(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the part of a series she is writing on business interruption claims).
Several weeks ago, in a blog titled To Consider the Economy, or Not to? ‘That is the Question’, I examined two diverging legal views regarding the use of post-loss market conduct in business interruption claims. In that blog, I borrowed information from an article published in the July/August 2009 issue of Coverage titled “Measuring Business Interruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?” by Richard Chattman and Gregory Miller and I explained that:
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 […]
On March 15, 2010, a few weeks after my post, the “Economy Ignored” line of cases scored big in Mississippi. See, Catlin Syndicate Limited v. Imperial Palace, No. 09-60209, 2010 WL 9008731 (5th Cir. 2010). Recognizing the aforementioned debate among courts, the United States Fifth Circuit of Appeals held that as a matter of Texas and Mississippi law:
[A] business interruption loss will be based on historical sales figures and we [courts] should not look prospectively to what occurred after the loss.
Imperial Palace, a Mississippi casino, was shut down for several months after Hurricane Katrina. The casino claimed to have had a business loss claim of $165 million, but Catlin Syndicate calculated the loss at $6.5 million. Basically, the parties disagreed on whether the policy allowed consideration of post-loss earnings in the calculation of business interruption loss.
The provision at issue in Imperial Palace is typical, and read as follows:
Experience of the business- In determining the amount of the Time Element loss as insured against by this policy, due consideration shall be given to experience of the business before the loss and the probable experience had no loss occurred.
Catlin Syndicate argued that under the policy, Imperial Palace’s recovery should be based on the net profits that the casino would have earned had Hurricane Katrina not struck the Gulf Coast by looking solely at pre-hurricane sales, arguing that “had no loss occurred” means “had no hurricane occurred”. The casino, on the other hand, argued that the policy allows consideration of its post-loss earnings and asked the court to interpret “had no loss occurred” to mean that Hurricane Katrina occurred, but the loss to the property did not.
In simpler terms, the casino argued that it should be entitled to recover what it would hypothetically have earned had it been able to remain open immediately after Katrina, while all of its competitors were closed due to damage to the storm.
Although the Fifth Circuit Court of Appeals agreed that, in theory, a “loss” is distinct from an “occurrence,” the Court followed several “economy ignored” cases and found that “loss” and “occurrence” are one and the same in the business interruption provision and ruled that “had no loss occurred” means “had no hurricane occurred,” thereby foreclosing any consideration to post-loss earnings.
While I recognize that the “economy ignored” cases are premised, for the most part, on valid concerns of preventing abhorrent windfalls, this hard-line analysis may have undesired effects. In my recent post, I commented as follows:
[…]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 […]
It appears that Texas and Mississippi will adhere to the “economy ignored” framework, where “had no loss occurred” means “had no occurrence occurred.” This is concerning. Notwithstanding Imperial Palace, 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 therefore very much alive.