiving only partial payments relative to what they were owed. Given the involvement of the federal government and the immense issues involved, the major players, with an ability to make a lot of noise, have more clout.
But affected businesses large and small are impacted by each other’s fortunes, yet another factor that complicates the tax and accounting ramifications of Sandy.
“The effects of this go way beyond insurance,” said Stephen Aponte, a partner in the taxation group at Holtz Rubenstein Reminick. “There’s also the effect of overall foot traffic loss at shuttered properties in lower Manhattan that will put neighboring tenants out of business. And there’s no insurance for that.”
The financial fallout from Sandy will reverberate well beyond this tax season. And buildings are already making modifications to mitigate future catastrophic storm damage. Improvements to 55 Water Street include moving electrical, mechanical and communications equipment to the third floor.
“Buildings are reconsidering what their first floors should look like,” Mr. Mizzaro said. “Should they be operational or just some sort of a commissary area, so there’s less chance of getting wiped out and the whole building going down in case of a flood? There are also worries about ground-floor storefronts and offices—you don’t want to sustain damages and have those people totally out of work.”
Unfortunately, recent patterns augur a future of increasingly common natural disasters in the area and subsequent accounting headaches.
“Companies have to closely analyze their plans and talk to insurance consultants, accountants and attorneys to make sure they’re covered for whatever we’ve dealt with over the past couple of years,” Mr. Mizzaro said. “Because certainly we’ve been seeing damage we’ve never seen before.”