The U.S. District Court for the Middle District of North Carolina ruled that a tenant could recover under the building coverage of a Standard Flood Insurance Policy for flood damage to leasehold improvements in Studio Frames LTD v. Standard Fire Ins. Co., NO. 1:01CV0876, 2005 WL 1993511 (M.D.N.C. Aug. 16, 2005).
The Studio Frames art gallery leased spaced at a shopping center owned by Federal Realty Trust Investments, Inc. After suffering flood damage as a result of Hurricane Fran, Studio Frames received a loan from the Small Business Administration, which required the company to carry flood insurance to cover its leasehold improvements and the contents of its gallery.
Studio Frames bought a Standard Flood Insurance Policy (SFIP) from the Standard Fire Insurance Company. The policy contained the standard language written by the Federal Emergency Management Agency (FEMA). To cover its interest in the leasehold improvements, Studio Frames bought building coverage in the amount of $194,700, as well as contents coverage in the amount of $287,200.
A subsequent flood caused severe damage to Studio Frames' contents and leasehold improvements. An adjuster from Standard Fire learned that Studio Frames leased its building from Federal Realty, which also maintained a flood policy.
The insurer said that Studio Frames was not eligible to receive payment under the building coverage portion of the policy because a tenant is not allowed to purchase building coverage. The adjuster said that Studio Frames could, however, make a claim for the leasehold improvements for an amount equal to 10 percent of the contents coverage.
Standard Fire attempted to refund the premiums that Studio Frames paid for the building coverage, but Studio filed a breach of contract claim against Standard.
Standard Fire asserted that because tenants can insure some leasehold agreements under the contents portion of the policy, the improvements cannot be insured under the building coverage portion. The court did not agree, stating, “Nowhere in the SFIP does it state that a tenant cannot purchase Building Coverage for its property interest in leasehold improvements.”
Standard Fire further argued that a tenant whose landlord already carries SFIP insurance cannot purchase it as well under the policy's prohibition of duplicate policies. The court pointed out, however, that the policy stated that the same property may not be insured under more than one policy, but not that a building cannot be insured under more than one policy.
The court stated, “A landlord and a tenant can, and in this case do, have different property interests and different insurable interests in the different components of a leased building.”
Standard Fire's final argument was that the National Flood Insurance Act barred insurance coverage of more than $500,000 on a single structure. The court refuted the argument, saying that “the statute is ambiguous in expressing Congress' intent,” and that “FEMA's reasonable interpretation of [U.S. Code section] 4013(b)(2) also supports a finding that [U.S. Code section] 4013(b)(4)'s text was not intended by Congress to serve as an aggregate limit of Building Coverage.”
Thus, the court found that Standard Fire repudiated its flood insurance contract with Studio Frames, and Studio Frames was entitled to recover damages for its leasehold improvements.