'Probable Experience' in Business Interruption Claims

Part One of this article discussed business interruption generally, Imperial Palace's “probable experience” claim following Hurricane Katrina, and “probable experience” case law. This second installment continues the discussion of “probable experience” case law and addresses the issues that were brought to a head in the Imperial Palace case.

Southern District of Florida on 'Probable Experience': Stamen and Fisherman's Paradise Boats

In Stamen v. Cigna Property & Casualty Insurance Co., No. 93-1005, slip op. at 6 (S.D. Fla. June 13, 1994), the court considered the business interruption claim of Food Spot stores, some of which had been shut down following Hurricane Andrew while others continued to operate. Though the full policy structure was not discussed in the court's unpublished order, it was noted that it was a form of “hybrid insurance contract” which provided that “'[i]n calculating your lost income, we will consider your situation before the loss and what your situation would probably have been if the loss had not occurred.'” Id. at 5 (citing policy language). The insurer argued that “loss” in the policy language quoted above meant “occurrence” and therefore the policy requires consideration of “what your situation would probably have been if the [hurricane] had not occurred.” The court rejected the contention that “loss” and “occurrence” had equivalent meanings, and on that basis held that the insured was entitled to recovery based on the assumption that the stores that were closed would have operated at levels equivalent to the profits generated by the insured stores that were open after the hurricane. Id. at 6.

Shortly after the order in Stamen, a different judge of the same court had occasion to consider another insured's Hurricane Andrew claim in American Automobile Insurance Co. v. Fisherman's Paradise Boats, Inc., 1994 WL 1720238 (S.D. Fla. Oct. 3, 1994). The policy at issue provided that business income loss would be determined based on “the likely Net Income of the business if no loss or damage occurred.” Id. at *3. The insured, Fisherman's Paradise Boats ' a boat and marine accessory purveyor ' sought recovery for the “'lost opportunity in the increased economic opportunities afforded after Hurricane Andrew'” and cited marketing surveys that speculated that the insured's business would have increased 192% over historical earnings. Id. The court rejected the insured's claim, noting that because “Fisherman's loss was a condition precedent to American Auto's duty to pay the business interruption benefits ' the loss cannot be ignored for purposes of calculating the damage.” Id. at *4. In short, “[t]he Policy is drafted in a way that allows net income projections that are not itself created by the peril.” Id. (citation omitted)

Eastern District of Louisiana on 'Probable Experience': Levitz Furniture

The tension first noted in Colleton and carried through in the conflict between Stamen and Fisherman's Paradise Boats was resolved by the U.S. District Court for the Eastern District of Louisiana. Levitz Furniture Co. v. Houston Cas. Co., 1997 WL 218256 (E.D. La. Apr. 28, 1997). The insured was a furniture store that had suffered damage to both building and inventory. The policy provided for recovery based on the “[p]robable experience thereafter ' had no interruption of production or suspension of business operations or services occurred,” and the insured therefore sought recovery based on the increased customer demand for replacement furniture caused by the flood itself. Id. at *3 (emphasis in original).

The district court held that the retailer could recover based on increased demand caused by the flooding. Id. at *2. In doing so, the court expressly “distinguishe[d] between 'no loss' and 'no interruption' [wordings.] The meanings of these terms are self-evident: 'no loss' means no damage, i.e. no flood, and 'no interruption' means no business stoppage.” Id. at *3. The court noted that in Colleton and in Fisherman's Paradise Boats, the insured's recovery was limited to the calculation “had no loss occurred” and that variations from this business interruption wording reflected a different intent. Thus, it was only where the “policy clearly and unambiguously provides coverage for earnings 'had no interruption' occurred,” that the insured in Levitz Furniture could recover the lost profits created by the peril that caused the interruption. Id.

Levitz established a clear distinction between different forms of “probable experience” policy language. When the policy language directs that the parties look to the insured's probable experience “had no loss occurred,” one may not include in the calculation profits created by the interrupting-causing peril. In contrast, when the policy language directs that the parties look to the insured's probable experience “had no interruption occurred,” one may consider such profit expectancies.

Synthesizing the Case Law: Imperial Palace

Following Hurricane Katrina, certain claims preparation service providers wrote articles in which they argued against the results reached in the Finger Furniture, Levitz Furniture, Fisherman's Paradise Boats, and Colleton cases. Generally, the authors of these articles cited certain form language developed by the Insurance Services Office (“ISO”) and argued that because that form language more explicitly prohibited the use of so-called “favorable conditions” post-loss in the measurement of business interruption claims, the phrase more commonly used in large commercial property insurance policies ' “probable experience had no loss occurred” ' should be deemed ambiguous. Indeed, these authors argued that the phrase “probable experience had no loss occurred” should be read so broadly as to allow use of actual, post-reopening profits as a proxy for probable experience during the period of interruption.

These issues were brought to a head in the Imperial Palace litigation. At the trial court level, on cross-motions for summary judgment, the parties addressed the legal issues raised by Imperial Palace's claim that, as a proxy for its “probable experience had no loss occurred,” the parties should look to the experience Imperial Palace hypothetically would have enjoyed if it continued to operate unscathed while its competition was wiped out by the storm, as measured by its actual performance after reopening (while its competitors were still undergoing repairs).

In briefing, Imperial Palace cited and relied on the post-Katrina commentary and the unpublished Stamen order to argue for consideration of post-reopening profits. Insurers cited the decisions in Finger Furniture, Levitz Furniture, Fisherman's Paradise Boats, and Colleton. The district court, relying significantly on the Fifth Circuit's decision in Finger Furniture, held that the language requiring “due consideration” of “probable experience had no loss occurred” is unambiguous and “contemplates a calculation based on what Imperial Palace probably would have done had Hurricane Katrina not occurred.” Catlin Syndicate Ltd. v. Imperial Palace of Miss., Inc., 2008 WL 5235888, at *7 (S.D. Miss. Dec. 15, 2008). Accordingly, Imperial Palace could not rely upon its post-reopening experience (when most of its competitors were shut down) because “[h]ad Hurricane Katrina not occurred, Imperial Palace's competitors would have remained open.” Id.

On interlocutory appeal, Imperial Palace argued that Finger Furniture should be distinguished and that the insurers' interpretation improperly conflated the meaning of the terms “loss” and “occurrence.” Catlin Syndicate Ltd. v. Imperial Palace of Miss., Inc., 600 F.3d 511 (5th Cir. 2010).

The Fifth Circuit rejected Imperial Palace's arguments and affirmed the decision of the district court. Writing for the court, Judge Edward Prado noted that Finger Furniture was not distinguishable on any of the bases proffered by Imperial Palace. With respect to Imperial Palace's contention that insurers' interpretation equated “loss” in the policy wording with “occurrence,” the Fifth Circuit held that “[w]hile we agree with Imperial Palace that the loss is distinct from the occurrence ' at least in theory ' we also believe that the two are inextricably intertwined under the language of the business-interruption provision.” Id. at 515. Without the “occurrence,” there would be no “loss.”

The Fifth Circuit's decision reads the term “loss” in this context and in light of the purpose of the business interruption provision. As the court held:

Without language in the policy instructing us to do so, we decline to interpret the business-interruption provision in such a way that the loss caused by Hurricane Katrina can be distinguished from the occurrence of Hurricane Katrina itself. ' Thus, in the business-interruption provision at hand, only historical sales figures should be considered when determining loss, and sales figures after reopening should not be taken into account.

Id. at 515-16.

Conclusion

With its recent decision in Imperial Palace, the Fifth Circuit has confirmed that the fair and accurate calculation of business interruption claims under policy wording requiring due consideration of the probable experience of the insured's business had no loss occurred must focus on projections of that probable experience, not actual performance upon resumption of operations, which may be skewed by factors including the broader impacts of a catastrophic event. This rule, in addition to conforming to the plain meaning of the wording and the historical precedent, also results in even-handed application, putting the insured in the same position, whether the insured's post-reopening revenue is greater than projected or less than expected.

Catherine A. Mondell, a member of this newsletter's Board of Editors, is a partner at Ropes & Gray LLP, and has handled a wide range of complex insurance coverage disputes and other commercial litigation matters. She has litigated in multiple jurisdictions cases involving first-party property claims with substantial time element and contingent time element components. Seth C. Harrington is a litigation associate at the firm, with experience in both insurance and other commercial litigation. He is currently litigating multiple matters involving first-party property insurance claims made following Hurricanes Katrina, Rita and Wilma.

Part One of this article discussed business interruption generally, Imperial Palace's “probable experience” claim following Hurricane Katrina, and “probable experience” case law. This second installment continues the discussion of “probable experience” case law and addresses the issues that were brought to a head in the Imperial Palace case.

Southern District of Florida on 'Probable Experience': Stamen and Fisherman's Paradise Boats

In Stamen v. Cigna Property & Casualty Insurance Co., No. 93-1005, slip op. at 6 (S.D. Fla. June 13, 1994), the court considered the business interruption claim of Food Spot stores, some of which had been shut down following Hurricane Andrew while others continued to operate. Though the full policy structure was not discussed in the court's unpublished order, it was noted that it was a form of “hybrid insurance contract” which provided that “'[i]n calculating your lost income, we will consider your situation before the loss and what your situation would probably have been if the loss had not occurred.'” Id. at 5 (citing policy language). The insurer argued that “loss” in the policy language quoted above meant “occurrence” and therefore the policy requires consideration of “what your situation would probably have been if the [hurricane] had not occurred.” The court rejected the contention that “loss” and “occurrence” had equivalent meanings, and on that basis held that the insured was entitled to recovery based on the assumption that the stores that were closed would have operated at levels equivalent to the profits generated by the insured stores that were open after the hurricane. Id. at 6.

Shortly after the order in Stamen, a different judge of the same court had occasion to consider another insured's Hurricane Andrew claim in American Automobile Insurance Co. v. Fisherman's Paradise Boats, Inc., 1994 WL 1720238 (S.D. Fla. Oct. 3, 1994). The policy at issue provided that business income loss would be determined based on “the likely Net Income of the business if no loss or damage occurred.” Id. at *3. The insured, Fisherman's Paradise Boats ' a boat and marine accessory purveyor ' sought recovery for the “'lost opportunity in the increased economic opportunities afforded after Hurricane Andrew'” and cited marketing surveys that speculated that the insured's business would have increased 192% over historical earnings. Id. The court rejected the insured's claim, noting that because “Fisherman's loss was a condition precedent to American Auto's duty to pay the business interruption benefits ' the loss cannot be ignored for purposes of calculating the damage.” Id. at *4. In short, “[t]he Policy is drafted in a way that allows net income projections that are not itself created by the peril.” Id. (citation omitted)

Eastern District of Louisiana on 'Probable Experience': Levitz Furniture

The tension first noted in Colleton and carried through in the conflict between Stamen and Fisherman's Paradise Boats was resolved by the U.S. District Court for the Eastern District of Louisiana. Levitz Furniture Co. v. Houston Cas. Co., 1997 WL 218256 (E.D. La. Apr. 28, 1997). The insured was a furniture store that had suffered damage to both building and inventory. The policy provided for recovery based on the “[p]robable experience thereafter ' had no interruption of production or suspension of business operations or services occurred,” and the insured therefore sought recovery based on the increased customer demand for replacement furniture caused by the flood itself. Id. at *3 (emphasis in original).

The district court held that the retailer could recover based on increased demand caused by the flooding. Id. at *2. In doing so, the court expressly “distinguishe[d] between 'no loss' and 'no interruption' [wordings.] The meanings of these terms are self-evident: 'no loss' means no damage, i.e. no flood, and 'no interruption' means no business stoppage.” Id. at *3. The court noted that in Colleton and in Fisherman's Paradise Boats, the insured's recovery was limited to the calculation “had no loss occurred” and that variations from this business interruption wording reflected a different intent. Thus, it was only where the “policy clearly and unambiguously provides coverage for earnings 'had no interruption' occurred,” that the insured in Levitz Furniture could recover the lost profits created by the peril that caused the interruption. Id.

Levitz established a clear distinction between different forms of “probable experience” policy language. When the policy language directs that the parties look to the insured's probable experience “had no loss occurred,” one may not include in the calculation profits created by the interrupting-causing peril. In contrast, when the policy language directs that the parties look to the insured's probable experience “had no interruption occurred,” one may consider such profit expectancies.

Synthesizing the Case Law: Imperial Palace

Following Hurricane Katrina, certain claims preparation service providers wrote articles in which they argued against the results reached in the Finger Furniture, Levitz Furniture, Fisherman's Paradise Boats, and Colleton cases. Generally, the authors of these articles cited certain form language developed by the Insurance Services Office (“ISO”) and argued that because that form language more explicitly prohibited the use of so-called “favorable conditions” post-loss in the measurement of business interruption claims, the phrase more commonly used in large commercial property insurance policies ' “probable experience had no loss occurred” ' should be deemed ambiguous. Indeed, these authors argued that the phrase “probable experience had no loss occurred” should be read so broadly as to allow use of actual, post-reopening profits as a proxy for probable experience during the period of interruption.

These issues were brought to a head in the Imperial Palace litigation. At the trial court level, on cross-motions for summary judgment, the parties addressed the legal issues raised by Imperial Palace's claim that, as a proxy for its “probable experience had no loss occurred,” the parties should look to the experience Imperial Palace hypothetically would have enjoyed if it continued to operate unscathed while its competition was wiped out by the storm, as measured by its actual performance after reopening (while its competitors were still undergoing repairs).

In briefing, Imperial Palace cited and relied on the post-Katrina commentary and the unpublished Stamen order to argue for consideration of post-reopening profits. Insurers cited the decisions in Finger Furniture, Levitz Furniture, Fisherman's Paradise Boats, and Colleton. The district court, relying significantly on the Fifth Circuit's decision in Finger Furniture, held that the language requiring “due consideration” of “probable experience had no loss occurred” is unambiguous and “contemplates a calculation based on what Imperial Palace probably would have done had Hurricane Katrina not occurred.” Catlin Syndicate Ltd. v. Imperial Palace of Miss., Inc., 2008 WL 5235888, at *7 (S.D. Miss. Dec. 15, 2008). Accordingly, Imperial Palace could not rely upon its post-reopening experience (when most of its competitors were shut down) because “[h]ad Hurricane Katrina not occurred, Imperial Palace's competitors would have remained open.” Id.

On interlocutory appeal, Imperial Palace argued that Finger Furniture should be distinguished and that the insurers' interpretation improperly conflated the meaning of the terms “loss” and “occurrence.” Catlin Syndicate Ltd. v. Imperial Palace of Miss., Inc. , 600 F.3d 511 (5th Cir. 2010).

The Fifth Circuit rejected Imperial Palace's arguments and affirmed the decision of the district court. Writing for the court, Judge Edward Prado noted that Finger Furniture was not distinguishable on any of the bases proffered by Imperial Palace. With respect to Imperial Palace's contention that insurers' interpretation equated “loss” in the policy wording with “occurrence,” the Fifth Circuit held that “[w]hile we agree with Imperial Palace that the loss is distinct from the occurrence ' at least in theory ' we also believe that the two are inextricably intertwined under the language of the business-interruption provision.” Id. at 515. Without the “occurrence,” there would be no “loss.”

The Fifth Circuit's decision reads the term “loss” in this context and in light of the purpose of the business interruption provision. As the court held:

Without language in the policy instructing us to do so, we decline to interpret the business-interruption provision in such a way that the loss caused by Hurricane Katrina can be distinguished from the occurrence of Hurricane Katrina itself. ' Thus, in the business-interruption provision at hand, only historical sales figures should be considered when determining loss, and sales figures after reopening should not be taken into account.

Id. at 515-16.

Conclusion

With its recent decision in Imperial Palace, the Fifth Circuit has confirmed that the fair and accurate calculation of business interruption claims under policy wording requiring due consideration of the probable experience of the insured's business had no loss occurred must focus on projections of that probable experience, not actual performance upon resumption of operations, which may be skewed by factors including the broader impacts of a catastrophic event. This rule, in addition to conforming to the plain meaning of the wording and the historical precedent, also results in even-handed application, putting the insured in the same position, whether the insured's post-reopening revenue is greater than projected or less than expected.

Catherine A. Mondell, a member of this newsletter's Board of Editors, is a partner at Ropes & Gray LLP, and has handled a wide range of complex insurance coverage disputes and other commercial litigation matters. She has litigated in multiple jurisdictions cases involving first-party property claims with substantial time element and contingent time element components. Seth C. Harrington is a litigation associate at the firm, with experience in both insurance and other commercial litigation. He is currently litigating multiple matters involving first-party property insurance claims made following Hurricanes Katrina, Rita and Wilma.