To mitigate the impact of COVID-19, business owners have increasingly turned to business interruption insurance. Two recent, pre-COVID-19, cases deal with litigation arising out of business interruption claims and point to opportunities for damages and valuation experts.
The Binghamton case involved a company that custom-made precast concrete products for the construction industry. It operated on a tight production schedule. The plaintiff had insurance for equipment breakdown. In June 2015, one of its concrete mixers broke down and caused an interruption in production until the mixer was repaired and resumed operations two days later. The plaintiff’s policy provided coverage for “actual loss of Business Income” during the restoration period and extra expenses incurred by operating the business during the restoration period. “Business income” was net income (net profit or loss before taxes). The plaintiff filed a claim with the defendant insurer for lost profits, showing production before, during, and after the breakdown and applying its profit margin during this time to the lost production.
After the insurance company denied the claim, the plaintiff filed suit for breach of contract. The trial court denied the defendant’s summary judgment motion, and the case went to the appellate division of the New York Supreme Court (trial court).
The defendant unsuccessfully claimed, under the policy, the plaintiff had to show it lost specific sales as a result of the equipment breakdown during the short restoration period. The appellate court said this was not a reasonable interpretation of the policy, which nowhere mentioned specific sales or indicated an intent to narrow coverage in the way the defendant argued.
Takeaway: Courts look to the individual business interruption policy to determine the merit of a claim.
Optical Works & Logistics involved a fledgling optical media company that suffered extensive damage to expensive, specialized machinery and equipment and the property out of which the company operated as a result of two major storms that hit the area about a month after the company had started operations. The company had business interruption insurance, but the insurer ultimately denied the claim. The company filed a breach of contract suit and alleged bad faith on the insurer’s part. It said that, while losses could have been limited to between $50,000 and $75,000 had the insurance company provided prompt coverage, damages rose to over $4 million and ultimately resulted in the company’s insolvency. The insurer asked the court for summary judgment, but the court denied the motion, finding there were too many disputed issues of fact.
As an example, the court mentioned the insurer made various assertions that the company was new and was not a viable business even before the storm. There was no evidence of expenses incurred before the storm, the insurer said, and, therefore, the company was not entitled to coverage of continuing operating expenses. But the plaintiff argued its consulting expert projected what expenses it would have incurred had it received the benefit under its policy and been able to successfully continue its operations. According to the court, determining when and whether the company could have resumed normal business operations presented “the type of murky factual question” that was best resolved by a trier of fact.
Takeaway: Financial experts can become involved in business interruption cases early, as consulting experts, either to support or dispute damages and valuation claims, and, as such, may play a key role in keeping a case alive or not.
For claims related to the coronavirus, there is an expectation that insurance companies will fight hard against having to pay. It all depends on your individual insurance policy. Insurers will try to argue that there is an exemption to coverage of the virus, or they may argue that the insured cannot show physical harm to property, which is a prerequisite to coverage. As you can see from the cases discussed above, insurers often fight long and hard to avoid having to pay out.
Digests of Binghamton Precast & Supply Corp. v Liberty Mutual Fire Insurance Co., 2020 NY Slip Op 02214 (April 9, 2020), and Optical Works & Logistics, LLC v. Sentinel Ins. Co., 2020 U.S. Dist. LEXIS 53987 (March 26, 2020), and the courts’ opinions will be available soon at BVLaw.