More on Business Interruption Insurance
In the last post, we took a look at the Dictiomatic case, in which the policyholder took a beating for overreaching on a business interruption claim. Turnabout being fair play, let’s now have a look at a recent case in which the insurance company got thumped in the business interruption arena. The case is Amerigraphics v. Mercury Casualty Co., 2010 Cal. App. LEXIS 377 (Cal. Ct. App. Mar. 23, 2010).
(By the way, the Amerigraphics decision has the first-party claim community more than a bit worried, judging from a recent article in Claims magazine.)
The essential issue was as follows. Amerigraphics was a three-person graphics company. A flood seriously damaged its business premises, knocking out its operating equipment. The property carrier (Mercury Casualty) determined that, but for the flood, Amerigraphics’ operating expenses would have exceeded revenues, resulting in a projected operating loss of about $159,000. After stalling on the business interruption claim for an extended period of time (and causing Amerigraphics to go out of business), Mercury came to a “no pay” conclusion. Mercury reasoned that, absent the flood, Amerigraphics would have been in the red. Therefore, Mercury argued, how could Amerigraphics legitimately claim that it had lost any income?
Unfortunately for Mercury, the appeals court saw things differently. The business income coverage - in this case, ISO Form 0030 – provides for two components:
(1) Net income (net profit or loss before expenses) that would have been earned or incurred absent the event that caused damage.
(2) Continued normal operating expenses paid or incurred, including payroll.
Generally and not surprisingly, insurance companies take the position that if (in their view) the policyholder would have operated at a net loss, there is no business income coverage. The Amerigraphics court disagreed with that position, finding that items (1) and (2) were separate and distinct. Specifically, the Court ruled as follows:
“If 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.”
The case had been tried to a jury, and, in addition to awarding $170,000 in compensatory damages, the jury found Mercury liable for $3 million in punitive damages for dragging its feet on the claim, and for telling Amerigraphics that certain coverages did not exist under the policy, when in fact they did. As in: “Volper [the policyholder’s principal] called Brown [the insurance claims person] and told him he wanted to make a claim for normal operating expenses. Brown responded that there was no such coverage. Volper then sent Brown a letter enclosing a copy of the relevant policy page with the relevant provision circled. Brown then requested that Volper provide him with a list of the normal operating expenses Amerigraphics had incurred.”
The appeals court described Mercury’s conduct as “despicable” (never a good thing for a claims department), and said: “Amerigraphics, which thought it had insured itself against catastrophic loss, and faithfully paid its premium to Mercury, ultimately became a particularly vulnerable victim. Put simply, Mercury's egregious conduct put Amerigraphics out of business.” The trial court had reduced the jury’s $3 million punitive damages award to $1.7 million, a 10-to-1 ratio with compensatory damages. The appeals court, however, further reduced the punitive damages award to $500,000, finding that a 10-to-1 ratio was excessive under United States Supreme Court precedent.