COVID-19 Pandemic. Business Interruption Claims. Legal consequences of the coronavirus pandemic, the economic impact, and a post-quarantine world fraught with multiple potential liabilities.
If you filed a business interruption claim (under your insurance policy) due to the COVID-19/ coronavirus pandemic and your insurance company denied or narrowed your claim for payment, contact The Callender Law Firm for a free analysis of your case. We will fight very hard to get you the relief you deserve!
The COVID-19 pandemic has caused business interruption, widespread economic distress, liability concerns, and additional uncertainty to businesses throughout our country. Businesses of every size and in virtually all industries are affected by the COVID-19 (commonly known as coronavirus) pandemic. Because of concerns for personal safety of employees and customers, government orders (including stay-at-home orders), and social distancing guidelines, many businesses have seen sharp declines in demand and revenues, have furloughed or fired employees, have shut down, experienced supply chain disruptions, are unable to fulfill financial or other contractual obligations, and/ or are forced to adopt limited or vastly scaled down operations.
With WTI crude oil futures contract for May 2020 delivery trading in negative territory in April 2020, the international petroleum market collapsed mostly because of a very sharp worldwide decline in gasoline demand. Because of high incidence of COVID-19 disease among meat processing industry workers, many meat processing plants were shut down – creating a critical disruption of the United States’ food supply. Additionally, stay-at-home orders for parents and school-age children (with schools moving to online only instruction) created a glut in demand for yeast that broke the yeast supply chain. Parents turned to baking as a boredom-tempering activity. The foregoing examples illustrate life in our society in the era of COVID-19 and the rapid changes people and businesses have to adjust to.
Essential businesses, allowed to remain open during the COVID-19 crisis, face enormous challenges keeping employees and customers safe, dealing with non-compliant customers, having enough staff and PPE (personal protective equipment), maintaining supply chains, and enacting measures and procedures to limit liability.
Legal Issues Arising from COVID-19 pandemic. Legal issues arising from the COVID-19 pandemic include business interruption insurance payment disputes between insurance companies and businesses filing claims under their business insurance policies. Additionally, we envision a significant increase in breach of contract claims resulting from failure to fulfill financial and/ or other contractual obligations, brought on or exacerbated by the pandemic.
In the era of COVID-19, during re-opening of economies in many states, and in the eventual post-COVID-19 pandemic world; businesses must implement policies and procedures to mitigate risks and reduce liability. That endeavor will depend on the type of business concern, will be very challenging, and will be very dynamic and ever evolving as the social-, regulatory-, and legal- environment change to address the new normal.The Callender Law Firm is here and well-equipped to assist you throughout this uncertain and challenging period. You can count on us for sound legal guidance and reliable, cost-effective services delivered with integrity. Our trusted, experienced attorneys are eager to assist you with any legal matter affecting your business. Contact us today for a free initial consultation.
Business Interruption Insurance Claims, Payment Disputes. What’s the law?
Business interruption insurance disputes arise when the insurer denies the business interruption claim, ‘unreasonably’ narrows the scope of the claim, or employs other strategies to avoid or limit payment on a claim. These disputes usually end up in court, where the outcomes are not readily predictable. Such is the endeavor undertaken by insurance companies to avoid paying businesses what they bargained for. If your business was shut down (or operations curtailed) due to the coronavirus pandemic and you have been denied a business interruption claim, that’s should not be the end of the matter. Contact The Callender Law Firm for a free initial consultation and evaluation of your case. We will fight very hard to get you the relief you deserve!
A business interruption insurance policy is a contract, and its interpretation is governed by the contracts interpretation law of the State in which the property resides. While most business interruption claim disputes end up in federal court for resolution, the court applies the state’s contract law because there is no federal contracts law. So ‘business interruption insurance’ disputes in Texas or New York are resolved by courts applying the respective state insurance code and case law precedents.
In general, a court interpreting an insurance contract in either Texas or New York – whether a business interruption claim or otherwise – follows similar rules. The court interprets an insurance policy to effect the common intent or understanding of the parties and construes the policy according to the entirety of its terms and conditions. If a policy language is clear and unambiguous, a court must enforce the contract as written. An insurance contract having more than one reasonable interpretation is ambiguous, the court resolves the ambiguity by looking at the insurance policy as a whole, resolving any persisting ambiguity in favor of the insured.
While some business interruption policies require actual property damage to trigger coverage, others do not. So whether or not you have coverage for business interruption, due to consequences of the COVID-19 pandemic or any other event, depends on the specific language in your insurance policy. If you have a business interruption claim payment dispute, please contact us today for a free analysis of your case.
The following examples, from the 2nd and 5th Federal Circuits, illustrate how courts resolve some issues presented in business interruption claim disputes.
- An Insurable Interest instead of a Property Interest determines whether a claim falls within the scope of the insured’s business interruption policy coverage.
In Zurich American Ins. Co. v. ABM Industries, Inc., 397 F.3d 158, (2nd Cir. 2005), the Court held that “ABM’s activities at the World Trade Center created an insurable interest cognizable under New York law, and that this insurable interest falls within the scope of the policy’s coverage”. Id at 164.
Before the horrific terrorist attacks on the World Trade Center complex in lower Manhattan, ABM Industries (“ABM”) provided extensive janitorial, maintenance, and engineering services at the World Trade Center (WTC). ABM operated the heating, ventilating, and air-conditioning (HVAC) systems for the entire WTC; serviced the common areas of the complex pursuant to contracts with owners Silverstein Properties and the Port Authority of New York and New Jersey. Under those contracts ABM had office and storage space in the complex and had access to janitorial closets and slop sinks located on every floor of the WTC buildings. ABM also had effective control over the freight elevators. At the time of the attacks, it employed more than 800 people at the WTC, and its exclusive and significant presence at the complex allowed it to secure service contracts with nearly all of the WTC’s tenants. ABM also had service contracts with various building owners and tenants at 34 other locations in lower Manhattan. Id at 161.
The Policy. ABM procured insurance coverage under an insurance policy from Zurich for properties ABM serviced throughout North America. The policy provided a blanket limit of $127,396,375, subject to various sub-limits. The Insurable Interest provision of the policy covered loss or damage to “real and personal property, including but not limited to property owned, controlled, used, leased, or intended for use by the Insured“. In addition to covering property damage, the policy also provided business interruption coverage by insuring against “loss resulting directly from the necessary interruption of business caused by direct physical loss or damage, not otherwise excluded, to insured property at an insured location” (Business Interruption or BI provision). The blanket limit of $127,396,375 is the only applicable limit to the BI provision.
Additionally, the Contingent Business Interruption or CBI provision provided extended coverage to actual losses sustained due to the necessary interruption of business as the result of direct physical loss or damage of the type insured against to properties not operated by the Insured which wholly or partially prevents any direct supplier of goods and/or services to the Insured from rendering their goods and/or services, or property that wholly or partially prevents any direct receiver of goods and/or services from the Insured from accepting the Insured’s goods and/or services. Id at 162.
The Dispute. Whether an “insurable interest,” rather than a “property interest” is a predicate to business interruption coverage. The 911 terrorist attacks completely obliterated the WTC complex and several other properties in lower Manhattan. ABM sought, from Zurich, insurance coverage for its losses under the Business Interruption policy provision. In response, Zurich brought a declaratory judgment action and requested a declaration that ABM’s business interruption losses were subject to a $10 million per-occurrence limit of liability. Zurich argued that this sublimit applied because ABM’s claim arose from damage and destruction of the premises of ABM’s customers and hence was encompassed by the policy’s Contingent Business Interruption clause–a provision triggered by damage to properties “not operated by the Insured.” Id at 163. Thus, Zurich was seeking to limit ABM’s business interruption losses to $10 million under the CBI provision instead of the blanket limit of $127,396,375 applicable to the Business Interruption (BI) provision.
New York Law. With respect to a contract claim, a court may construe the contract and grant summary judgment when the contractual language is “plain and unambiguous.” Brass v. Am. Film Techs., Inc., 987 F.2d 142, 148-49 (2d Cir. 1993). Ambiguity exists when a contract is “capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.” 397 F.3d 165 Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1095 (2d Cir. 1993).
In interpreting an insurance contract under New York law, a court must strive to “give meaning to every sentence, clause, and word.” Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s of London, 96 N.Y.2d 583, 594, 734 N.Y.S.2d 531, 760 N.E.2d 319 (2001). The only prerequisite to coverage mandated by New York law is that an entity have an “insurable interest” in the property it insures. New York law embraces the sui generis nature of an “insurable interest” and statutorily defines this term to include “any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.” N.Y. Ins. Law § 3401 (2002). In determining the extent of an insured’s coverage under an insurance policy, the court looks to the entire contract to determine “its purpose and effect” and the “apparent intent of the parties.” Maryland Cas. Co. v. Cont’l Cas. Co., 332 F.3d 145, 161 (2d Cir. 2003). While the meaning of a term or provision may be clear when read in isolation, its interaction with other parts of the policy may infuse it with ambiguity.
How the Court Ruled. The 2nd Circuit concluded that “ABM’s activities at the World Trade Center created an insurable interest cognizable under New York law, and that this insurable interest falls within the scope of the policy’s coverage”, and granted summary judgment to ABM on its business interruption claim. Id. At 164. In reaching its conclusion, the Court examined the plain meaning of the policy’s Insurable Interest provision, which defined the scope of business interruption coverage as “[t]he interest of the Insured in all real and personal property including but not limited to property owned, controlled, used, leased or intended for use by the Insured.” The Court construed the latter provision to require only an “insurable interest,” rather than finding that a “property interest” is a predicate to coverage.
The Court considered whether ABM “controlled”, “used’, or “intended to use” the common areas and the premises of the other tenants. The Court reasoned that “The existence and configuration of the common areas and tenants’ premises were vital to the execution of ABM’s business purpose”, and [those] areas and premises were the means by which ABM derived its income and were as essential to that function as ABM’s cleaning tools. The court concluded ABM “used” the common areas and the premises of the other tenants in the WTC within the meaning of the Insurable Interest provision. Additionally, the court held that ABM “used” and “controlled” the areas that it occupied as contemplated under the policy and was also entitled to BI coverage for those areas.
The court found the Contingent Business Interruption (CBI) provision inapplicable in this circumstance because the insured’s customers occupied a building that the insured itself operated. The issue was whether ABM “operated” the properties at issue in the action. By its express terms, the CBI provision covers business interruption due to loss or damage to properties “not operated by the Insured”. The court held that through its operation of the infrastructure of the WTC, ABM also operated the physical spaces occupied by itself and other tenants as well as those shared with the public. Id at 169.
- An Insured Cannot Use Post-Interruption Economic Conditions to Calculate Business Interruption Loss.
In Catlin Syndicate Ltd. v. Imperial Palace of Mississippi, Inc., 600 F.3d 511, (5th Cir. 2010), Hurricane Katrina damaged Imperial Palace Casino, forcing it to shut down for several months. When Imperial Palace reopened, its revenues were much greater than before the hurricane; many nearby casinos remained closed, and gamblers had few choices. Imperial Palace submitted a claim to its insurers, including Catlin. Catlin agreed to pay the claim, but the parties disputed Imperial Palace’s losses. Imperial Palace calculated losses of approximately $165 million, while Catlin contended the losses were about $65 million. The parties disagreed about how to determine loss under the business-interruption provision of the insurance policy. Catlin brought a declaratory judgment action against the insured casino (Imperial Palace) to resolve their dispute over the amount of Imperial Palace’s post-Katrina business-interruption loss. Id. at 512.
The Dispute. Whether the policy allowed consideration of Imperial Palace’s post-reopening revenues to determine the profits Imperial Palace lost during the interruption, i.e., its business interruption loss. Imperial Palace calculated losses of approximately $165 million, while Catlin contended the losses were about $65 million. The largest discrepancy was in the amount of business-interruption loss: Imperial put this amount at about $80 million, while Catlin put it at about $6.5 million. This discrepancy resulted from the parties’ different interpretations of the policy’s business-interruption provision. Catlin argued that the business-interruption provision unambiguously indicates that only historical sales figures should be considered when determining loss. Imperial Palace contended that the provision is ambiguous, and therefore sales figures after reopening should also be taken into account.
The Policy. In pertinent part, the policy’s business interruption provision states “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”. Id at 513.
The law. Under Mississippi law, if a policy is worded so that it can be given only one reasonable construction, a court must enforce the policy as written. See U.S. Fid. & Guar. Co. of Miss. v. Martin, 998 So.2d 956, 963 (Miss.2008).
How the court ruled. In affirming the District Court’s grant of summary judgment for Catlin, the 5th Circuit ruled that under the specific language of Imperial Palace’s business interruption provision “the proper method for determining loss under the business-interruption provision was to look at sales before the interruption rather than sales after the interruption”. In sum, the Court held that the lost-profit calculation does not involve the company’s business experience after the hurricane. See Finger Furniture Co. v. Commonwealth Ins. Co., 404 F.3d 312, 314 (5th Cir.2005) (” The contract language does not suggest that the insurer can look prospectively to what occurred after the loss to determine whether its insured incurred a business-interruption loss.” ).
- An Insurer Cannot Use Post-Interruption Economic Conditions to Calculate Business Interruption Loss
In Finger Furniture Co. Inc. v. Commonwealth Ins. Co., 404 F.3d 312, (5th Cir. 2005), Finger Furniture Co. Inc. (Finger) owned seven furniture stores in Houston, Texas. Beginning on June 8, 2001 and continuing into June 9, 2001, the heavy rains of Tropical Storm Allison hit the Houston area and caused severe flooding. Because of the flooding, Finger’s employees could not access the Finger store that housed the company’s central computer system. As a result, Finger could not operate any of its Houston stores on Saturday, June 9, 2001, and no sales were made on that date. All of Finger’s stores opened at various times on Sunday, June 10, 2001. The following weekend, June 16-17, 2001, sales soared after Finger slashed its prices and customers purchased furniture at discounted prices.
After the flooding, Finger filed a claim for sales lost on June 9-10, 2001 under the business-interruption provision of its insurance contract with Commonwealth. Commonwealth denied the claim. After an unsuccessful mediation effort, Commonwealth initiated a declaratory judgment action against Finger. Commonwealth and Finger stipulated that Finger incurred a gross-earnings loss of $325,402.86 on June 9-10, 2001. [1] Finger filed its answer and counterclaimed seeking $342,029.32 in stipulated losses. This figure was based on the $325,402.86 in lost sales plus $16,626.46 for expenses incurred to determine its claim under the policy. Both parties moved for summary judgment. The magistrate judge recommended that the district court enter summary judgment in favor of Finger for $342,029.32. The district court adopted the magistrate judge’s recommendation and entered judgment in favor of Finger. Finger then asked for attorney’s fees. The magistrate judge recommended that the district court grant Finger’s request, with some exceptions. The district court entered an award of $79,201.00 for attorney’s fees.
The Dispute. The proper method of calculating business interruption loss. How to calculate a loss under the business-interruption provision of Finger’s policy with Commonwealth. Commonwealth contends that Finger’s losses on June 9-10, 2001 should be offset with Finger’s post-storm profits on June 16-17, 2001. Finger counters that the policy language does not allow Commonwealth to consider Finger’s post-storm profits in determining Finger’s business-interruption losses. Further, Finger contended that Commonwealth sought to expand the policy language to avoid paying Finger’s losses on June 9-10, 2001.
The Policy. The business interruption provision: [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 Law. In Texas, if a policy is worded so that it can be given only one reasonable construction, the court must enforce the policy as written.
How the Court Ruled. The 5th Circuit, applying Texas law, ruled that the business-interruption provision in Finger’s policy has only one reasonable interpretation. The Court rejected Commonwealth’s argument that “Finger did not sustain an actual loss under this provision because Finger made up the sales that it did not make on June 9-10, 2001 on June 16-17, 2001”. The court interpreted the policy language “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” to mean that a business-interruption loss will be based on historical sales figures.
The court explained that “Historical sales figures reflect a business’s experience before the date of the damage or destruction and predict a company’s probable experience had the loss not occurred. The strongest and most reliable evidence of what a business would have done had the catastrophe not occurred is what it had been doing in the period just before the interruption.” Moreover, the court ruled “The contract language does not suggest that the insurer can look prospectively to what occurred after the loss to determine whether its insured incurred a business-interruption loss. Instead, the policy requires due consideration of the business’s experience before the date of the loss and the business’s probable experience had the loss not occurred.” Id. At 314.
- In a business interruption payment dispute, whose calculation is the proper calculation of the insurance deductible in an ambiguous contract.
In Texas Industries, Inc. v. Factory Mut. Ins. Co., 486 F.3d 844, (5th Cir. 2007), Texas Industries, Inc. (TXI) has a cement manufacturing plant with five kilns. TXI obtained property damage and business interruption insurance from Factory Mutual. TXI started a previously-planned maintenance outage on Kiln No. 5 on January 5, 2003, scheduled to last until January 16, 2003. On January 7, 2003, a fire damaged Kiln No. 5, but had no effect on the other kilns. As a result of the fire, production was interrupted until January 30, 2003, and full production did not resume until February 3, 2003. There was a 23-day period in which Kiln No. 5 did not operate at all and a 4-day period in which partial operation occurred. The plant was not at full operation for 27 days – the business interruption loss period. Ten of the days without any operation were part of the previously-planned outage. TXI submitted a business interruption insurance claim for its loss. The parties agreed that the total business interruption loss actually suffered by TXI was $3,916,905. The deductible is subtracted from the amount of loss suffered in order to determine the amount of insurance proceeds to which TXI is entitled.
The Dispute – The proper calculation of the deductible. Factory Mutual calculated TXI’s deductible as $4,084,323, which is greater than TXI’s actual loss, and refused to pay TXI’s business interruption claim. TXI calculated its deductible as $2,571,444, determining business interruption proceeds in the amount of $1,345,461. TXI sued for the recovery of $1,345,461, plus costs and interest. Trial court granted summary judgment to TXI – awarding TXI its requested damages.
The Policy. TXI’s policy states the deductible for the business interruption as equivalent to “15 Day’s Value Time Element of the Objects Experiencing the Loss or Damage.” The policy defines the “Day’s Value Time Element of the Objects Experiencing the Loss or Damage” as: The amount equivalent to the number of days shown times the 100% daily Time Element value of the objects experiencing the direct physical loss or damage including the 100% daily Time Element value of all other objects or operations at the location where the loss or damage occurs which are dependent on the objects experiencing the loss or damage. The 100% daily Time Element value of the objects, including the other dependent daily value will be the full percentage contribution which would have resulted had the loss or damage not occurred to the 100% daily Time Element value of the entire premises at the location. In determining the 100% daily Time Element value, due consideration will be given to the experience of the business before the loss and the probable experience thereafter.
The Law. Under Texas contract law, “[i]f policy language is worded so that it can be given a definite or certain legal meaning, it is not ambiguous and we construe it as a matter of law.” Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex. 2003). “Whether a contract is ambiguous is itself a question of law.” Id. The fact that the parties offer different contract interpretations does not create an ambiguity. See id.” An ambiguity exists only if the contract language is susceptible to two or more reasonable interpretations. When construing the policy’s language, the court must give effect to all contractual provisions so that none will be rendered meaningless.” Id. (internal citation omitted). Finally, when an insurance policy can be given multiple reasonable interpretations, “[i]t is a settled rule that policies of insurance will be interpreted and construed liberally in favor of the insured and strictly against the insurer.” Kelly Assocs., Ltd. v. Aetna Cas. & Sur. Co., 681 S.W.2d 593, 596 (Tex. 1984) (noting that this rule is “especially so when dealing with exceptions and words of limitation”); see also Am. States Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998) (“Exceptions and limitations in an insurance policy are strictly construed against the insurer.”).
How the court ruled. The Court read the contract in accordance with TXI’s interpretation of the deductible calculation language, and ruled in favor of TXI. Resolving the disputed issue – whether to divide the expected production for the period by 17 days or 27 days, the 5th Circuit found the contract language ambiguous as to the proper calculation of the “100% daily Time Element value” of the kiln, and noted that the contract did not clarify how “due consideration” should “be given to the experience of the business’. According to the court, the contract was ambiguous because it was subject to opposing yet reasonable interpretations. Where there exists multiple reasonable interpretations of an insurance contract, the court does not choose which interpretation is more reasonable. “[I]f a contract of insurance is susceptible of more than one reasonable interpretation, we must resolve the uncertainty by adopting the construction that most favors the insured.” Nat’l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991); cf. id., 811 S.W.2d at 555 (“The court must adopt the construction of an exclusionary clause urged by the insured as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties’ intent.”). See 486 F.3d 848 -849.
