It's theoretical: a ruling holds that the period of restoration is the time that it should take to rebuild.

After the World Trade Center's Twin Towers collapsed on Sept. 11, 2001, fires that smoldered in the ruins eventually were put out. But litigation has raged on between Silverstein Properties, the landlord, and its property insurers concerning the extent of coverage and valuation of the loss. Juries have rendered verdicts first against and then in favor of the policyholder regarding the entities liable to Silverstein Properties and the limit of the remaining insurers' liability, respectively. In the third phase, an appraisal panel is proceeding with the valuation of the property damage and business income loss as a result of the destruction.

One question before that panel is a determination of the dollar amount of the rental losses incurred by Silverstein. That figure is dependent upon the period of restoration that is used to calculate the rental loss. Silverstein contends that proper measure is the actual time it takes to rebuild the Twin Towers. The property insurers contend that under the terms of the insurance policies, a theoretical measure for rebuilding time must be used. The insurers moved for partial summary judgment on this issue.

In February 2005, U. S. District Court Judge Michael Mukasey made clear that the job of the appraisal panel is to determine the valuation of the loss and not issues of coverage, which must be determined by the court. Determining what's meant by "period of restoration" in an insurance policy is a coverage issue, he said.

The wording in the policies issued to Silverstein is typical of that in many business-income coverage forms. tinder the terms of the policy, the insurer is obligated to pay for "the actual loss of ... Rental Value sustained by the Insured due the necessary 'suspension' of the Insured's "operations' during the 'period of restoration.' "The policy defines "period of restoration" as beginning on "the date and time of the direct physical loss or damage" and, absent resumption of operations at a new permanent location, ending on "[t]he date when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality." Since Silverstein did not intend to resume business in a new, permanent location, the court was left to determine the meaning of the phrase "when property should be repaired, rebuilt or replaced with reasonable speed and similar quality."

Silverstein argued that the "should" in the restoration period definition imposes a theoretical measure only where the insured does not rebuild or fails to do so with reasonable speed and similar quality. Next, it contended its position is grounded in law, supported by an unpublished 9th Circuit opinion and two older state court cases. Finally, it argued all of the cases that have applied a theoretical measure are easily distinguishable from the facts that relate to the Twin Towers.

Mukasey rejected these arguments, indicating that Silverstein's reliance on intrinsic and extrinsic evidence is improper if the insurance policy provision involved is unambiguous. Several courts have agreed.

Next, the judge found the argument by Silverstein that the word "should" in the "period of restoration" definition does double duty because it could apply to either an actual or hypothetical restoration period to be an arbitrary statement. The argument, according to Mukasey, flies in the face of existing legal precedent, other text in the policy, the context, and logic. Finally, he rejected the legal authorities cited by Silverstein in support of the use of an actual period of restoration.

Instead, Mukasey found that reasoning in cases that applied a theoretical period to be far more compelling, particularly the decision in the Southern District of New York in a case involving business income loss to a World Trade Center tenant as a result of the events of Sept. 11.

Mukasey concluded by holding:" [e]specially in a case such as this, where rebuilding is likely to take many years, it would be impractical, as well as inconsistent with the long-standing interpretations of the restoration period clauses at issue here, to conclude that the court and the parties should all be required to await the passage of those years until the new WTC properties are in place to determine for just how long the Silverstein Parties will be allowed to recover their rental value losses." Thus, he granted partial summary judgment to the insurers and instructed the appraisal panel to use a theoretical period.

This decision has now answered the question frequently posed in business income claims: How is the period of restoration determined? The answer: It's theoretical--the amount of time that it should take to rebuild assuming reasonable speed and similar quality, and not the actual time.

Frederic R. Mindlin is a partner at the New York-based law firm of Mound Cotton Wollan & Greengrass. He can be reached at [e-mail].