What's Good for the Goose is Good for the Gander - Post-Loss Market Conduct Ignored in Louisiana - Understanding Business Interruption Claims, Part 36
For those keeping score of the hottest debate in business interruption claims, a patient reading of Consolidated Companies, Inc. v. Lexington Insurance Company, No. 09-30178, ___ F. 3d ___ (5th Cir. August 17, 2010) is of rigor. For those who need to catch up to speed, I suggest reading my blog posts titled, To Consider the Economy or Not to? ‘That is the Question’ as well as Post Loss Market Earnings Ignored in Mississippi.
As noted before, there are two diverging views on whether post-loss market conduct should be considered to determine the value of a business interruption loss. Experts have coined the debate between “economy ignored” and “economy considered” cases as follows:
The “Economy Ignored” cases stick to the more traditional coverage analysis where courts measure the business interruption loss by comparing the actual past business experience against the probable experience during the period of restoration had the peril not occurred. This type of analysis, however, does not consider the impact a catastrophic peril could have had on the economy, market or demand for the insured’s goods or services […]
Conversely, under the “Economy Considered” line of cases, courts use a different approach to place the business in the position it would have occupied had it been operating in the actual, post-catastrophe environment, but only allowing losses that directly flow from the insured damages [...]
In Catlin Syndicate Limited v. Imperial Palace, No. 09-60209, 2010 WL 9008731 (5th Cir. 2010), the Fifth Circuit Court of Appeals recently followed the “economy ignored” line of cases, foreclosing any consideration to an insured’s post-loss earnings to determine lost profits under Texas and Mississippi law. In Catlin, the insured did very well after Hurricane Katrina because it was one of the first casinos to reopen after the hurricane, but the Court only allowed consideration of the historical sales figures, finding that “loss” and “occurrence” are one and the same in the business interruption provision. It ruled that “had no loss occurred” in the “Experience of the Business” provision means “had no hurricane occurred.”
Six months after Catlin, the Fifth Circuit Court of Appeals revisited the same issue in Consolidated Companies, Inc. v. Lexington Insurance Company, but this time under Louisiana law. In Consolidated, the insured did poorly after Hurricane Katrina. The insurer wanted to consider the poor post-loss market condition, arguing that the insured’s profits would have been reduced from their usual level even if there had been no property damage, but Catlin was too hard to distinguish.
In Consolidated the Court held:
We reject this [Lexington’s] interpretation for the same reasons we rejected it in Catlin (citation omitted). The jury was not to look at the real world opportunities for profit post-Katrina, but instead was to decide the amount of money required to place Conco [insured] in the same position in which it would have been had [Katrina not] occurred […]
The Court further stated that the insured “was not required to draw a bright line in its evidence between loss stemming from property damage and loss stemming from market conditions.” I love this quote. It certainly makes the debate interesting.
I recognize that the “economy ignored” cases are premised, for the most part, on valid concerns of preventing abhorrent windfalls, but this hard-line analysis may have undesired effects. In my recent post, I commented:
[…]the “economy ignored” analysis provides less coverage than the basic requirements otherwise permitted when the insured performs better post-catastrophe, but more coverage that the basic requirements when the insured performs worse after the catastrophic loss. The “economy considered” analysis, however, may serve as a more accurate “measuring stick,” since the formula considers the changes in the post-catastrophe economy without regard to whether the insured would have performed better or worse after the catastrophe, and it only covers loss earnings directly flowing from the physical damage […]
I have also noted that experts on this matter still believe and conclude that the “economy ignored” framework has the effect of treating business interruption coverage as some sort of catastrophe insurance, instead of insurance for the financial consequences of defined property damage, which is the intent and purpose behind business interruption coverage. The debate is very much alive. Stay tuned.
Michelle,
Given an environment where “economy ignored†appears to have the upper hand is there a way to minimize the impact on an insured suffering a partial loss such as:
• 100 room hotel with an undisputed 50% historical occupancy rate.
• Exactly ½ of its rooms are damaged and unavailable while the remaining undamaged ½ are filled due to increases in demand and the reduction in available rooms caused by extensive damage in the area.
Under this scenario their post loss results of 100% of ½ their previously available rooms would equal the pre-loss overall 50% occupancy assuming no change in rates.
Accordingly, using the “economy ignored†approach this insured would have no compensable business interruption loss despite the insured’s contention that had the other 50 rooms been available they clearly would have also been rented / occupied.
Perhaps a middle approach would apply the historical pre-loss experience to the damaged rooms (property) which would yield a loss of 25 rooms (50 rooms multiplied by 50% historical occupancy percentage). The lost rooms would need to be multiplied by the historical rate and then reduced for applicable saved expenses as well.
This approach would ask the carrier to pay the historical rate on the damaged rooms without effectively giving the carrier the windfall for the storm related increases achieved on the undamaged portion of the insured’s business. In effect the carrier and insured would share the benefits of partial operations clearly impacted by the storm without all of the benefits or costs going totally to one side or the other.
What policy changes or court language would be needed to accomplish this result?