“Read the policy, read the policy, read the policy” is a famous piece of advice for coverage counsel everywhere.  Last Friday in Midwest Reg’l Allergy, Asthma, Arthritis & Osteoporosis Center v. Cincinnati Ins. Co., 2015 WL 4590642, 2015 U.S. App. LEXIS 13430 (8th Cir., Jul. 31, 2015), a unanimous panel of the Court of Appeals rejected arguments that a contract of insurance required that any Extra Expense serve to reduce the otherwise payable business income loss in order to be compensable.  As interpreted by the court, the policy was written in such a fashion as to make that a prerequisite for only one of the three defined types of Extra Expense.

The insured operated a clinic in Joplin, Missouri.  On May 22, 2011, the city was devastated by an F5 tornado that killed 158 people and caused almost $3 billion in damage, making it the costliest in U.S. history.  The clinic was in the twister’s path; its MRI machine was heavily damaged and its x-ray machine, bone density scanner and laboratory analysis and specialty infusion equipment were all destroyed.  The policyholder relocated to temporary offices in nearby Webb City and continued to operate, but it did so without the revenue streams which it would have received from the damaged and destroyed devices.

The clinic’s owner decided to relocate to a new building in Joplin, and he had the MRI machine repaired and moved to the clinic’s new offices and replaced the destroyed diagnostic equipment as well.  The installation of the MRI machine required extensive modifications at the new site, including reinforced flooring, new HVAC systems, and copper shielding in the walls and ceiling.

The insurer paid its policy limits for building and business personal property (BPP) loss, and it also reimbursed the insured for its full business income loss.  It balked at paying for the repair and installation of the MRI machine and the replacement of the other diagnostic devices, however, contending that these did not represent legitimate Extra Expense but were instead part of the building and BPP loss for which the policyholder had already received policy limits.

Litigation followed.  The district court granted the insured’s motion for partial summary judgment, holding that the claimed expenses were recoverable as Extra Expense, and the matter moved to the Court of Appeals.  Last week, a 3-0 panel affirmed in an opinion written by District Judge James Gritzner.

The Extra Expense provision was section k of the contract of insurance.  It defined an “Extra Expense” as one incurred “[t]o avoid or minimize the ‘suspension’ of business and to continue ‘operations;’ “ “[t]o minimize the ‘suspension’ of business if you cannot continue ‘operations;’ “ or “[t]o . . . [r]epair or replace any property . . . to the extent it reduces the amount of loss that otherwise would have been payable” as business income.

The Eighth Circuit’s decision held as follows:

Considering the policy as a whole and reading all provisions in harmony, it is a reasonable construction that the repair of the MRI machine and the replacement of the other specialty equipment were costs to equip and operate the Replacement Location.  It is similarly reasonable to construe the installation expenses associated with the MRI machine as costs to relocate the business to the Replacement Location.

The insurer argued that the expenses were not recoverable because they did not serve to reduce the overall business income loss, but the panel found that that was not a prerequisite under the first two definitions of what constituted an Extra Expense.  In Judge Gritzner’s words:

Under the plain language of the Policy, an ordinary person of average understanding in the insured’s position would interpret the three definitions of extra expenses in section k(2) as distinct and separate.  There is no connecting language between subsections k(2)(a), k(2)(b), and k(2)(c), and therefore they are each construed independently.

In the court’s view, the claimed expenses were incurred to avoid or minimize the suspension of business and to continue operations, and the requirement that they serve to reduce the amount of business income loss applied only to the third subsection of the definition of what constituted a recoverable Extra Expense.

The carrier’s contention that the clinic was using the Extra Expense provision “to circumvent the policy limits” for building and BPP coverage was also rejected.  The panel noted that the contract of insurance specifically stated that Extra Expense coverage was not subject to policy limits.  As a result, it did not exclude coverage under the Extra Expense provision simply because the claimed expense was  simultaneously compensable under another coverage in the policy.