The New York Supreme Court has ruled that two lenders cannot hold the owner of 4 Times Square, a major Manhattan office building, in default for not buying adequate terrorism insurance.

Attorneys for the Durst Organization, which owns the 1.6 million sq. ft. tower, hailed the ruling as a preliminary victory against lenders Cigna and LaSalle National Bank Association. Cigna is the special servicer and LaSalle the major lender for the mortgage on the building. Both Cigna and LaSalle had sought to extract fees and penalties from Durst, who they claim is in default of loan terms. Neither Cigna nor LaSalle could be reached to comment on the ruling.

"Even if this court were to accept defendants’ argument that the case now presents some new issues, defendants still have failed to show that they cannot be adequately compensated by monetary damages," said State Supreme Court Justice Rosalyn Richter.According to Durst organization attorneys, existing mortgage insurance on 4 Times Square, which is located on Seventh Avenue between 42nd and 43rd streets, fulfills its legal obligations to the lenders. A final decision in the case will not be made for another 12 to 18 months, however.

"The litigation has created a life of its own," says Douglas Durst, co-president of the Durst Organization, which owns and manages roughly 7.5 million sq. ft. of Manhattan office space. Durst promises "never to do business with Cigna again."

The 4 Times Square terrorism insurance dispute is one of many squabbles that have emerged over how much terrorism coverage is necessary for a given property — and how much lenders demand borrowers to acquire.

The Terrorism Risk Insurance Act of 2002 made it illegal for insurers of U.S property to exclude the coverage from their property & casualty (P & C) policies. But the Federal Backstop doesn’t dictate pricing, and by many accounts the premiums are far too expensive for many landlords to afford.

Another potential hazard with the TRIA legislation is it expires in 2005, at which point insurers won’t be legally obligated to offer terrorism coverage. There is also the substance of the legislation that raises issues: nuclear, biological and chemical (NBC) attacks are not covered under the standard TRIA package, though attacks by such means are strongly suspected in the future.

As Durst himself notes, this could be a future problem for those who own high-profile office properties. "When that federal legislation expires it will put us right back where we were immediately after 9/11," he says.