An Arkansas appellate court held that a commercial property policy which covers expenses incurred to avoid the loss of business income covers those expenses only if the loss of income, had it occurred, would have been covered under the policy. Welspun Pipes, Inc. v. Liberty Mut. Fire Ins. Co., 2017 WL 449635 (E.D. Ark. Feb. 2, 2017).
A pipe manufacturer’s plant sustained fire damage which affected its ability to produce pipe required under a contract. To avoid losing the order, it shifted production to another facility and incurred costs to do so. The production schedule was also delayed. The insured’s policy insured the manufacturer for, among other things, loss of business income and necessary expenses incurred to reduce its loss of business income. The manufacturer made a claim under the policy for the costs incurred.
The policy covered loss of business income through the end of an extended restoration period set forth in the policy. However, the income which the manufacturer protected by shifting its production would not be realized until after that date and therefore any reduction in income would not be covered. The court therefore rejected the claim for the costs incurred to shift production costs, holding that because the insurer would not be obligated to pay for loss of income for which those expenses were incurred to avoid (because any income would be realized after the restoration period), it was not obligated to cover the insured’s expenses incurred to reduce the losses. The court held that because the insurer would pay nothing for a business loss that was not covered, it should pay nothing to mitigate the loss.