This past week I traveled to Reno, Nevada, (known as “The Biggest Little City in the World”), along with other attorneys from our firm, to attend an insurance claims practice seminar.
Upon my arrival, the hundreds of slot machines (first at the airport and then at the hotel) immediately caught my attention.
In my research involving casinos that have had property damage claims, I found a case with a connection to Reno. In WMS Industries, Inc. v. Federal Insurance Company,1 a manufacturer of electronic slot machines, WMS Industries, Inc. (“WMS”) sued its property and business income insurer for bad faith when the insurer denied coverage. WMS centrally managed electronic slot machines in Gulfport, Mississippi, and networked these slot machines across multiple casinos which leased the slot machines. When Hurricane Katrina struck on August 29, 2005, there was extensive physical damage to WMS’ distribution center/monitoring facility in Gulfport. Therefore, WMS moved their monitoring to Reno, Nevada, on September 11, 2005. They repaired the physical damage to the Gulfport facility in November and then moved their operations back to the Gulfport facility on December 2, 2005.
WMS was covered by Federal Insurance Company’s (“Federal”) policy for Business Income and Extra Expenses (“BI/EE”) coverage for $100 million in losses and Dependent Business Premises coverage for $1 million in losses:
The following Premises Coverages apply only at those premises for which a Limit Of Insurance applicable to such coverages is shown in the Declarations.
Except as otherwise provided, direct physical loss or damage must:
• be caused by or result from a covered peril; and
• be at, or within 1,000 feet of, the premises, other than a dependent business premises, shown in the Declarations.
This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property, unless otherwise stated.
This Premises Coverage applies only at those premises:
• where you incur a business income loss or extra expense; and
• for which a Limit Of Insurance for Business Income With Extra Expense is shown in the Declarations.
Dependent Business Premises
This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property or personal property of a dependent business premises at a dependent business premises.
Federal paid policy limits of $1 million under the Dependent Business Premises coverage and took the position that the majority of WMS’ losses resulted from a loss of income because WMS’ casino customers did not reopen for some period of time, not because of damage to WMS’ own premises. Because its losses were over $1 million, WMS disagreed and filed suit contending that the losses were also covered under BI/EE coverage. The Fifth Circuit Court of Appeals interpreted the policy language under Mississippi law where the standard is as follows:
[I]f a contract is clear and unambiguous, then it must be interpreted as written. A policy must be considered as a whole, with all relevant clauses together. If a contract contains ambiguous or unclear language, then ambiguities must be resolved in favor of the non-drafting party. Ambiguities exist when a policy can be logically interpreted in two or more ways, where one logical interpretation provides for coverage. However, ambiguities do not exist simply because two parties disagree over the interpretation of a policy. Exclusions and limitations on coverage are also construed in favor of the insured. Language in exclusionary clauses must be clear and unmistakable, as those clauses are strictly interpreted. Nevertheless, a court must refrain from altering or changing a policy where terms are unambiguous, despite resulting hardship on the insured. U.S. Fid. & Guar. Co. of Miss. v. Martin, 998 So.2d 956, 963 (Miss.2008) (citations and quotation marks omitted).
Id. at 375. (Emphasis added).
Here, the parties did not contend that the policy was ambiguous; they each just had different interpretations of the language. The Fifth Circuit held that the BI/EE coverage under the policy unambiguously required that the losses from the property damage under BI/EE coverage had to be caused at the listed premises of the insured. Therefore, the losses caused to WMS by closure of the casino customers’ facilities (which were not attributable to a direct physical loss to the insured’s own business premises) were not covered under BI/EE, however were covered by the Dependent Business Premises coverage.
If you have a question on your property damage or business income/interruption loss due to a catastrophe, you should consult with an experienced policyholder attorney to review your policy’s language and provide an opinion on the validity of your claim.