As Tropical Storm Gordon made landfall in
Louisiana with wind speeds near hurricane strength, its impact will likely be
felt across many states. Unlike the traditional business interruption loss,
where the focus is on the impacted business and its pre-loss performance, when tropical
storms and hurricanes hit, issues surrounding the impact of the storms on the
overall economy can come into play. How courts deal with this issue can vary significantly
based on the policy language used to define how the business interruption loss
is to be calculated.
The 5th
Circuit first dealt with this issue under Texas law in Finger
Furniture Company, Inc. v. Commonwealth Insurance Company, 404 F.3d 312
(5th Cir. 2005). In Finger Furniture
the insurer wanted to consider the insured’s increased sales after it reopened
to offset losses during the period of restoration. The 5th Circuit found the policy language did
not allow the insurer to look prospectively to determine if its insured
incurred a business interruption loss during the period of restoration. Instead, the court found that the policy
language required consideration of the business experience prior to the date of
loss and the business’s probable
experience had the loss not occurred. Therefore,
only historical sales figures could be examined to answer both of those
questions. Nothing in the policy allowed
the insurer to use “actual” sales after the loss to offset potential losses.
In Catlin
Syndicate v. Imperial Palace of Mississippi, Inc., 600 F.3d 511 (5th Cir.
2010), the 5th Circuit was asked to address the same question under Mississippi
law. In Catlin Syndicate it was the
insured that wanted to consider post-loss sales when calculating its loss
during the period of restoration. Although
Finger Furniture had been decided under
Texas law, the 5th Circuit concluded that the analysis in Finger Furniture was applicable because Mississippi law and Texas
law were not in conflict on this issue.
It concluded, that the business interruption language only allowed
reference to historical sales figures in calculating the actual loss sustained
by the insured and there was nothing in the business interruption language that
would allow either party to take into account actual performance after a loss in
calculating the loss.
In contrast,
some Louisiana courts have, under certain circumstances, allowed the post loss
economic conditions to be considered in calculating the business interruption
loss. In Levitz Furniture Corp. v.
Houston Cas. Co., No. CIV. A. 96-1790, 1997 WL 218256, at *3 (E.D. La. Apr.
28, 1997), the court held that the insured could take into consideration the
increased demand caused by the loss. Id. at
*3 In doing so it distinguished the use of “no interruption” in the relevant
policy rather than “no loss.” Id. The
court determined that a plain reading of the policy included consideration of
earnings “that would have existed” had no business interruption occurred, i.e.,
had Levitz not been forced to close after the flood as opposed to HCC’s
interpretation that would have the court read into the policy “had no loss
occurred.” Id. The policy clearly and
unambiguously provided coverage for earnings “had no interruption” occurred,
and does not exclude profit opportunities due to increased consumer demand
created by the flood. Id.
In Berk-Cohen
Assocs., L.L.C. v. Landmark Am. Ins. Co., 433 F. App'x 268, 270 (5th Cir.
2011) the 5th Circuit upheld the District Court opinion finding that the
favorable economic conditions after Hurricane Katrina could be considered as
part of the business interruption loss. Id.
The policy language in question excluded from the business interruption
calculation favorable business conditions caused by the impact of a Covered
Cause of Loss. Id. However, the
favorable conditions that the insured was seeking to rely on after the loss
arose from flood which was not a Covered Cause of Loss. Id. Therefore, the court concluded that the favorable rental market
caused by flood damage after the loss could be considered. Id. The District Court distinguished Catlin and Finger Furniture by
finding that the policy language in those cases referred to “loss” as opposed to
“Covered Cause of Loss.” Berk-Cohen
Assocs., L.L.C. v. Landmark Am. Ins. Co, 2010 WL 3522959 *4.
In an earlier decision, the 5th Circuit
reached a different conclusion applying Louisiana law, but the policy language
was more similar to that in Catlin and
Finger Furniture. In Consol. Companies, Inc. v. Lexington Ins.
Co., 616 F.3d 422, 432 (5th Cir. 2010), the court found the language in the
policy was nearly identical to that in Catlin
and Finger Furniture Id. Although those two decisions did not
involve Louisiana law, and were therefore not controlling, the 5th Circuit
concluded that Louisiana law on contract interpretation was nearly identical to
Texas and Mississippi law. Id. Therefore,
the difference in the decisions in Catlin,
Finger Furniture, Consul Companies and Berk-Cohen
must lie exclusively with the language used in each policy and not necessarily vagaries
of jurisdictional law.
While it would appear that Louisiana courts will
allow post loss economic considerations, while Texas and Mississippi will not,
careful consideration must be given to the policy language used in the relevant
policy. Given the 5th Circuits conclusion that Texas, Louisiana and
Mississippi law on contract interpretation are not in conflict, the ability to
use post loss economic impact in calculation will likely be case specific and
depend on the specific policy wording. Therefore, it is important in any claims
involving business interruption arising from Tropical Storm Gordon that you
read and understand the policy language that will govern the calculation of the
loss. The use of “loss” vs “covered cause of loss” can be critical to how a
court may ultimately interpret how post loss economic conditions can be
considered.
Posted by Jonathan R. MacBride
