## Facts

- Omni Berkshire Corp. and related entities borrowed $250 million in 1998, secured by five hotels.
- The loan agreement required Omni to maintain “comprehensive all risk insurance” and, on notice, “such other reasonable insurance” as the lender might reasonably request for hazards commonly insured against for similar regional properties.
- The agreement did not define “all risk” and did not mention terrorism insurance.
- Before September 11, 2001, terrorism losses were typically covered within standard all-risk property policies, and separate terrorism policies were not commonly purchased.
- After 9/11, insurers commonly added terrorism exclusions to all-risk policies; terrorism coverage became available mainly through separate policies at substantial extra cost.
- Omni renewed its property policy effective March 1, 2002 with an express terrorism exclusion.
- The loan servicer (later Wells Fargo) asserted the policy no longer complied and demanded terrorism coverage.
- Omni obtained a quote for $60 million in terrorism coverage at an approximately $316,000 premium (about 63% of the all-risk premium) and refused to purchase it.
- Omni sued for declaratory relief that the loan agreement did not require stand-alone terrorism insurance.
- After suit was filed, Congress enacted the Terrorism Risk Insurance Act of 2002 (TRIA), requiring participating insurers to offer terrorism coverage for certain risks but not regulating pricing.
- The case was tried to the court in July 2003.

## Issues

1. Whether the loan’s “comprehensive all risk insurance” requirement obligated the borrower to maintain terrorism coverage after terrorism was generally excluded from standard all-risk policies.
2. Whether, even if not required by the all-risk clause, the servicer could reasonably require terrorism insurance under the contract’s “other reasonable insurance” provision.
3. Whether ambiguity in the insurance terms permitted consideration of extrinsic evidence (including industry practice and course of performance) to determine contractual meaning.

## Decision

- The court found the terms “all risk” and “comprehensive all risk insurance” ambiguous as used in the agreement and considered extrinsic evidence, including industry practice and expert testimony.
- The court held Omni did not breach the “comprehensive all risk insurance” clause by failing to procure stand-alone terrorism insurance once terrorism was no longer included in customary all-risk policies.
- The court held the servicer acted reasonably in requesting terrorism insurance under the “other reasonable insurance” clause, given the post-9/11 risk environment, the size of the loan, and the developing market practice of purchasing terrorism coverage for major commercial properties.
- The court granted declaratory relief consistent with these rulings: no terrorism requirement under the all-risk clause, but the servicer’s demand was permissible under the “other reasonable insurance” provision.

## Legal Principles

- When a contract term is ambiguous, a court may admit extrinsic evidence, including circumstantial evidence and industry practice, to determine the parties’ intent.
- A contractual requirement to maintain “all-risk” insurance is interpreted in light of customary market meaning at the time and does not automatically impose coverage for a peril later carved out of standard all-risk policies absent clear contractual language.
- A lender’s “other reasonable insurance” clause may permit the lender/servicer to require additional coverage for hazards commonly insured against for similar properties, subject to a reasonableness constraint tied to prevailing practices and the lender’s exposure.
- Statutory and market developments recognizing a distinct line of coverage (such as TRIA-era terrorism insurance) may inform whether a peril is part of customary “all-risk” coverage and whether a lender’s request for separate coverage is reasonable.

## Conclusion

The court held that the borrower’s promise to maintain “comprehensive all risk insurance” did not obligate it to buy stand-alone terrorism coverage once terrorism was generally excluded from standard all-risk policies, but the lender’s servicer could reasonably require terrorism insurance under a separate contractual provision authorizing requests for other reasonable coverage commonly obtained for similar properties.


Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 307 F. Supp. 2d 534 (S.D.N.Y. 2004)