(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).
Keith Turner, a fellow attorney from California, forwarded me a novel and interesting court opinion from his home state that may change the typical business interruption rhetoric.
Most business interruption forms read as follows:
* * * * * *
1. “Business income” means:
a. Net income (net profit or loss before income taxes) that would have been earned or incurred; and
b. Continuing normal operating expenses incurred, including payroll.* * * * * *
Under this provision, carriers will often argue that if a policyholder was operating at a net loss greater than the business’ normal operating expenses, the business interruption recovery would be zero. In Florida, some carriers rely on Dictiomatic, Inc. v. Mercury Cas. Co., 958 F.Supp. 594 (S.D. Fla. 1997), where a court held that “business interruption insurance may not be used to put the insured in a better position than it would have occupied without the interruption,” to deny or offset recovery for operating costs if the business was not doing so well prior to the loss.
However, an appellate court in California used a different kaleidoscope to read the same provision and found that that, in the event of a covered loss that forced the complete suspension of its business operations, the policy would provide coverage for any lost profits, and, even if there were no lost profits, for ongoing expenses incurred during the period of suspension. In Amerigraphics v. Mercury Casualty Company, 182 Cal. App. 4th 1538 (March 23, 2010), the Court declined to follow Dictiomatic and held that:
[i]f a catastrophic event damages an insured’s business premises and prevents the insured from being able to operate, any business in that situation would face two distinct problems: (1) a loss of money coming into the business (loss of income), and (2) payment of ongoing fixed expenses, even though no money is coming in. A reasonable insured would see that the definition of “Business Income” has two distinct components: (i) net income, and (ii) continuing normal expenses. Because the definition provides that “Business Income” includes both items, a reasonable insured relying on the plain language of the clause would reasonably conclude that the policy covers both items. Indeed, we note that the “Business Income” provision appears in the policy under the preceding heading of “Additional Coverages.” Given its placement in the policy and the plain language of the provision, it would be objectively reasonable for an insured purchasing the policy to construe it as protecting both its lost income stream and as defraying the costs of ongoing expenses until operations were restored.
Under both parties’ interpretation, an insured business will be paid if the business were operating at a profit prior to the covered loss. It is only when a business was operating at a net loss greater than its operating costs that it would not be paid at all under Mercury’s interpretation. But there is nothing in the policy language to suggest to an insured that if a business is not earning a profit it should not expect coverage for its continuing expenses during the period it cannot operate. It is not unusual for business income to fluctuate from year to year. A business should not have to be concerned that if it does poorly for one or two years and a covered catastrophic loss occurs during that time frame, then the business will not be paid anything under the “Business Income” provision. In essence, Mercury’s interpretation relies on the implied assumption that only a profitable business would be protected by the provision. A business that is just starting out may operate at a temporary loss until it becomes established and secures a customer base. If that business knew that there would be no coverage under the “ Business Income” provision of the policy for ongoing expenses if it suffered a catastrophic loss under the policy, there would be no point for that business to purchase the additional coverage.
Feel free to contact me if you have any questions or concerns about how this new decision may impact your business interruption claim.