Hurricane Michael - Business Interruption Coverage in Florida and Georgia

Hurricane Michael’s devastation of the Florida Panhandle and damage caused as it moved through the South and mid-Atlantic regions of the United States, will undoubtedly result in claims for lost income from the interruption of business. Whether these losses will be covered will depend on the policy wording used and the specific facts of each loss. Nevertheless, in anticipation of these claims, it is prudent to become familiar with the outcome of prior litigation arising out of business interruption and/or suspension of operations coverage disputes, as these cases can be instructive.

In general, to recover for business interruption losses caused by a hurricane, an insured must prove that: (1) it sustained damage to property, (2) that the property was covered under the policy, (3) the damage was caused by a covered peril, (4) that there was an interruption to business caused by the covered property damage. See, e.g., Ramada Inn Ramogreen, Inc. v. Travelers Indemnity Co., 835 F.2d 812 (11th Cir. 1988) (applying Florida law). The last factor is particularly important, as it requires an insured to demonstrate that any lost income claimed was in fact caused by a disruption in the business due to physical loss or damage, and not by some other factor(s).

Several cases in Florida and Georgia are instructive on the various issues that may arise when insureds seek post-storm business interruption coverage under property policies. For example, in Del Monte Fresh Produce, N.A., Inc. v. Ace Insurance Co., 2002 WL 34702174, at *1 (S.D. Fla. Oct. 3, 2002) (applying Florida law), the U.S. District Court for the Southern District of Florida held that reduced banana yield arising from flooding caused by Hurricane Mitch constituted an “interruption of business” within the meaning of the Policy. The Policy in Del Monte provided business interruption coverage for a “loss resulting from the necessary interruption of business caused by physical damage to property of the type covered by a peril insured against by this Policy . . .” Id. at *5. Although the banana plants themselves were not covered property, the court determined that Del Monte’s infrastructure was covered, and that damage to the infrastructure was the “efficient proximate cause” of the damage to the banana plants. Id. at *6.

The case law regarding business interruption coverage as the result of a hurricane in Georgia is limited. However, a Georgia appellate court did address the issue as it related to the Civil Authority clause of the business interruption provision in Assurance Company of America v. BBB Service Company, Inc., 265 Ga. App. 35, 593 S.E.2d 7 (2003). In that case, BBB Service Company, Inc. (“BBB”) sued its insurers after they denied coverage for BBB’s claim for loss of business income. Id. at 35. BBB, the owner of several Wendy’s franchises, was forced to close some of its restaurants in Florida for two days and evacuate the area when the county declared a state of emergency due to “serious threat to the lives and property of residents” from Hurricane Floyd. Id. at 35. Under the Policy, BBB claimed it was entitled to coverage under the “Civil Authority” clause:
We will pay for the actual loss of “business income” you sustain and necessary “extra expense” caused by action of civil authority that prohibits access to your premises due to direct physical loss of or damage to property, other than at the “covered premises,” caused by or resulting from any Covered Cause of Loss. This coverage will apply for a period of up to 4 consecutive weeks from the date of that action. Id. at 35.
Insurers rejected BBB’s claim, maintaining there was no actual damage to property, just the mere threat of damage. Id. at 35. On appeal of cross-motions for summary judgment, the Court of Appeals of Georgia originally held that while BBB presented evidence to show “the loss was caused by a civil authority action which prohibited access to BBB’s insured premises,” BBB had not presented any evidence proving that “actual damage to property other than the insured premises was a basis for the evacuation order.” Id. at 36. The Court of Appeals remanded because this issue of fact remained in dispute. During the bench trial that followed, BBB presented evidence that the individuals responsible for declaring the state of emergency had taken into consideration the damage caused by the hurricane in the Caribbean. On subsequent appeal, the Court of Appeals found that these facts were a sufficient basis for the trial court’s finding of the requisite physical damage in order to render a verdict in favor of BBB on its claim for business interruption coverage. Id. at 36.

Even where business interruption expenses are covered under a property policy, additional issues related to calculating the loss may arise. For example, American Automobile Insurance v. Fisherman's Paradise, 1994 WL 1720238, at *1 (S.D. Fla. Oct. 3, 1994) involved a store that sustained damage by winds from Hurricane Andrew and a dispute over the calculation of post-hurricane business interruption losses. Id. The insured argued that in calculating interruption of business expenses the court should factor in the “increased economic opportunities afforded after Hurricane Andrew.” Id. at *3. The court disagreed, finding that the policy provided for loss of earnings and direct profits, but that “windfall profits are not within the scope of the policy.” Id. at *4.

In another case, U.S. Capital/Fashion Mall, LLC v. American Zurich Insurance Co., 2011 WL 197364, at *1 (S.D. Fla. Jan. 20, 2011), the U.S. District Court for the Southern District of Florida, applying Florida law, dismissed a lawsuit relating to a supplemental claim for business interruption losses arising out of Hurricane Wilma property damage. Id. The insured had instituted a prior suit over the building damage but had not made a business interruption claim or included a claim for business interruption in the prior litigation. Id. The insured argued that it could not have known what its business interruption loss was until the property damage issues had been resolved. Id. Zurich countered that the policy covered actual losses and not “hypothetical income loss” Id. The court agreed and held that had the insured actually suffered income loss as a result of the damage from Wilma, it would have known about it at the time the original claim and suit had been filed. Id

While it may not have known the final value of the loss, it would have known it was suffering a loss. Id. Therefore, the court dismissed the second suit. Id. While these cases are instructive on how courts have resolved some of the issues that may arise in business interruption claims, ultimately, it is critical to understand the particular policy language at issue and how the facts of each, specific loss impact coverage.

Posted by Peter Kelly Golfman and Gabrielle Siskind