I’m getting ready to speak at an ABA-TIPS conference on the topic of business interruption insurance. Given the number of horrible tragedies we’ve been through in the past decade (prayers for all those affected by the earthquake in Japan), it’s certainly a timely subject.
To cut to the chase: Business interruption insurance is designed to protect the earnings that the policyholder would have made, had the event or occurrence insured against not happened. Many courts have noted that business interruption insurance is not designed to put the policyholder in a better position than it would have been in had no business interruption occurred.
The elements of proof for a business interruption claim are pretty simple. Basically, the policyholder must generally establish the following:
- That damage covered by the policy has taken place.
- That there was an interruption to the business (“suspension of operations”) caused by the property damage.
- That there was an actual loss of business income during the period of time necessary to restore the business, and that the loss of income was caused by the interruption of the business and not by some other factor or factors (like, for example, lousy products or services). See, e.g., Dictiomatic v. United States Fidelity & Guaranty Co., 958 F. Supp. 594, 602 (S.D. Fl. 1997).
As with most claims, BI claims can easily go off the rails when the policyholder takes extreme positions, damaging its credibility. The poster child for that situation is the Dictiomatic case. (It’s never good when the court uses the word “speculative” to refer to your claim in seven different places in its opinion.) I recommend that anyone involved with this area of the law read that decision very carefully.
Basically, the case involved a company that made hand-held electronic gizmos that translated certain languages into English (including the immensely popular Hungarian and Icelandic). The latest generation of the gizmos didn’t work very well. In fact, in an “OJ with the gloves” moment, the policyholder apparently demonstrated how “well” they worked during the trial, prompting the court to remark tartly: “The in-court demonstration of the product revealed that the sound quality of the speaker was poor and that the pronunciation was not clearly discernible.”
Dictiomatic was taking on water like the Andrea Doria – over $1 million in debt and no discernible market for its poorly-made products in sight. (The court remarked: “[Due to inconsistencies in Plaintiff’s proof and sloppy record keeping, the court is unable to determine the exact amount of debt. The evidence is clear and consistent, however, that at the time of the Hurricane the Plaintiff’s debt was substantial and was in an amount in excess of $1,000,000.”) Then Hurricane Andrew came, which damaged the company’s Florida administrative offices, but not its subcontractor’s manufacturing facility in Singapore, where tens of thousands of the gizmos sat collecting dust. Undeterred, Dictiomatic put in an initial BI claim of $1.3 million (later supplemented to include more), claiming that, despite its woeful financial records, the company would have turned huge profits if not for the bad weather.
The Court made numerous snarky remarks about the credibility of Dictiomatic’s position, and ultimately dismissed the case at the close of plaintiff’s proofs, stating in part as follows:
“[T]he evidence shows that the summaries of past profits the Plaintiff provided to the Defendant in support of its claims of past sales were not accurate inasmuch as bookkeeping journals and ledgers to support the summaries were not diligently kept current on a regular basis. In sum, during processing of the claim, Dictiomatic never provided USF&G with consistent, reliable information which might have supported its claim for loss of business income.”
“Consistent and reliable” documentation. If you want to win on a BI claim, that’s the key.
By the way, if you want to know anything and everything there is to know about business interruption insurance, check out some of Michelle Claverol’s wonderful posts on the subject. Michelle has gone above and beyond the call of duty in explaining this area of insurance and the law.