General Session 1 Session Title Wednesday, October 28, 2015 2:00
3:15 PM
Seminar 7
When Tragedy Strikes: A Roadmap for Post-Casualty Protocols and
Processes
Thursday, October 29, 20159:00 10:15 AMJoe Nuez, Esq.Vantage Law
Group, PLLCMinneapolis, MNDorothy Bolinsky, Esq.Drinker Biddle
& Reath LLPPrinceton, NJ
Adam Leitman Bailey, Esq.Adam Leitman Bailey, P.C.New York, New
York
1
What is a Casualty?A casualty can have a number of
definitions.
It can be limited to naturally-occurring disasters, or be
widened to include acts of war or terrorism.
The governing definition will be the one used in a particular
contract, and the lease or policy will only extend so far as that
definition allows.
2
TOP 12 MOST COSTLY HURRICANES IN U.S. HISTORY* (Insured losses,
2013 dollars, $billions)Source: Insurance Information Institute
Sandy Fact File, October 2014
Hurricane KatrinaAugust 23 August 31, 2005
$150 Billion in US Economic damage $108 Billion in Property
damage largest single insurance loss event ever$41.1 Billion in
Insured Losses plus$16.1 Billion in FEMA claims plus $3 Billion in
off shore energy facility losses
Super Storm Sandy October 22 November 2, 2012
Impacted 24 US States$65 Billion in US Economic damage $68
Billion Overall Economic damage$50 Billion in Property damage$28.2
Billion in Insured Losses$18.75 Billion in Insured Property Losses
(excluding FEMA claims)
Because of Past Casualties, Will Previous Owners Be Legally
Required To Do More to Protect Their Buildings?
Future e6
7
8
9
Manfra, Tordella & Brookes, Inc. V. 90 Broad Owner, LLC,
2013 WL 373327
Plaintiff-tenants theory is that the landlord was liable for
neglecting to take supposedly reasonable precautions against
flooding caused by Superstorm Sandy such as window boarding and
sandbagging.
Amongst the allegations of the complaint were:
32. "Because of its history of flooding and location in low
lying Zone A, Defendant was well aware that 90 Broad in general,
and MTB's offices in Particular, were highly susceptible to
flooding and would likely experience severe flooding in the event
of a major storm, such as Hurricane Sandy."37. Defendant was thus
fully aware, and warned of the potential flooding that would occur
as soon as Sandy made landfall. Despite this knowledge, and
expectation of storm related flooding, Ms. Arce's email did not
include any information regarding any steps Defendant took or would
take to prevent or at the very least, mitigate, the potential
damage to the Building from storm related flooding.
What happened to this case? Research.
10
Issues in Tort: Can a Landlord be Liable for Damaging a
Neighborhood?
Depending on the lease provision, when premises are rendered
unusable or uninhabitable the tenant is considered constructively
evicted and is no longer responsible for rent, as of the time it
abandons the premises. 11
12
When a casualty originates in a landlords own building, the
effects may spread beyond the premises, subjecting the owner to
litigation by nearby building owners, tenants, and others.
While the owner may be responsible for physical damage ensuing
from the casualty, courts have held that the landlord typically is
not responsible for the purely economic harm caused by a casualty.
Issues in Tort: Can a Landlord be Liable for Damaging a
Neighborhood?
13
532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 96
N.Y.2d 280, 750 N.E.2d 1097 (2001)
The accident, from construction on a single building, damaged
other buildings and required the closure of 15 heavily-trafficked
blocks in midtown Manhattan for at least two weeks. Multiple
plaintiffs sued the owner and managing agent of the building where
the construction was being done, including a proposed class action
covering all businesses within 30 square blocks of midtown
Manhattan. The case centered on whether the defendant owner could
be found liable for purely economic damages to the nearby affected
businesses.
14
In analyzing a tort claim against the owner, the New York Court
of Appeals held that a landowner who engages in activities that may
cause injury to persons on adjoining premises owes those persons a
duty to take reasonable precautions to avoid injuring them, but
such a landowner does not owe a duty to protect an entire urban
neighborhood against purely economic losses.
532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr., Inc., 96
N.Y.2d 280, 750 N.E.2d 1097 (2001)
15
Drafting a Better Casualty Lease Clause
16
Carefully Define CasualtyDefinition should specify whether it is
limited to natural disasters: earthquakes, wind and fire, or
includes acts of god, war, terrorism, negligence, etc.
Definition should include a provision apportioning liability to
tenant for any casualty caused by tenant, its agents, or
customers.
Drafting a Better Casualty Lease Clause
Definition should specify whether it is limited to natural
disasters such as fires, earthquakes, wind storms and sinkholes, or
includes acts of god, war, terrorism, negligence, etc.
17
Provides proportional rent abatement based on amount of unusable
space
Limited to the time between the casualty to the earlier of the
substantial completion date (which must be defined)The date at
which the tenant or subtenant retakes possession of the space.
Drafting a Better Casualty Lease Clause
18
Requires tenants notification to landlord of casualty and/or
intent to cease rent payments due to casualty.
Requires landlords notification to tenant of substantial
completion of repairs and restoration, or alternatively,
establishes circumstances under which landlord can terminate the
lease. Establish Notice RequirementsDrafting a Better Casualty
Lease Clause
19
Contains a provision for complete or near-complete destruction
of the premises allowing landlord to terminate lease. Drafting a
Better Casualty Lease Clause
20
Whether Tenant Receives Rent Abatement Maiden Lane Props., LLC
v. Just Salad Partners LLC, 2013 N.Y. Misc. LEXIS 2647 (N.Y. Civ.
Ct. Apr. 29, 2013)
Case should be explained verbally and grab the audiences
attention NOT read off the slide.
The case concerned a commercial lessee which went without
electricity after Sandy. Plaintiff, the lessor, obtained a
generator for its own use and for the use of residential tenants in
the building, but did not allow commercial tenants to use it. The
tenant failed to pay a portion of its rent, and alleged that this
nonpayment was justified by the lessors failure to repair damage
after Sandy. The issue in the case was whether the tenants lease
allowed such nonpayment in these circumstances.Article 9(a) of the
REBNY lease states [i]f the demised premises or any part thereof
shall be damaged by fire or other casualty, Tenant shall give
immediate notice thereof to Owner and this lease shall continue in
full force and effect except as hereinafter set forth.In this case,
the tenant never gave notice of a casualty as required by the
lease. Furthermore, there was no physical damage to the leased
premises. Most damningly, a separate clause in the lease noted that
the lessor had no responsibility for interruptions in electricity,
and that such interruptions would not give rise to constructive
eviction or to an abatement of rent.Therefore the court held that
the tenant was required to continue to pay rent and there is no
basis for its defense or any abatement here.
21
Maiden Lane Props., LLC v. Just Salad Partners LLC, 2013 N.Y.
Misc. LEXIS 2647 (N.Y. Civ. Ct. Apr. 29, 2013)
Maiden Lane Properties v. Just Salad Partners, 056312/13, NYLJ
1202598292879,At *1 (Civ NY Schecter).
Tenant did not give notice as required by lease, but still
claimed the benefits of rent abatement allowances.
Tenants claim was entirely based on loss of electricity, which
was tenants exclusive responsibility under the lease, and other in
which the damage to the premises themselves was light, but the
weeks of no public utility provided electricity inspired the tenant
to claim an abatement of the rent.
The court in Just Salad wrote:
Theses terms establish that loss of electricity was a
contingency that was anticipated and accounted for by the parties
and not, under the circumstances, a type of casualty damage subject
to section nine.
22
Rent Abatement: A Tenants Right to Not Pay RentAt common law, a
casualty did not relive a tenant of its obligation to pay its
landlord rent. The common law has been modified in most states by
statute.
For example, N.Y. Real Property Law 227 allows a tenant to break
a lease or tenancy and surrender the premises in the event of
disaster. 23
N.Y. R.P.L. 227Where any building, which is leased or occupied,
is destroyed or so injured by the elements, or any other cause as
to be untenantable, and unfit for occupancy, and no express
agreement to the contrary has been made in writing, the lessee or
occupant may, if the destruction or injury occurred without his or
her fault or neglect, quit and surrender possession of the
leasehold premises, and of the land so leased or occupied; and he
or she is not liable to pay to the lessor or owner, rent for the
time subsequent to the surrender. Any rent paid in advance or which
may have accrued by the terms of a lease or any other hiring shall
be adjusted to the date of such surrender.
24
The New York statute, as with many similar statutes, also
specifically allows for contrary provisions in contract. Therefore,
most commercial leases explicitly waive 227.Ex: section 9(f) of the
Real Estate Board of New York Form Store Lease reads: Tenant hereby
waives the provisions of Section 227 of the Real Property Law and
agrees that the provisions of this article shall govern and control
in lieu thereof.
Lease Control
However, the New York statute, as with many similar statutes,
also specifically allows for contrary provisions in contract.
Therefore, most commercial leases explicitly waive 227. For
example, section 9(f) of the Real Estate Board of New York Form
Store Lease reads: Tenant hereby waives the provisions of Section
227 of the Real Property Law and agrees that the provisions of this
article shall govern and control in lieu thereof.
25
That same form lease provides, in its casualty clause:If the
premises are partially damaged or partially unusable rent is to be
apportioned from the day following the casualty according to the
part of the demised premises which is usable.
However, the New York statute, as with many similar statutes,
also specifically allows for contrary provisions in contract.
Therefore, most commercial leases explicitly waive 227. For
example, section 9(f) of the Real Estate Board of New York Form
Store Lease reads: Tenant hereby waives the provisions of Section
227 of the Real Property Law and agrees that the provisions of this
article shall govern and control in lieu thereof.
26
A lease should indemnify the landlord against casualties caused
by the tenant or by the tenants agents or customers. The lease also
needs to clearly provide whether a waiver of subrogation is
intended, and how the subrogation provision works with
indemnification provisionsLandlords Ability to Recover or Avoid
Payment After a Casualty
. In the case on the next slide the lease was poorly drafted and
the landlord was not fully indemnified against a fire caused by the
tenants customer.
27
Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d 835 (6th Cir.
2000)Plaintiff is the insurer of the landlord of a shopping mall,
and covered the landlord for both property damage and business
interruption. Defendant is a commercial tenant in the mall.
A fire was started by a customer in Defendants store, causing
extensive damage and requiring approximately $1 million in payments
from the plaintiff insurer to the landlord.
http://www.enquirer.com/editions/1997/02/01/loc_woolfire.html
photo28
Lexington Ins. Co. v. F.W. Woolworth Co., 230 F.3d 835 (6th Cir.
2000)The lease required Defendant tenant to:Indemnify the landlord
against any and all claims and demands, including for personal
injury, loss of life, or property damage, if the injury or damage
occurred within the demised premises and arose out of the tenants
use of the premises.
The court found that there were no claims and demands here, and
so that indemnification provision did not apply.
29
Scottsdale Ins. Co. v. Mason Park Partners LP, 249 F. App'x 323
(5th Cir. 2007) The court found that the landlord was not covered
under tenants property coverage because he was not specifically
named. The court also found that the landlord was not covered under
the tenants general liability coverage, as commercial liability
coverage is only triggered when the insured is legally required to
pay damages, which did not extend to the tenants damage to
landlords building.All leases should require that the landlord be
named as an additional insured party under the tenants insurance
policy
Can not find picture. 30
Constructive Eviction: When is the lease automatically
terminated in the wake of a casualty?
Depending on the lease provision, when premises are rendered
unusable or uninhabitable the tenant is considered constructively
evicted and is no longer responsible for rent, as of the time it
abandons the premises. 31
Protecting Your Client Through Casualty Insurance
32
Market Value RiderA market value rider to an insurance policy
ensures that the maximum coverage provided under the policy will be
the fair market value of the property rather than the original
purchase price.
In the event that the insured property increases in value, the
insurance will still cover the full value of the property in case
of casualty.
A market value rider to an insurance policy ensures that the
maximum coverage provided under the policy will be the fair market
value of the property rather than the original purchase price.
Therefore, in the event that the insured property increases in
value, the insurance will still cover the full value of the
property in case of casualty. This is often used in title
insurance.
33
Code upgrade coverage applies to extra costs incurred as a
result of rebuilding property under codes or ordinances which have
been updated since the original construction of the premises.
These new requirements can be from local, state, or federal law.
For example, local building code might require changes to the
construction of older buildings in order to be accessible.
Code Upgrade Coverage
Code upgrade coverage applies to extra costs incurred as a
result of rebuilding property under codes or ordinances which have
been updated since the original construction of the premises. These
new requirements can be from local, state, or federal law. For
example, local building code might require changes to the
construction of older buildings in order to be accessible. This
type of coverage may be referred to by other names, including
ordinance or law insurance, depending on the area.This coverage can
be included in or excluded from either standard property insurance
or business interruption insurance.See Scott G. Johnson, Insurance
Coverage for Building Code Upgrades, 44 Tort Trial & Ins. Prac.
L.J. 1031 (2009)
34
Importance of Type of Policy and Policy Language
A policy can be a named perils policy which covers only the
perils expressly listed or an all risk policy, which covers all
perils except those explicitly excluded.
A policy can be a named perils policy which covers only the
perils expressly listed or an all risk policy, which covers all
perils except those explicitly excluded. Most lenders will require
all risk policies. With an all risk policy, the burden of proof
shifts to the insurer to show the loss is not covered once the
insured has demonstrated that a loss has been suffered.
35
Importance of Type of Policy and Policy Language (Continued)Most
lenders will require all risk policies. With an all risk policy,
the burden of proof shifts to the insurer to show the loss is not
covered once the insured has demonstrated that a loss has been
suffered.
A policy can be a named perils policy which covers only the
perils expressly listed or an all risk policy, which covers all
perils except those explicitly excluded. Most lenders will require
all risk policies. With an all risk policy, the burden of proof
shifts to the insurer to show the loss is not covered once the
insured has demonstrated that a loss has been suffered.
36
World Trade Ctr. Properties, L.L.C. v. Hartford Fire Ins. Co.,
345 F.3d 154 (2d Cir. 2003); SR Int'l Bus. Ins. Co. v. World Trade
Ctr. Properties, LLC, 467 F.3d 107 (2d Cir. 2006)
Silverstein Properties, which leased the World Trade Center from
Port Authority, obtained insurance from about two dozen insurers in
the collective amount of $3.5 billion per occurrence. The
difference between defining the casualty as one or two occurrences
(for the two separate planes) meant the different between being
able to recover $3.5 billion and $7 billion. This resulted in
massive litigation involving Silverstein, Port Authority, and the
insurance companies, among others.
37
World Trade Ctr. Properties, L.L.C. v. Hartford Fire Ins. Co.,
345 F.3d 154 (2d Cir. 2003); SR Int'l Bus. Ins. Co. v. World Trade
Ctr. Properties, LLC, 467 F.3d 107 (2d Cir. 2006)Silverstein
Properties, which leased the World Trade Center from Port
Authority, obtained insurance from about two dozen insurers in the
collective amount of $3.5 billion per occurrence. The difference
between defining the casualty as one or two occurrences (for the
two separate planes) meant the different between being able to
recover $3.5 billion and $7 billion.
This resulted in massive litigation involving Silverstein, Port
Authority, and the insurance companies, among others.
Continued
Silverstein Properties, which leased the World Trade Center from
Port Authority, obtained insurance from about two dozen insurers in
the collective amount of $3.5 billion per occurrence. The
difference between defining the casualty as one or two occurrences
(for the two separate planes) meant the different between being
able to recover $3.5 billion and $7 billion. This resulted in
massive litigation involving Silverstein, Port Authority, and the
insurance companies, among others.
38
The Second Circuit held that this $3.5 billion question, how to
define occurrence, was to be decided by a jury. The jury found that
under the definition of some policies it was a single occurrence,
whereas under others it was two separate occurrences. The court
found that [t]hese forms were designed with different interests in
mind and, not surprisingly, yielded different results. In our
opinion, the jury's determination that the insurers provided
different coverage is not a manifestation of judicial error.
Silverstein Properties, which leased the World Trade Center from
Port Authority, obtained insurance from about two dozen insurers in
the collective amount of $3.5 billion per occurrence. The
difference between defining the casualty as one or two occurrences
(for the two separate planes) meant the different between being
able to recover $3.5 billion and $7 billion. This resulted in
massive litigation involving Silverstein, Port Authority, and the
insurance companies, among others.
39
Types of Casualty InsuranceAs Blacks Law Dictionary notes, [t]he
meaning of casualty insurance has become blurred because of the
rapid increase in different types of insurance coverage. Insurance,
Black's Law Dictionary (10th ed. 2014). After an event like Sandy
or Katrina, losses can stem from different causes, such was wind,
wind driven rain, storm surge, flooding, power outages, order by
civil authority, change in codes, looting etc.
40
Property Insurance Fair Market ValueActual Cash ValueReplacement
CostReplacement cost coverage was devised to remedy the shortfall
in coverage which results under a property insurance policy
compensating the insured for actual cash value alone. That is,
while a standard policy compensating an insured for the actual cash
value of damaged or destroyed property makes the insured
responsible for bearing the cash difference necessary to replace
old property with new property, replacement cost insurance allows
recovery for the actual value of property at the time of loss,
without deduction for deterioration, obsolescence, and similar
depreciation of the property's value.
Fair Market ValueThis valuation method is based on the price
that a property would sell for if placed on the market today and
purchased in a fair, arms-length transaction. To determine that
price an insurer is likely to look at recent sales of nearby
comparable properties.This valuation may be similar to an actual
cash value valuation, discussed below, because the market value
typically takes into consideration any deterioration of the
property. However, the fair market value method is more susceptible
to outside forces such as the strength of the real estate market at
the time.Actual Cash ValueThis valuation method attempts to
calculate the cost to replace insured property, and then subtracts
from that amount to account for depreciation of assets. This means
that the amount paid by an insurer would be less than the cost to
replace the insured property, and would continue to decrease over
time. Under an actual cash value policy the insured is responsible
for making up the difference between the cost to replace the
property and the lesser amount the insurer will pay.Replacement
CostThis valuation method attempts to estimate the cost to
reconstruct or repair the insured property, typically using
comparable methods and materials. A replacement cost policy will
not deduct for deterioration or depreciation, differentiating it
from fair market value or actual cash value policies.Replacement
cost coverage was devised to remedy the shortfall in coverage which
results under a property insurance policy compensating the insured
for actual cash value alone. That is, while a standard policy
compensating an insured for the actual cash value of damaged or
destroyed property makes the insured responsible for bearing the
cash difference necessary to replace old property with new
property, replacement cost insurance allows recovery for the actual
value of property at the time of loss, without deduction for
deterioration, obsolescence, and similar depreciation of the
property's value. 12 Couch on Ins. 176:56.
41
Attributing Damage to Water vs. WindBecause many insurance
policies exclude flood and water damage, businesses which do not
obtain separate flood policies are often left with damage in the
wake of a casualty such as a hurricane which may not be covered by
the policy. If there is any chance of water damage, whether from
direct flooding, hurricane, or other cause, a landlord should
obtain additional flood insurance. Cashew Holdings, LLC v. Canopius
U.S. Ins., Inc., No. 13-CV-4528 ERK SMG, 2013 WL 4735645 (E.D.N.Y.
Sept. 3, 2013)
The case below provides an example of a court deciding whether
damage was caused by water or wind, and accordingly whether the
damage was excluded by the policys flood exclusion clause.
42
Cashew Holdings, LLC v. Canopius U.S. Ins., Inc., No. 13-CV-4528
ERK SMG, 2013 WL 4735645 (E.D.N.Y. Sept. 3, 2013)
The relevant exclusion in the policy provided
Exclusions1. We will not pay for loss or damage caused directly
or indirectly by any of the following. Such loss or damage is
excluded regardless of any other cause or event that contributes
concurrently or in any sequence to the loss.g. Water(1) Flood,
surface water, waves, tides, tidal waves, overflow of any body of
water, or their spray, all whether driven by wind or not;(2)
Mudslide or mudflow;(3) Water that backs up or overflows from a
sewer, drain or sump; or(4) Water under the ground surface pressing
on, or flowing or seeping through:(a) Foundations, walls, floors or
paved surfaces;(b) Basements, whether paved or not; or(c) Doors,
windows or other openingsBut if Water, as described in g.(1)
through g.(4) above, results in fire, explosion or sprinkler
leakage, we will pay for the loss or damage caused by that fire,
explosion or sprinkler leakage.
43
Flood Exclusions and Concurrent Causation ClausesAn insurance
theory stating that if loss or damages occur as a result of more
than one cause, one of which is covered (insured) while the other
is not, the damages are likely to still be compensated for by the
insurer.
44
In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir.
2007)
This case consolidated a number of residential and commercial
property insurance claims brought in the wake of Hurricane Katrina.
The plaintiffs policies contained flood exclusions, but they
nevertheless made insurance claims, primarily under the theory that
the New Orleans flooding was caused by the negligent design,
construction and maintenance of the levees, and that the insurance
policies flood exclusions do not exclude coverage for flooding
cause by negligence. The defendant insurance companies, of course,
contested that interpretation of the flood exclusion clauses.Sample
exclusion clauses from some of the consolidated cases:We do not
insure for loss caused directly or indirectly by any of the
following. Such loss is excluded regardless of any other cause or
event contributing concurrently or in any sequence to the
loss.Water Damage, meaning:... Flood, surface water, waves, tidal
water, overflow of a body of water, or spray from any of these,
whether or not driven by wind ....We do not insure under any
coverage for any loss which would not have occurred in the absence
of one or more of the following excluded events. We do not insure
for such loss regardless of: (a) the cause of the excluded event;
or (b) other causes of the loss; or (c) whether other causes acted
concurrently or in any sequence with the excluded event to produce
the loss; or (d) whether the event occurs suddenly or gradually,
involves isolated or widespread damage, arises from natural or
external forces, or occurs as a result of any combination of
these:... Water Damage, meaning: (1) flood, surface water, waves,
tidal water, overflow of a body of water, or spray from any of
these, all whether driven by wind or not....Definition of FloodThe
court found that although the term flood was not specifically
defined in the policies, it was not ambiguous and so should be
accorded its plain meaning. The court also found that even though
other insurance policies specifically addressed floods caused by
negligence, the omission of that particular contingency from these
policies did not render the terms ambiguous. The court ultimately
looked to standard usage of the term, and found that it included
flooding as the result of negligence: When a body of water
overflows its normal boundaries and inundates an area of land that
is normally dry, the event is a flood. This is precisely what
occurred in New Orleans in the aftermath of Hurricane
Katrina.Though the court held that the term flood was not
ambiguous, this costly litigation might have been avoided by
including a definition.All Risk PoliciesThe plaintiffs also raised
the argument that because they had all risk policies, they had
heightened expectations of coverage. The court rejected this
argument based on the clearly-stated exclusions.This is a
cautionary tale, and should be taken as a reminder that simply
labeling a policy as all risk does not guarantee that it, in fact,
covers all risks.Efficient Proximate Cause and
AntiConcurrentCausation ClausesThe court found that any negligence
with regard to the levees was not a separate cause of damage from
the flooding itself, and so this doctrine did not apply.
45
Flood or ExplosionLester Schwab v. Great Northern, Index #:
652708/2013
The Plaintiff argues that the Defendant is legally bound to
indemnify the Plaintiff for its losses because the damage that
resulted from Hurricane Sandy is a covered peril. Specifically, the
Plaintiff argues that its loss of utilities that prevented it from
carrying out regular business activities was caused by an explosion
(and not by a flood) to Con Edisons transformer which is a covered
peril under the policy. In the alternative, the Plaintiff makes
clear that it purchased an additional Flood Endorsement policy
through the Defendant which provides an additional avenue for
coverage if it is discovered that the flood, and not the explosion,
caused the loss of utilities.
The Defendant disclaimed coverage and argues that the Plaintiffs
loss of utilities (which ultimately led to its inability to carry
out regular business operations on the premises) was caused
directly by flood damage to the underground utility infrastructure
and not by an explosion. Since flood damage does not suffice as a
covered peril, the Defendant refuses to indemnify the Plaintiff.
Further, the Defendant argues that because the state of New York
did not order an evacuation of Plaintiffs offices, there was no
legal inability to ingress and egress from the premises. The
Defendant takes the position that the Plaintiffs employees
technically could have carried on its regular business activities
and, therefore, is under no legal obligation to indemnify the
Plaintiff for its losses.
Insurance on Real PropertyComplaints46
Flood or Explosion
47
Require Tenant Insurance Property insurance at minimum, but
possibly general commercial liability insurance and/or business
interruption insurance
Drafting a Better Casualty Lease Clause
48
The End
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