In the current coronavirus pandemic environment, many businesses and their insurance carriers are (or soon will be) looking at the issue of claims for “business interruption.” While there is not a large body of caselaw in North Carolina or the Fourth Circuit devoted to such claims, below are summaries of a few cases that address this type of coverage.
In Prudential LMI Commercial v. Colleton Enterprises, Inc., 976 F.2d 727 (4th Cir. 1992), the Fourth Circuit gave a concise summary of what business interruption insurance is:
Generally, business interruption insurance “is designed to do for the insured in the event of business interruption caused by [an insured peril], just what the business itself would have done if no interruption had occurred-no more….”
The Court also summarized how an insured must prove a claim for lost profits under business interruption coverage, citing cases from around the country:
In order to establish coverage for lost profits or lost earnings under business interruption coverage provisions, the insured must establish that: (1) the peril insured against occurred, (2) the peril caused damage to the business facility insured, (3) the damage resulted in a partial or complete interruption of business, and (4) the business suffered a loss of earnings or profits as a direct result of the business interruption.
Colleton also addressed an interesting issue of causation. The case involved a Charleston, SC motel that was shut down for a period of time after it sustained damage in 1989’s Hurricane Hugo. The business sought lost profits that it contended it would have received from housing the influx of repair persons and construction workers that traveled into the area after the devastating storm. The Court focused on the fact that the same event caused both the business interruption and the increase in visitors that the hotel missed out on housing, and for which they were claiming lost profits. The Court emphasized that the purpose of business interruption insurance is to keep a business in the same position as it would have been if there had been no interruption. In this case, the panel majority said that there existed “an intuitively-sensed logical flaw,” and that to have allowed the hotel’s lost profit claim based on the increase in visitors to the area would have resulted in a windfall for the insured. Thus, since the purpose of business interruption insurance is to keep the insured in the same position as it would have been if the interruption not occurred, the Court held that the insurer was not liable for the claimed lost profits of the hotel: “the business interruption provision here in issue did not cover the specific claim for loss of net-profit from the peril-generated source relied upon.”
Colleton was not a unanimous opinion, however. The dissent argued that coverage should not be affected by the fact that the cause of the interruption was the same as the cause of the uptick in profits that were not realized. In the dissent’s view, only the loss to the insured should be considered, and the impact of the cause of that loss on the surrounding area was of no relevance to whether coverage existed:
The majority acknowledges that proof of an imminent general economic up-turn, or of a lost profit opportunity thwarted by the loss causing event, can justify recovery under a lost-earnings provision. I assume, then, that had the motel been destroyed by an isolated fire the day before Hugo hit, the majority would rule that lost profits would have been recoverable because the cause of the property loss (the fire) was not the same as the cause of the profit opportunity (the storm). Similarly, if gold were discovered the day after Hugo and the entire region filled with gold seekers (as well as relief workers), I assume that lost profits would be covered. Colleton had a lost profit opportunity (the dimensions of which the parties stipulated). Although Hugo caused both the property loss and created the profit opportunity, it does not strike me as an “intuitively-sensed logical flaw” to permit recovery under these circumstances.
The North Carolina Court of Appeals addressed a declaratory judgment action on a business interruption claim in Great American Ins. Co. v. Mesh Cafe, Inc., 158 N.C.App. 312 (2003). That case also involved a hurricane, 1999’s Hurricane Floyd. A restaurant that lost power and water for 24 hours as a result of the storm sought to recover income lost during that time under an insurance policy that covered “loss of Business Income or Extra Expense, caused by the interruption of service to the described premises.” At issue in the case was language in the policy that said “the interruption must result from direct physical loss or damage by a Covered Cause of Loss to the property described below,” followed by a list that included “Water Supply Services” and “Power Supply Services.” The insurer argued that the damage to the business was caused by flooding, and that did not qualify as “direct physical loss or damage.” For its part, the insured argued that its loss of power and water was a “direct physical loss,” and therefore coverage existed; it argued that under the policy’s wording, the “Covered Cause of Loss” list did not apply to “direct physical loss.”
The trial court held that coverage existed, and the Court of Appeals affirmed. The Court of Appeals determined that whether coverage existed under the plain language of the policy was susceptible to different reasonable interpretations:
Whereas a reasonable person could understand the language “by a Covered Cause of Loss” to be a prepositional phrase modifying “direct physical loss or damage,” another reasonable person could understand “direct physical loss” to be an alternative to “damage by a Covered Cause of Loss” because of the conjunction “or.”
Therefore, because the policy language was ambiguous and the policy had been drafted by the insurer, whether there was coverage was to be construed in favor of the insured.
Mesh Café was not the Court of Appeals’ first foray into the world of business interruption insurance claim disputes. In Harry’s Cadillac-Pontiac-GMC Truck Co, Inc. v. Motors Insurance Corporation, 126 N.C. App. 698 (1997), the Court analyzed whether a snowstorm that caused the insured’s dealership to be inaccessible for a week fell within the coverage provision for its business interruption insurance. Importantly for that case, the snowstorm caused damage to the dealership’s roof that required repairs but the roof damage and the repairs did not cause an interruption in plaintiff’s business. The interruption in business was caused solely by the business owner’s inaccessibility of the dealership due to the snowstorm.
The business income coverage provision in Harry’s Cadillac was as follows:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’ The suspension must be caused by direct physical loss of or damage to property at the premises described in the Declarations, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss.
The policy defined “A Covered Cause of Loss” as “risks of direct physical loss.”
The insured argued that its inability to access the dealership to conduct business because of the snowstorm caused it to lose profits in the same way it would have had the building been leveled by the storm. In contrast, the insurer argued that, aside from the roof damage that did not cause business interruption, there was no “direct physical loss or damage” that resulted in a loss of business income.
The Court found that the business interruption clause in the policy “[did] not cover all business interruption losses, but only those losses requiring repair, rebuilding, or replacement.” Based on that reasoning, the Court held that there was no coverage for the insured’s losses because the alleged lost business income was not due to damage to or the destruction of the property – it was caused by the business owner’s inability to access the dealership due to the snowstorm. The Court stated:
Under the language of the business interruption clause of the policy, coverage is provided only when loss results from suspension of operations due to damage to, or destruction of, the business property by reason of a peril insured against.
Similar to business interruption insurance is event cancellation insurance. Event cancellation insurance, generally speaking, provides coverage to protect single event revenue and expenses that are lost due to circumstances beyond the control of the insured. With the multitude of event cancellations occurring due to Covid-19, this is sure to be at the forefront of the minds of event organizers and insurers everywhere. For a North Carolina Court of Appeals case dealing with event cancellation insurance, see Defeat The Beat, Inc. v. Underwriters At Lloyd’s London, 194 N.C. App. 108 (2008). That case highlights a potential difference between business interruption and event cancellation insurance, particularly when it comes to reimbursement for lost profits.
Keep checking back regularly with It’s Just Business, as we hope to continue to provide more information over the coming days and weeks on areas of law that are going to be impacting businesses and business litigators as we together navigate these unique and trying times. Stay safe, stay healthy, and wash your hands.
–Patrick Kane and Olivia Fajen