Hurricane Ian Shoreline Loss: Four Policies, Oh Joy!
October 19, 2023
The pandemic and political turmoil are causing widespread and long-term economic volatility after many years of positive trends. But covered commercial property losses continue, whether caused by fire, wind, or other causes independent of the underlying bases for the current market turmoil. And Hurricane Ian, in light of its occurrence during volatile economic times, will trigger numerous business interruption valuations in Florida, many of which will have to consider past and/or future economic realities. Here, we revisit and analyze cases addressing the problems associated with the valuation of such business interruption claims in light of sudden economic factors, such as those caused by domestic and world events. These cases should provide some guidance on where courts may go in addressing business interruption valuations during these unprecedented economic times.
Some basics, first. Business interruption coverage (also known business income, business loss or time element coverage) indemnifies the insured by replacing lost income and any extra expenses when an insured’s business is forced to shut down or stop operating normally as a result of damage caused by a covered peril. Business income generally is determined by examining the net income profit or loss before taxes that would have been earned and the continuing normal operating expenses incurred, including payroll. Lost income often is determined based on the experience of the business immediately prior to the event that causes the loss, the historic experience of the business during the same time in the prior years, and the insured’s reasonably expected performance over the period of time under review.
Normally, business interruption losses are calculated based on the history of revenues and expenses preceding the loss. Measuring past revenues and expenses ensures that an insured’s business interruption claim is valued as accurately as possible, without creating a financial windfall. Valuation of lost business income after a covered loss during stable economic times is difficult enough. But when a pandemic or other widespread factors impact the local, state, national, or even the international business climate, business interruption calculations can be extremely challenging. Throw in nuances in policy language and valuation becomes even more complex.
The extended duration of the pandemic, and possibly of the current international tension, undoubtedly will result in valuation disputes for business income losses. The suddenness of the economic turmoil, along with the differing impact on businesses, may result in a variety of valuation approaches. For example, a face mask-producing business damaged by fire at the onset of the pandemic will want to take into account the predictable sales increase it would have enjoyed but for the fire. Or a hurricane-damaged salon business will not wish to consider the pandemic’s sudden downtown in its calculations, looking strictly to past revenues under then, more favorable economic conditions.
Case law across jurisdictions differ on how to factor (or not) sudden economic changes into business income loss calculations. Generally, depending on prevailing case law and policy language, courts will either allow consideration of post-loss economic conditions or they will only focus on historical profits. And courts have analyzed whether the market impact of the covered peril in question can be considered. In the wake of Hurricane Ian and the recent economic volatility, Florida courts will undoubtedly be faced with many of the same issues addressed nationwide. Policy language and fundamental principles of indemnity should be strong factors in any court decisions.
In Hampden Auto Body Co. v. Owners Ins. Co., 17-CV-1894-WJM-SKC, 2020 WL 6511956 (D. Colo. Nov. 5, 2020), a lightning strike damaged equipment in the insured’s auto body shop. The damage to the equipment increased the service time for vehicles. Later that year, the metro area was hit with severe storms, dramatically spiking the demand for the insured’s services. Hampden could not meet that increased demand due to the service delays caused by the damaged equipment, which could not get replaced until after the storms and surge in demand.
Right before trial, the insurer moved to exclude the insured’s expert on the business income loss, claiming that the expert was wrong to base his opinion on the local surge in demand (due to the later storms) after the lightning strike. The insurer claimed that the policy language required valuation based on the business income at the time of the covered loss or damage and without considering the spike in demand afterward. The trial court first examined the applicable policy language, noting:
[Owners] will pay for the actual loss of Business Income [Hampden] sustain[s] due to the necessary suspension of [its] ‘operations’ during the ‘period of restoration.’ The Business Income Policy defines Business Income in the following manner:
Business Income means the:
(1) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and
(2) Continuing normal operating expenses incurred, including payroll.
Moreover, the Business Income Policy provides that the amount of Business Income Loss will be determined based on:
(a) The Net Income of the business if no loss or damage occurred;
(b) The likely Net Income of the business if no loss or damage occurred;
(c) The operation expenses, including payroll expenses, necessary to resume “operations” with the same quality of service that existed just before the direct physical loss or damage; and
(d) Other relevant sources of information, including:
(1) Your financial records and accounting procedures;
(2) Bills, invoices and other vouchers; and
(3) Deeds, liens or contracts.
(emphasis added) The trial court rejected the insurer’s contention that the policy contemplated a retrospectively-determined calculation of business income. The trial court instead observed that “the phrase ‘Net Income of the business if no loss or damage occurred’ leaves open the possibility that Business Income Loss could include increased economic opportunities that arise after the date of the loss.” Nothing in the policy language limited the business interruption valuation temporally to the time of the loss. Therefore, the insured’s expert could include in his calculations the increased business opportunities that occurred as a result of the subsequent storms.
The trial court noted other cases where the insured was not allowed to factor increased business opportunities due to the same event that caused the damage. But those cases do not apply because the lost business opportunities of the auto body shop occurred because of separate storm events and not because of the physical loss-causing covered peril of the lightning strike.
In Penford Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 09-CV-13-LRR, 2010 WL 2509985 (N.D. Iowa June 17, 2010), the insured manufacturer suffered losses from a flood just before market conditions worsened. The insured moved to bar the testimony of the insurer’s expert, who had based his business income loss calculation on the insured’s own bleak revenue projection prepared before the flood. The insured claimed that the calculation should have relied solely on the insured’s historical revenues and costs and not the revenue projection, which considered the worsening recession’s effect on market conditions.
The insurer argued that its expert properly considered the recession and its effect on the insured’s business in valuing the business income loss. It cited as support “the policy language and the general principles of business interruption coverage, which is intended to do for the business ‘what the business would have done had no flood occurred.”
The trial court held that that unfavorable market conditions were relevant factors in determining the business income loss. It began by reviewing the controlling policy provision:
[I]n determining the amount of loss payable, the [insurers] will consider the experience of the business before and after and the probable experience during the PERIOD OF LIABILITY.
This provision was read in conjunction with another that allowed the insured to recover lost earnings only to the extent that it is “able to demonstrate a loss of sales for the operations, services or production prevented.” The policy, therefore, permitted considering the business profits both before and after the flood. The court found that the recession would have affected the insured’s profits regardless of whether the flood ever occurred and thus it was relevant to determining the insured’s profits had no flood occurred.
The trial court rejected the insured’s reliance on a Hurricane Katrina case, Catlin Syndicate Ltd. v. Imperial Palace of Mississippi, Inc., 600 F.3d 511 (5th Cir. 2010), where the appellate court held that under a “virtually identical” policy only historical sales figures should be considered, and not sales figures after reopening.” The Penford trial court agreed with and, in fact, adopted the insurer’s argument in distinguishing that case, where the insured attempted to seek lost profits from the covered peril itself:
The issue raised in Imperial Palace is how to treat the wider geographic consequences of a catastrophic event when the event directly impacts the insured’s property and the wider geographic consequences indirectly impact the insured’s business. That simply is not the case here where the flood event which caused direct physical loss and damage is quite distinct from the worst economic catastrophe to befall the nation since the Great Depression. Penford does not get to recover what it would have earned in the absence of both the flood and the recession; it gets only what it would have earned in the absence of the flood.
In Levitz Furniture Corp. v. Houston Cas. Co., CIV. A. 96-1790, 1997 WL 218256 (E.D. La. Apr. 28, 1997), the federal court found that historic and expected future increased profits resulting from favorable market conditions caused by the peril itself could be considered in calculating business income loss. In Levitz, the insured filed a claim for flood damage to a furniture store and destruction of the showroom inventory. Post-flood, there was an increased consumer demand for furniture caused by the flood itself.
The insurer argued that the expected increased consumer demand for furniture after the flood should not be considered in the business income loss calculation. In other words, the insurer contended that the insured should not be placed in a better position than had the loss not occurred.
After distinguishing the policy provisions in Fisherman’s Paradise and Colleton, the trial court rejected the insurer’s argument, stating that it would not read into the policy language that did not exist. The policy included a Gross Earnings Clause, which covers business interruption losses. That provision considers the experience of the insured had the interruption not occurred, and not the experience had the loss not occurred. The applicable provision stated:
In determining the indemnity payable under this Endorsement, due consideration shall be given to the experience of the business before the Period of Interruption and the probable experience thereafter and to the continuation of only those normal charges and expenses that would have existed had no interruption of production or suspension of business operations or services occurred.
The court found that the term “no interruption” meant no business stoppage rather than no physical loss occurring. Therefore, the policy allowed consideration of profits “that would have existed” had Levitz not been forced to cease operations after the flood. Unlike the wording of other policies, the Levitz policy did not exclude consideration of increased profits caused by the loss itself.
In Berk-Cohen Associates, L.L.C. v. Landmark Am. Ins. Co., 433 Fed. Appx. 268 (5th Cir. 2011), the insured’s apartment complex was damaged from separate but sequential events including a tornado, Hurricane Katrina, a fire, and a transformer damaged by a car crash. The property was damaged from the tornado, the covered loss. Two weeks later the insured and many other businesses were damaged from the hurricane. The insurer paid $20 million to cover repairs and business income loss. The policy did not cover for losses caused “directly or indirectly by Flood” but covered wind damage resulting from the tornado.
The business income provision stated:
“[t]he likely Net Income of the business if no physical loss or damage had occurred.” But the policy did not cover “any Net Income that would likely have been earned as a result of … favorable business conditions caused by the impact of the Covered Cause of Loss ….”
The insured demanded more in lost income payments, claiming that Hurricane Katrina resulted in an increase in rents. The insurer refused, reasoning that the policy excluded damage directly or indirectly caused by floods. The lower court agreed with the insured that flood-induced market conditions were appropriate considerations for business income loss caused by the wind damage to the property. And the appellate court agreed as well, finding that the policy barred flood damages but did not exclude lost income opportunity from the increased demand and decreased competition as a result of the flood. The policy permitted the consideration of favorable market conditions not caused by the Covered Cause of Loss (wind) in calculating lost income. Therefore, the flood exclusion did not limit the consideration of increased rent caused by the non-covered flood peril.
In Prudential LMI Commercial v. Colleton Enterprises, Inc., 976 F.2d 727 (4th Cir. 1992), the federal appellate court found that the favorable post-loss market conditions should not be considered in calculating lost profits. The insured, a hotel, filed a claim for loss business profits resulting from damage caused by Hurricane Hugo to the hotel and surrounding areas. The insurer indemnified the insured for all matters except for business income. The hotel had business income losses of $350,000 for the 32-month period before the hurricane.
The hotel argued that regardless of its history of reported losses, it would have made a profit in the months after the hurricane had it not closed. Post-storm, there had been an influx of repair personnel, construction, and temporary relief workers that had arrived to assist in the area, creating a big demand for lodging which, the insured argued, should be considered in calculating loss income.
In rejecting the insured’s contention, the court considered the following policy language:
[I]n determining [earnings] loss … due consideration shall be given to: (a) the earnings of the business before the date of damage or destruction and to the probable earnings thereafter, had no loss occurred.
The court noted that under this provision, a general economic upturn that happened to occur post-loss could be considered in calculating a business income loss. But the court refused to extend that to increased profits caused by the hurricane, reasoning that:
had the hurricane not occurred (the policy’s built-in premise for assessing profit expectancies during a business interruption), neither would the specifically claimed earnings source have come into being. To allow the claim therefore would be to confer a windfall upon the insured rather than merely to put it in the earnings position it would have been in had the insured peril not occurred. Business interruption insurance of the type in issue here is not intended to provide such windfall coverage.
In a nutshell, the court applied the general “no windfall” insurance principle and held that the policy “did not cover the specific claim for loss of net-profit from the peril-generated source relied upon.”
Note that the dissenting opinion in Colleton would have allowed consideration of hurricane-created increased revenue. It viewed the “had no loss occurred” language as referring only to the damage to the insured’s specific physical loss, not the overall loss in the surrounding area. The dissent hypothetically mused that if a fire had destroyed the business the day before Hurricane Hugo, the majority would have allowed the lost profit opportunity of the hurricane because the cause of loss (fire) was different than the cause of the profit opportunity (Hugo). Given that, the dissent did not see any logical flaw in allowing recovery to the insured for lost profits that would have been generated had it been open during Hugo.
In Finger Furniture Co. Inc. v. Commonwealth Ins. Co., 404 F.3d 312 (5th Cir. 2005), the federal appellate court also refused to consider post-loss market conditions in business income loss. In 2001, Hurricane Allison hit Houston, Texas causing severe flooding to the area. The insured, Finger Furniture Company (“Finger Furniture”), was impacted when the flooding prevented the employees from accessing the store and the company’s central computer system. The store was closed for two days. The following weekend, the store had a sale and made a profit on the discounted items, offsetting what would have been a larger loss.
Finger Furniture filed a claim with its insurer for business-interruption for the two days the store was inaccessible due to the flood. The business-interruption provision of the policy read:
[Commonwealth] shall be liable for the actual loss sustained by insured resulting directly from such interruption of business, but not exceeding the reduction in gross earnings less charges and expenses which do not necessarily continue during the interruption of business.
In determining the amount of gross earnings covered hereunder for the purposes of ascertaining the amount of loss sustained, due consideration shall be given to the experience of the business before the date of the damage or destruction and to the probable experience thereafter had no loss occurred.
The insurer claimed that the insured did not suffer a loss because it actually made up the sales that it did not make when the store was closed. The court rejected this argument. The policy required that business-interruption loss calculations be based on the experience of the business before the loss, not after. Historical sales figures should be used in to determine the “business’s experience before the date of the damage or destruction and to predict a company’s probable experience had the loss not occurred.” The court agreed with the insured, ruling that despite Finger Furniture’s post-catastrophe sale profits, the provision did not allow for those additional profits to be taken into account to lower the amount of business income loss claimed. As a result of the flood and closure, looking strictly at historical figures, Finger Furniture lost profits during the two days that the store was inaccessible.
In Consol. Companies, Inc. v. Lexington Ins. Co., 616 F.3d 422 (5th Cir. 2010), the insurer appealed a judgment against it after trial, contending in part that insured’s warehouse business income evidence was insufficient to support the jury verdict. It did not properly account for the post-Katrina poor economic conditions that would have reduced its business income had it not been shut down.
At trial, the insurer had contended that the insured’s proof was insufficient to support the lost profits portion of its business interruption damages. It blamed some of the losses calculated by the insured as caused by the generally poor economic conditions and the not the damage to the insured’s property. Therefore, the insurer contended, the verdict should be reversed because the evidence did not distinguish between these two causes of the losses.
The appellate court considered the following policy language:
(3) EXPERIENCE OF BUSINESS: In determining the amount of net profit (or loss), charges and expenses covered hereunder for the purpose of ascertaining the amount of loss sustained, due consideration shall be given to the experience of the insured’s business before the date of damage or destruction and to the probable experience thereafter had no loss occurred.
The insurer claimed that under this provision, the poor, post-loss market conditions caused by Hurricane Katrina could be considered because had the business stayed open, i.e., had no damage occurred to the business, it would have suffered from the poor economic conditions caused by the storm. The insurer pointed out the distinction between “no loss” occurring vs. “no hurricane” occurring.
The appellate court rejected the insurer’s interpretation as inconsistent with the policy as a whole. “Loss” and “occurrence” are inextricably intertwined. The jury, therefore, was correct to consider the amount of money required to place the insured “in the same position in which [it] would have been had [Katrina not] occurred,” with the poor economic conditions not occurring.
In Catlin Syndicate Ltd. v. Imperial Palace of Mississippi, Inc., 600 F.3d 511 (5th Cir. 2010), the insured, a casino, was forced to cease operations for several months in the wake of Hurricane Katrina. The casino was able to resume operations earlier than the nearby competing casinos post-Katrina, bringing in greater revenues than before the hurricane because customers had fewer casinos to choose from. The insured agreed to pay on the claim but disputed the amount with the insured claiming $80 million in business interruption losses and the insurer believed the amount to be closer to $6.5 million.
The business interruption provision stated:
Experience of the business—In determining the amount of the Time Element loss as insured against by this policy, due consideration shall be given to experience of the business before the loss and the probable experience thereafter had no loss occurred.”
In other words, consideration should be given to historical figures only.
The insurer argued business interruption should be calculated based on net profits it would have earned had the hurricane not impacted and damaged the casino, factoring in only historical sales figures, and not the favorable market conditions caused by the hurricane. The casino argued that historical figures should not be considered. Rather, it contended that the correct approach should assume that Hurricane Katrina had struck the area but not damaged the insured property, allowing it to stay fully open. Therefore, the insured argued, the correct amount should be “based in part on the amount it actually earned when it eventually opened after Katrina.”
Relying on Finger Furniture, the court agreed with the insured and declined to consider post-interruption sales as the policy says nothing about reviewing sales post-loss. The court held only historical sales figures should be considered when calculating business interruption loss under this policy.
In Am. Auto. Ins. v. Fisherman’s Paradise, 93-2349CIVGRAHAM, 1994 WL 1720238 (S.D. Fla. Oct. 3, 1994), Hurricane Andrew damaged the insured’s property. Fisherman hired a direct marketing company who solicited county residents to determine the amount of stock from Fisherman the residents would have purchased had the store been open after the hurricane.
The business interruption insurance provision stated:
We will pay for the actual loss of Business income you sustain due to the necessary suspension of your operations during the period of restoration…
1. Business Income
Business Income means the:
a. Net Income (Net Profit or Loss before Income Taxes) that would have been earned or incurred…
The Policy specifically defined the term “Loss Determination.” The plain language of paragraph 4.a. indicates the factors to be used in calculating the loss:
D. Loss Conditions
4. Loss Determination
a. The amount of Business Income Loss will be determined based on:
(1) The Net Income of this business before the direct physical loss or damage occurred;
(2) The likely Net Income of the business if no loss or damage occurred;
Fisherman argued that the term “likely” in the policy was ambiguous and argued that construction of “likely profits” should mean the profit it would have earned if the store had not been damaged and was able to reap the increased sales of post-hurricane consumer demands for boats and accessories offered by Fisherman. The insured argued that it was entitled to an additional $1.2 million, or a 192% increase in earnings resulting from the improved economic opportunities post-Hurricane Andrew. It argued that this increase was, per the policy language, the “likely Net Income of the business if no loss or damage occurred.”
The court disagreed and stated that the interpretation was inconsistent with the policy when viewed as a whole. It stated that the policy was “drafted in a way which allows net income projections that are itself not created by the peril.” The court ruled against the insured’s claim for lost business opportunities, citing to Colleton’s rationale that “had no hurricane occurred (the policy’s built in premise for assessing profit expectancies during business interruption), [then] neither would the claimed earnings source.”
The current pandemic and economic upheaval will trigger many considerations concerning the calculation of business income losses in Hurricane Ian claims. The nuances of policy language, of course, will be the driving force in determining whether pandemic- or political-driven market volatility post-loss can be considered. There is a certain inertia against allowing the perception that an insured will profit from the same cause of loss that caused the increased business opportunity. But insurers should be wary of relying on policy language that does not specifically bar consideration of covered peril-induced market conditions.
Moreover, insurers employing experts to defend claims in litigation should consider requesting an additional opinion—if appropriate—based on the insured’s policy interpretation of business income calculation. This would act as a hedge against having the expert struck completely if the trial court disagrees with the insurer’s policy interpretation of business income loss calculation during volatile economic times.
For any further questions, please contact Pablo Cáceres.