On August 22, 2013, a fire destroyed an office building where one tenant, Bernstein Liebhard LLP, was a mass tort law practice. The firm’s mass tort practice was shut down for a year. The insured law firm sued Sentinel Insurance Company Limited for $27 million arising from lost income from several hundred mass tort clients who failed to retain the firm during the 12-month period after the fire.

The policy defined “Business Income” as “Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no direct physical loss or physical damage had occurred.” This coverage was limited to 12 months after the date of the damage.

The parties agreed that the Policy clearly provided that income must be “earned” — but how do you define when someone “earns” a contingency fee? The court went with the definition that “earned’ can mean both received or entitled to.

The trial court reasoned that Bernstein had the capacity, lawyers, and staff to prosecute the cases for which it would have been retained during the applicable period, but the equipment damaged by the fire prevented it from taking those cases. But for the fire, Bernstein would have earned its fees when those cases settled or were tried to verdict. Citing National Union Fire Ins. Co. Of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 153 AD3d 1153 (1st Dept. 2017), the court found that the loss of capacity to produce energy in TransCanada and the loss of Bernstein’s income-producing mass tort case inventory is identical; in both instances, the opportunity to achieve that income during the applicable period was lost due to the respective damaging events. The court concluded that Sentinel knew Bernstein was a law firm at inception of the policy and that most mass tort cases do not close in a year.

The reasoning in this decision could affect future business interruption cases where the coverage being sought is based on a contingency fee profession. . . like a law firm or public adjuster.

The case is Bernstein Liebhard LLP v. Sentinel Ins. Co. Ltd., No. 652726/2015 (Sup Ct, New York County Jan. 23, 2018).

I leave you with a quote from one of the founding fathers of the United States, Benjamin Franklin, “a penny saved is a penny earned.”

  • Johnathan Lerner

    The Court also held that to interpret the policy as the carrier proposed would render the coverage illusory. This is something I have been arguing for a long time whenever an insured’s income model (like a law firm retained on a contingency fee) provides for a deferred method of receiving income