• September 11th Business Interruption Losses Must Be Offset By Federal Funds Received By Insured
  • September 19, 2006 | Author: Maria Z. Vathis
  • Law Firm: Clausen Miller PC - Chicago Office
  • In PMA v. U.S. Airways, Inc., et al, 271 Va. 352, 626 S.E.2d 369 (Va. 2006), the Supreme Court of Virginia assessed whether payments that an airline received from the federal government pursuant to the Air Transportation Safety and System Stabilization Act (“Stabilization Act”) after the September 11th terrorist attacks qualified as “recoveries” within the meaning of a property insurance policy provision.  The court held that the proceeds received by U.S. Airways from the  federal government reduced U.S. Airways’ claimed losses against the insurance company.

    Facts

    After the terrorist attacks on September 11, 2001, the Federal Aviation Administration issued a “Notice to Airmen” ordering all civilian aircraft to land or stay on the ground.  After the attack on the Pentagon, the airport manager for the Metropolitan Washington Airport Authority ordered the evacuation and closure of Ronald Reagan Washington National Airport.  Although other airports around the country were allowed to resume operations within several days after the attacks, the FAA issued a temporary flight restriction, which closed the airspace within 20 nautical miles of Reagan National Airport.  Because of this order, U.S. Airways was not permitted to conduct commercial flights into or out of Reagan National Airport from September 11, 2001 to October 4, 2001.

    Pursuant to the Stabilization Act, U.S. Airways received approximately $310 million from the federal government to compensate for any losses resulting from the September 11th terrorist attacks.  U.S. Airways also made a claim under its all-risk manuscript property policy for $58 million in business interruption losses in connection with the restriction of flights in and out of Reagan National Airport after September 11, 2001.

    The only question on appeal was whether the trial court erred in finding that any payments received by U.S. Airways from the federal government pursuant to the Stabilization Act were not “recoveries” under the policy’s set-off provision and, therefore, did not reduce the amount recoverable under the policy.  The policy’s set-off provision required that losses claimed under the policy be reduced by “[a]ll salvages, recoveries, and payments, … received prior to a loss settlement …”.

    Analysis

    The court first examed the Stabilization Act’s language to determine the federal government’s intent.  Section 101 of the Stabilization Act, entitled “Aviation Disaster Relief,” stated in pertinent part:

    [a]  In General – Notwithstanding any other provision of law, the President shall take the following actions to compensate air carriers for losses incurred by the air carriers as a result of the terrorist attacks on the United States that occurred on September 11, 2001:

    (2)  Compensate air carriers in an aggregate amount equal to $5 million for –

    (A) direct losses incurred beginning on September 11, 2001, by air carriers as a result of any Federal ground stop order issued by the Secretary of Transportation or any subsequent order which continues or renews such a stoppage; and
     
    (B) the incremental losses incurred beginning September 11, 2001, and ending December 31, 2001, by air carriers as a direct result of such attacks.

    The court determined that, by its plain language, the Stabilization Act was designed to compensate air carriers like U.S. Airways for both direct losses that resulted from federal ground stop orders and incremental losses that were a direct result of the September 11, 2001 terrorist attacks.

    The court then examined both the language of the Stabilization Act and Section 24 of the policy together to determine that the proceeds received by U.S. Airways from the federal government qualified as “salvages, recoveries, and payments.”  Finding that the federal government’s intent was to regain and restore the losses suffered by airlines as a result of the terrorist attacks on September 11, 2001, the court determined that the Stabilization Act funds received by U.S. Airways qualified as a form of “recoveries” under Section 24 of the policy.  According to the Supreme Court of Virginia, the trial court essentially re-wrote the policy and created a new contract between PMA and U.S. Airways by finding that U.S. Airways was not required to reduce its claim for business interruption by the amount of the funds received from the federal government.

    Learning Point:

    Insurers should be aware of the federal government’s intent to compensate businesses for the losses sustained in connection with the September 11, 2001 terrorist attacks.  In this case, the policy language required the airline to reduce its claimed losses by the amount of proceeds received from the federal government.  As a result, the insured was completely barred from recovering under the policy because the $310 million in proceeds received from the federal government exceeded its potential recovery of $58 million under the policy.