Reading cases and learning hard lessons where other attorneys lose cases is a lot cheaper than me losing cases. So, I study the losing cases as much as the winning ones. A recent losing case has one obvious lesson and a secondary lesson worthy of remembering when faced with the situation. 

Commercial policyholders are often faced with a mountain of requests for documents when business income and extra expense claims are made. The vast majority of all policies allow the insurers to inspect the books and records of the policyholder, and those documents should be turned over as a matter of course so long as they are relevant to the reason for the inquiry.

What happens if the policyholder cannot find all the documents, alleges that some of the requested documents were destroyed in the loss, or that they cannot be found? How can the policyholder support the economic claim without supporting documents? What happens if the insurer says the supporting documents simply were not turned over and that the policyholder cannot collect or prove damage without them? 

These were the questions raised in a recent case1 where the court cited the fundamental dispute as follows: 

Plaintiff alleges that Underwriters’ refusal to extend payment for the disputed claims amounts to a breach of the policy. Crawford and the Underwriters, on the other hand, have consistently premised the denial of coverage on the fact that CENA has failed to provide supporting documentation that substantiates its claimed losses.

The basic rule is that the policyholder has to prove that a covered loss occurred during the policy period and the amount of damage. The insurer can escape liability by proving that the loss is excluded or excused from payment. 

In the recent case, the insurer won because the policyholder could not prove the amount of damage since it could not produce documents before litigation or after litigation began to support a viable claim for damage. The court noted:

Defendant takes issue with CENA’s evidentiary record of damages in this case, which, primarily consists of a large spreadsheet that purports to establish the overall value of the Company’s losses. Defendant alleges that the spreadsheet, which summarizes in list format the hundreds of items and expenses that make up the Company’s alleged Water Products and Extra Expenses losses, is inadmissible pursuant to Federal Rule of Evidence 1006. Accordingly, Defendant submits that without this list of unverified amounts and items articulated in the spreadsheet, Plaintiff’s evidentiary record is nothing more than an unhelpful collection of documents from which no jury could reasonably discern the existence of CENA’s alleged losses—a position supported by Defendant’s forensic accounting expert’s opinion and which CENA does not controvert. 

Based on our independent review of the available record, we find that CENA has failed to meet its evidentiary burden with respect to the alleged damages because the unverified summary on which it primarily relies is inadmissible. The Company’s vague, unspecific, and non-corroborative references to a massive and mostly unhelpful record do not give rise to a genuine, evidence-based dispute of material fact as to its claimed damages.

Please note that the insurance company had an accounting expert say there were no corroborating documents supporting a spreadsheet with claimed damages. Where was the policyholder’s accountant?

Auditing books and records is one of the fundamental areas of expertise accountants perform and provide opinions upon. Business records and document investigation is something that accountants do all the time. When faced with this situation, a policyholder should retain an accountant to prepare the disclosure of financial documents and prepare an estimate of damages in the litigation. 

The quality of the attorneys hired by policyholders matters. In this case, the judge criticized the attorney’s brief for being non-responsive to a number of issues raised by the insurance company. The court also criticized the attorney for presenting evidence of spreadsheets made by the owners and managers of the company. 

Hiring a certified public accountant to investigate and then provide an opinion of loss is what was needed in this case. In most situations, this type of evidence is needed in any business income and extra expanse loss. 

Thought For The Day 

If I have an accountant that just reports I just invested $10 million in my business, and he doesn’t exactly itemize where every cost goes, it gives a flag to the government. They want to make sure that the reason I’m not paying taxes is because I’m reinvesting in these businesses and not trying to hide stuff.

—Damon Dash

1 CE North America, LLC v. Certain Underwriters at Lloyd’s, London, No.20-20446-Civ (S.D. Fla. Mar. 30, 2023).