Buffman, Inc. v. Lafayette Insurance Co., 2010 WL 1509363 (La. App. 4 Cir.)(April 14, 2010)
In one of the first business interruption/lost income cases to come in the wake of Hurricane Katrina, an expert’s careful, credible opinion proves critical to swaying a jury’s opinion and the court’s ultimate award.
Nursing home loses numerous residents to tragedy. The facts and local impact may have also played a part in the outcome of this Louisiana case. Hurricane Katrina struck the Gulf Coast early on August 29, 2005 and continued for several hours. As the storm winds subsided, the floodwaters rose, trapping the residents of a nursing home in St. Bernard Parish, about five miles from downtown New Orleans. The owners hacked holes in the roof with an axe and pulled several residents to safety, but many others drowned in the calamity.
The nursing home’s insurance policy covered losses due to wind but not flood or water damage. Within a week of the storm, the owners notified their insurance company (Layfayette). Over the next several months, the insurer’s engineers and adjusters found some wind damage to the roof but attributed more damage to the owners’ rescue efforts. Its experts estimated that repairs would take no more than eight weeks, during which most of the facility could remain open.
By contrast, the nursing home’s roofer concluded most of the damage was due to hurricane winds and estimated repairs at $609,000, without subtracting any amounts caused by the rescue efforts. He also repairs would take four to five months while the building was empty. The parties disputed coverage and finally, two years after the storm, the insurance company sent a check for a mere $1,150.00 to cover the facility’s repairs.
The nursing home sued its insurer for breach of contract plus statutory penalties for unjustified delay. It presented evidence of roof damage along with a CPA specialist in business interruption claims to estimate these losses. The expert’s firm had produced cost reports for the nursing home for over a decade and was familiar with its operations. The insurance policy limited recovery of net business income losses (before taxes) to $600,000 for a maximum of 120 days. It also obligated the insurance company to pay only when covered damages directly caused the suspension of the business.
The nursing home provided 100 patient beds and a spectrum of care payable from four primary sources: Medicare, Medicaid, private insurers, and individual payors. The payment sources fluctuated from day to day, and the accounting protocols to effect reimbursement—especially from government agencies—were “fraught with intricate, byzantine requirements,” according to the court.
Facility flourished before the storm. The nursing home’s expert reviewed the facility’s monthly revenue and expense statements for 2004 through early 2006 (six months after the storm). He looked at the general ledger for 2005 up to August 31, 2005, and examined statistical data related to skilled nursing facilities for the years 2004 and 2005. The nursing home’s revenue streams had been rising right up until the storm, due to improved collectability and/or better patient populations. Overall, revenues grew by approximately 12.58% in between 2004 and the first eight months of 2005; however, between January and July of 2005, revenues rose by 32%.
To calculate the covered business income losses, the nursing home’s expert analyzed the revenues and growth rate, concluding he could not compare the second half of 2004 with the second half of 2005 because the hurricane had shut down the facility. Applying “accepted accounting principles,” he projected income losses of $775,616 for the six months following the storm and losses of $649,612 for five months post-Katrina. Mindful of the policy limits, he estimated the four-month net business income losses at $529,473.
The jury also heard from an expert for the insurance company, but ultimately awarded business interruption damages in the precise amount determined by the nursing home’s expert, and the insurer appealed. Because the appellate opinion examines only the evidence necessary to support the jury award, it does not discuss the calculations by the insurance company and its expert. However, the court did find the insurer’s expert “had only a brief opportunity to review the insurance policy and business records and to prepare a report shortly before trial.” She also admitted to calculation errors in her report and conceded the insurance company was liable for net business income losses.
“The jury chose the methodology and analysis offered by [the nursing home’s expert],” the court said. After examining the entire record, it concluded the jury had a reasonable factual basis awarding the nursing home $529,573 in business interruption losses.