In the classic film Forrest Gump, after Forrest returned from the Vietnam War, he honored a wartime promise he had made to his deceased friend Bubba by buying a shrimp boat (that he namedJenny), moving to the Bayou, and launching the Bubba Gump Shrimp Company. Although Bubba Gump Shrimp initially struggled to stay afloat (Forrest caught only five shrimp), the company was extremely profitable after Hurricane Carmen decimated every shrimping boat in the region except for Forrest’s Jenny, and Forrest’s competitors thus went out of business. As Forrest explained, “people still needed them shrimps for shrimp cocktails and barbecues and all, and we were the only boat left standing.” In addition to being a lucrative twist for Forrest, this scene presents a scenario that has been the subject of many coverage disputes regarding hurricane-related (or other catastrophe-related) business interruption insurance claims.
Specifically, parties have disputed, and courts have addressed, whether the valuation of a business interruption claim should consider the effects that the hurricane or other catastrophic event had on the surrounding region, positive or negative, including its effect on the policyholder’s competitors and on the local economy. Some courts have held that the business interruption claim calculation should take into account real-world economic conditions that exist after, and were caused by, the hurricane or loss event. In other words, the assumption should be that the hurricane or catastrophe hit but did not damage the policyholder’s property. Other courts, by contrast, have held that the business interruption calculation should assume that the hurricane or catastrophe never happened at all and thus should be based on pre-loss sales, projections, and economic conditions.
The same analytical approach can result in a propolicyholder or a pro-carrier result depending on whether the hurricane or loss event would have either increased or decreased the demand for the policyholder’s goods or services. For example, if the hurricane adversely affected the policyholder’s competitors, then considering the greater effects of the hurricane could allow a policyholder to recover increased profits that it would have earned had it, like Bubba Gump Shrimp, been able to continue operating after the hurricane damaged, and interrupted the businesses of, its competitors. By contrast, if the hurricane’s effect on the local economy would have resulted in a decreased demand for the policyholder’s goods or services, then considering the wider effects of the hurricane could reduce, or negate, a policyholder’s business interruption claim. In fact, as discussed below, the very same court-i.e., the Fifth Circuit-applied this principle in two Hurricane Katrina business interruption cases that it decided just months apart, ruling in favor of the insurance carrier in the first case and in favor of the policyholder in the second. In the first case, the court held that a casino policyholder was not entitled to recover for increased profits that it would have earned during the recovery period if Hurricane Katrina had struck and damaged its competitors’, but not its own, facilities; in the second case, the court rejected the carrier’s argument that the policyholder’s business interruption claim should be reduced to reflect the poor economic conditions caused by Hurricane Katrina.
One thing to keep in mind, however, is that even though a court might not consider the greater effects of a storm or other covered event on the policyholder’s business operations, that does not necessarily mean that the court will not consider any economic conditions that exist after a storm or covered event. Rather, such courts likely would consider post-loss economic conditions that are unrelated to, and would exist regardless of, the storm or loss event.
This article examines the evolution of case law and policy language addressing this issue. In a number of cases beginning in the 1990s and extending beyond Hurricane Katrina, courts’ analysis of this issue focused on the interpretation of the following phrase, which appears in most business interruption valuation provisions: “due consideration shall be given to the experience of the business before the period of recovery and the probable experience thereafter had no loss occurred” (or words to this effect). In response to these cases, the insurance industry began crafting policy language that expressly addresses circumstances under which the greater (or less great) effects of a hurricane or other peril will be factored into the valuation of a business interruption claim. Different variations of this language exist in the marketplace today. One version of this language was construed by the Fifth Circuit in the context of a Hurricane Katrina claim, and we can expect similar cases in the future.
Cases Construing the “Had No Loss Occurred” Policy Language
A number of the cases examining the relevance of post-event economic conditions have addressed the issue in the context of policy language that requires a policyholder’s business interruption loss to be measured as if “no loss had occurred.” The following is an example of the relevant business interruption provision that commonly appears in business interruption insurance provisions and which courts have interpreted: “In determining the loss hereunder, due consideration shall be given to the earnings of the business before the date of the damage or destruction and to the probable earnings thereafter, had no loss occurred.” As is often the case, various courts have interpreted this language differently.
Cases Declining to Consider the “Greater Effects” of the Storm or Other Peril
Pro-carrier cases. Some courts have interpreted this language to require that the policyholder’s loss must be measured as if the triggering event had not happened at all. Hence, courts have held that a policyholder cannot recover for losses that it hypothetically would have earned during the period of recovery had the event or occurrence taken place and caused widespread damage but not damaged the policyholder’s property (e.g., the Bubba Gump Shrimp Company’s experience). For example, in Prudential LMI Commercial Insurance Co. v. Colleton Enterprises, Inc., the policyholder’s Econo Lodge motel was opera ting at a loss before it was damaged by Hurricane Hugo.1 The policyholder sought to recover almost $200,000 in lost profits, arguing that it would have earned these profits had it been open for business after the storm due to the influx of temporary residents in need of hotel accommodations after the storm. Prudential denied the claim, arguing that the policyholder’s business interruption claim must be based on its historical profit projections, and that because the Econo Lodge was operating at a loss pre-storm, it was not entitled to recover any business interruption losses.
Although the court noted that the policyholder’s pre-storm losses did not conclusively establish that it would not have been profitable post-storm, it concluded that the “had no loss occurred” policy language reflected an intent to exclude from consideration post-loss economic conditions caused by the same event that caused the policyholder’s property damage. The court reasoned that consideration of postloss economic conditions caused by Hurricane Hugo would defeat the purpose of business interruption coverage, which it characterized as putting the policyholder “in the earnings position it would have been in had the insured peril not occurred,” and would provide the policyholder with an unintended windfall.
Other courts have adopted this rationale in construing the “had no loss occurred” language by holding that a policyholder’s business interruption claim should not include amounts that would have been earned as a result of favorable postloss economic conditions caused by the same event that caused the policyholder’s business interruption loss. In American Automobile Insurance Co. v . Fisherman’s Paradise Boats, Inc., the court did not allow the policyholder to recover profits that it likely would have earned had its fisherman’s store not been damaged by Hurricane Andrew and had it thus been able to “reap the economic benefits of post-hurricane demand for boats and marine accessories.”2 The court reasoned that “had no hurricane occurred (the policy’s built in premise for assessing profit expectancies during business interruption), [then] neither would the claimed earnings source.”3
Likewise in Catlin Syndicate Ltd .v . Imperial Palace of Mississippi, Inc., the court held that the policyholder, a casino operator, could not recover “what it would have earned had it been able to remain open immediately after Hurricane Katrina, while all of its competitors were closed due to damage from the storm.”4 In Imperial Palace, the policyholder’s casino was damaged by, and forced to close for several months after, Hurricane Katrina. When Imperial Palace reopened, its revenues were greater than those before the hurricane because many of the other casinos in the area remained closed and those who wanted to gamble had fewer options. Imperial Palace argued that the court should assume that Katrina struck the area but did not damage Imperial Palace’s facilities, and that its business interruption loss should be partially based on the revenues it actually earned when it reopened after the storm. The court disagreed. In construing the “had no loss occurred” policy language, the court acknowledged that “loss” and ‘”occurrence” are separate and distinct terms. It nevertheless found that they are “inextricably intertwined under the language of the business-interruption provision,”’ and declined to “interpret the business-interruption provision in such a way that the loss caused by Hurricane Katrina can be distinguished from Hurricane Katrina itself.”5 The court thus held that “only historical sales figures should be considered when determining loss, and sales figures after reopening should not be taken into account.”6
Pro-policyholder cases. On the flip side of this same coin, courts have held that the “had no loss occurred” policy language prohibits insurance carriers from relying on post-loss economic conditions caused by the covered peril to reduce a policyholder’s business interruption recovery. For example, in Finger Furniture Co. v. Commonwealth Insurance Co., the court considered Finger Furniture’s business interruption claim after flooding from Tropical Storm Allison required Finger Furniture to close seven of its stores for a little more than one day.7 The carrier denied the claim, arguing that Finger Furniture did not sustain a loss during the period of interruption because it was able to recover its losses the following weekend by selling its furniture at heavily discounted prices. The court rejected the carrier’s argument, explaining that Finger Furniture properly measured its lost profits by basing its calculations on its historical sales performance immediately preceding the storm, which the court concluded was “[t]he strongest and most reliable evidence of what [Finger Furniture] would have done had the catastrophe not occurred.”8 The court thus held that the increased sales the following weekend should not be considered in Finger Furniture’s business interruption calculation.9
Similarly, in Consolidated Cos. v. Lexington Insurance Co., Consolidated Cos. (Conca) was forced to completely suspend its warehouse operations for a 10-day period after Hurricane Katrina damaged its facilities, and then was able to resume only partial operations for another 15 months.10 The policy required consideration of the probable experience of the business during the period of recovery as if “no loss occurred.” Conca’s business interruption claim was calculated based on historical earnings data and projections. Lexington contended that Conca’s proof was insufficient to support its lost profits claim. It argued that Conca was entitled to recover only lost profits caused by damage to its facilities, but that Conca’s claim also improperly included lost profits caused by the generally poor post-Katrina economic conditions. The court rejected Lexington’s assertion that Conca’s failure to offer evidence distinguishing these two types of damages should bar its recovery. Relying on, among other things, the Imperial Palace court’s interpretation of the “had no loss occurred” policy language, the Conca court explained that “[t]he jury was not to look at the real-world opportunities for profit post-Katrina, but instead was to decide the amount of money required to place Conca in the same position in which [it] would have been had [Katrina not] occurred.”11 The court further found that “Conco was not required to draw a bright line in its evidence between loss stemming from property damage and loss stemming from market conditions.”12
Consideration of post-loss economic factors not caused by the occurrence. It is important to emphasize, however, that even if a court were to agree with the result reached in this line of cases, that does not mean that the court would refuse to consider any economic conditions that exist after a storm or other peril. Rather, such courts likely would consider postloss economic conditions that were not caused by the storm or other peril itself. In other words, some courts have recognized that not all economic conditions following a storm or other loss event actually were caused by the storm or other loss event.
For example, in Penford Corp. v. National Union Fire Insurance Co. of Pittsburgh, PA, which involved coverage for a flood loss, Penford, relying on Imperial Palace, sought to exclude portions of the carrier’s business interruption expert’s testimony on the ground that he improperly based his opinion, in part, on “the allegedly unfavorable ‘market conditions’ [following the flood], instead of relying solely upon Penford’s historical revenues and costs.”13 In response, the carrier asserted that its expert properly considered the economic recession’s negative impact on the demand for Penford’s products. Agreeing with the carrier, the court explained that the purpose of business interruption insurance is to put the policyholder in the same position that it would have been had its business operations not been interrupted. It found that “unfavorable market conditions, such as a recession, would have affected Penford’s earnings regardless of whether the flood ever occurred,” and therefore “are relevant to the question of what Penford’s likely revenues would have been in the absence of the flood.”14 In so ruling, the court distinguished Imperial Palace, and explained why the case before it did not qualify as a “greater effects” case:
The issue raised in Imperial Palace is how to treat the wider geographic consequences of a catastrophic event when the event directly impacts the insured’s property and the wider geographic consequences indirectly impact the insured’s business. That simply is not the case here where the flood event which caused direct physical loss and damage is quite distinct from the worst economic catastrophe to befall the nation since the Great Depression. Penford does not get to recover what it would have earned in the absence of both the flood and the recession; it gets only what it would have earned in the absence of the flood.15
Similarly, in Orrill, Cordell, & Beary, L.L.C. v. CNA Insurance Co ., during the period of recovery, a law firm experienced an increase in overall income after Hurricane Katrina due to an increase in hourly fees resulting from its annual hourly rate increases but experienced a decrease in its contingency fees as a result of Katrina, and submitted a business interruption claim based on its lost contingency fee income.16 The carrier contended that the law firm did not suffer an actual loss of business income because its overall income had increased during the recovery period. The court rejected the carrier’s argument and found that the policyholder had suffered an “actual loss.” The court explained that the “insurance policy does not limit anticipated profit that increases annually, except for the increased net profit that specifically results from an increase in the volume of business conditions caused by the impact of the covered cause of loss.”17Because there was no evidence or argument that the law firm’s “net profit increased because of an increase in the volume of business conditions caused by the impact of Hurricane Katrina, [the firm’s] increase in profit in its hourly fees does not exclude recovery for a decrease in its contingency fees.”18
Cases Considering the “Greater Effects” of the Storm or Other Peril
Not all courts have measured a policyholder’s business interruption loss as if the triggering event had not occurred at a ll. At least one court has interpreted “loss” to mea n the property damage sustained by the policyholder as a result of the e vent or “occurrence” that caused the covered loss rather than the event or “occurrence” itself. In Stamen v. Cigna Property & Casualty Insurance Co., the policyholder sought to recover lost profits it sustained after many of its convenience stores were damaged by Hurricane Andrew.19The policyholder argued that it was entitled to recover profits that its stores would have earned had they remained open after the hurricane; whereas the carrier argued that the policy language required that lost profits be calculated as if Hurricane Andrew never took place. The court agreed with the policyholder, holding that the policy required one to “look at [the policyholder’s] situation as if each individual…store had not been damaged, or had not incurred any loss.”20 The court found that “loss” necessarily must have a different meaning than “occurrence,” which clearly referred to the hurricane, and reasoned that if the parties had intended to exclude post-hurricane economic conditions from consideration, then the policy’s business interruption valuation provisions would have used the term “occurrence” rather than “loss.” The court also rejected the carrier’s windfall argument, explaining that the policyholder’s stores would have reaped greater profits after the hurricane, and that these losses are exactly what the policy is required to cover.
A few other courts, construing different policy language, likewise have allowed policyholders to recover increased revenues or profits that they would have earned during the period of recovery due to more favorable business conditions created by the peril that damaged their property. In Levit z Furniture Corp. v. Houston Casualty Co., the court held that the policyholder, which suffered a flood-ca used business interruption loss, was entitled to recover the lost profits it would have earned due to increased consumer demand had it been able to continue its operations after the storm.21 Unlike the policies at issue in Colleton Enterprises and Fisherman’s Paradise, however, the Levitz Furniturepolicy expressly allowed for consideration of the “[p]robable experience thereafter…had no interruption of production or suspension of business operations or services occurred.”22 The policy thus “clearly and unambiguously” covered “profit opportunities due to increased consumer demand created by the flood.”23
Additionally, in Sher v. Lafayette Insurance Co., an apartment building owner’s rental units were damaged by, and thus uninhabitable for a period of time after, Hurricane Katrina.24The policy at issue covered the “Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’”25 Reasoning that the policy “covers Mr. Sher’s ‘actual loss’ of business income,” the court affirmed the jury’s award for lost rents that were calculated based on the higher rental rates available in the postKatrina economic environment.26 It also should be noted that consideration of post-storm economic circumstances may operate to completely offset a policyholder’s business interruption recovery. In B. F. Carvin Construction Co. v. CNA Insurance Co., for example, the construction company policyholder was located in a large warehouse that suffered extensive damage from Hurricane Katrina.27 As a result of the storm, the company was forced to relocate to smaller facilities and, because of the space and equipment limitations, had to abandon its pre-storm work on Louisiana Public Works Act projects for smaller residential projects. The court held that the policyholder was not entitled to a business interruption recovery for the lost profits from the Public Works Act projects because the financial data proved that the post-storm residential projects were significantly more profitable. The court concluded that “this type of policy is designed to prevent the insured from being placed in a better position than if no loss or interruption of business had occurred.”28
Policy Language Specifically Addressing Post-Loss Economic Conditions
In response to disputes and case law concerning consideration of the greater effects of a hurricane or other peril on the surrounding area, some business interruption provisions now include language . specifically addressing whether post-loss economic conditions should factor into the calculation of the policyholder’s business interruption loss. There are different variations of this language. For example, some policies state that the measurement of a business interruption claim shall not take into account “any net income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the covered cause of loss on customers or on other businesses.”
The Fifth Circuit construed a similar clause in Berk-Cohen Associates, L.L.C. v. Landmark American Insurance Co., in which the policyholder sought to recover lost rental income after its apartment complex was damaged by Hurricane Katrina (among other catastrophes).29 The policyholder’s claim was calculated based on increased rental rates in effect after, and as a result of, Katrina. The parties agreed that Hurricane Katrina had caused a combination of wind damage, which indisputably was covered under the policy, and flood damage, which indisputably was not. Landmark argued that the policyholder’s reliance on inflated post-Katrina rental market rates to measure its business interruption loss was not permitted under the policy, which stated that there shall be no consideration of “any Net Income that would likely have been earned as a result of . . . favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses.”30
The court rejected Landmark’s argument, focusing on the phrase “Covered Ca use of Loss.” The court held that the policyholder “may not recover for lost business income as a result of wind damage suffered by customers and competing businesses. On the other hand, any increase in customers’ demand or reduction in competitors’ supply due to flooding at other properties is a permissible factor in calculating lost business income.”31The court further held that the policy’s flood exclusion was inapplicable. It reasoned that that exclusion is relevant only to the determination of whether there is coverage, and because there was no dispute that the policy covered wind damage, “the flood exclusion has nothing further to say… We decline to use a limitation on coverage to alter the calculation of damages for a covered cause of loss.”32 The policyholder thus was permitted to recover additional lost income due to increased rental rates resulting from flooding throughout New Orleans.
Other policies include different variations of “greater effects” language. Some policies state that the “probably experience” of the business during the period of recovery “will consider any increase or decrease in the demand for the policyholder’s good or services” during the recovery period, regardless of whether such increase or decrease is from the same event that cause the physical loss or damage that triggered the business interruption coverage.
By contrast, other policies include “heads I win, tails you lose!” language. These forms on the one hand state that the policyholder cannot recover lost profits that would have been earned due to favorable opportunities or conditions created by the covered peril, but on the other hand also state that the carrier is entitled to reduce the business interruption claim to reflect unfavorable economic conditions attributable to the impact that the covered peril had on the surrounding geographic area. In some of these policies these two provisions appear in completely difference sections of the insurance policy. For example, in some policies, the “loss determination” clause that appears in the business income/extra expense form of the policy states that the policyholder cannot recover profits it would have earned as a result of favorable business opportunities created by the covered cause of loss:
The amount of business income loss will be determined based on the… likely net income of your business if no loss or damage occurred, but not including any business income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the covered loss on customers or on other businesses.33
Surprisingly, the provision stating that the carrier nevertheless can reduce the policyholder’s claim as a result of unfavorable economic conditions caused by the covered cause of loss appears in the “period of restoration” definition that appears in the conditions form of that policy:
In determining the business income amount that would have existed if no direct physical loss or damage occurred, we will reduce such amount to the extent necessary to reflect unfavorable economic conditions attributable to the impact the covered peril had in the geographic area where the lost or damaged property is located.34
Structuring the policy this way is likely to lead to confusion or, worse yet, the risk that one of these provisions may be overlooked.
An important takeaway from the “greater (or not so great) effects” case law is that the policy language included in business interruption valuation provisions can be determinative. It is important for companies to review this language carefully when buying or renewing their business interruption policies, particularly because different variants of this language exist in the marketplace. At a minimum, companies should avoid buying policies that allow carriers to reap the benefits of an economic downturn but do not allow policyholders to reap the benefits from a potential uptick in demand for their goods or services, caused by a covered peril.