"Business Interruption Claims" and the Recent Gulf of Mexico Oil Spill

Kathleen Bonczyk, Esq.
June 11, 2010 — 870 views  
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On April 20, 2010, an explosion on the mobile drilling rig Deepwater Horizon occurred some 130 miles southeast of New Orleans, Louisiana.
 
As of May 23, 2010, it is estimated that a minimum of 6 million gallons of crude oil have spilled into the Gulf of Mexico as a result of this incident.  However, a growing number of scientists assert that they believe the count is even higher than that troublesome figure.
 
In addition to the environmental disaster this accident has caused, many private industries have been affected, including, the fishing industry, the wholesale industry, the retail industry, the tourism industry and the manufacturing industry. The oil spill threatens to be an unprecedented disaster as the resulting oil slick makes its way to the beaches along southern Louisiana as well as Alabama and the west coast of Florida.  It is feared that the slick will wrap itself around the pristine beaches of the Florida Keys and impact Florida’s Gulf Coast, Treasure Coast and beyond the eastern end of the peninsula.
 
Executives at the federal, state, and local efforts have expressed concern of the ramifications associated with this explosion.
 
For example, Florida’s Governor Charlie Crist recently signed Executive Order 10-101., which establishes the Gulf Oil Spill Economic Recovery Task Force to support Florida’s businesses and industries in recovering from the losses suffered due to the Deepwater Horizon oil spill.  Among other Things, this Task Force will coordinate state agencies so as to assist affected while also creating a marketing plan to ensure that the vitality of business and tourism industries continue to prosper.
 
Executive Order 10-101 can be viewed at: http://www.flgov.com/pdfs/orders/10-101-oil.pdf.
 
A number of lawsuits associated with the spill have already been filed. It is anticipated that in the weeks and months ahead, the disaster in the Gulf of Mexico will lead to more litigation, including those involving business interruption claims to the entities impacted by same.
 
Business Interruption – Lost Profits
 
A typical insurance property policy will provide indemnity benefits associated with the cost to repair or replace buildings, contents, and equipment damaged as the result of a covered loss.  It will not, however, cover the loss of income the insured is likely to suffer during the time from the occurrence of the loss to the resumption of normal business.  Business interruption coverage protects against the loss of revenue or income as if there was no effect to same from the loss.

Thus, business interruption insurance indemnifies the business against loss or damage to the income or profit due to an interruption in the business.  Typically, these policies provide indemnity for profits that would have been earned based on financial records had the insured not been damaged by the covered disaster.  Business Interruption covers the time when the business is shut down until the property is repaired or replaced so that the business’s operations may be restored.  

The language of the operative insurance contract might say something like this:
 
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 “dependent property” at a premises described in the Schedule caused by or resulting from any Covered Cause of Loss . . . .
 
Business Interruption – Extra Expenses
 
In addition to providing coverage for lost profits, some policies cover “extra expenses” incurred for such reasons as operating out of a temporary location while the insured’s premises is being repaired. This is because the business may incur extra expenses
during this time after a loss, such as rent, utility payments, taxes and mortgage payments.

In this regard, the insuring instrument may include the following definition:

Extra Expense means necessary expenses you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss of or damage to the premises of any “dependent property” described in the Schedule caused by or resulting from a Covered Cause of Loss:

a. To avoid or minimize the suspension of business and to continue “operations;” or

b. To minimize the suspension of business if you cannot continue “operations.”
 

General Principles of Insurance Contract Litigation

Obviously, there is no “cookie cutter” approach to determining whether a claim associated with the Deepwater Horizon spill will be covered under a particular insurance policy. 

With that said, there are certain general principles governing the interpretation of an insurance contract that are applicable to business interruption insurance, one of which is that unambiguous contractual language of a business interruption policy will be construed as written, and not based on the reasonable expectations of what the insured's  hope it will say.

The case of Gross, et al. v. St. Paul Fire & Marine Ins. Co., 68 Fed. Appx. 348  (3rd Cir. 2004) involved a first party insurance coverage dispute pertaining to a business interruption policy is illustrative in this regard.  

The Appellants/Insured in the Gross case sued Appellee/Insurer to recover unpaid coverage under business interruption insurance to which they argued they were entitled. The insured and insurer filed cross-motions for summary judgment. The United States District Court for the Eastern District of Pennsylvania granted the insured's motion for summary judgment and dismissed the case, and the insured appealed. Plaintiffs' main contention, of course, is that the District Court should have interpreted the contract to mean that the insured was entitled to $ 2.6 million in business interruption coverage per year. The Plaintiffs claimed that “if a provision is ambiguous, that provision is interpreted to "give effect to the reasonable expectations of the parties." Reid Crowther & Partners Ltd., [1993] S.C.R. 252. In addition, the contra proferentem doctrine provides that an ambiguous provision is to be construed against the drafting party - here the insurer. Id. The Plaintiffs argue that the District Court erred in not applying these principles to the insurance contract in this case and, had it done so, it would have concluded that one of the Plaintiffs was entitled to $ 5.2 million from St. Paul.

However, the Court noted that these principles of contract interpretation apply only if the terms of the contract are ambiguous. The reasonable expectations of an insured are immaterial if the policy limitations are plain; extrinsic evidence becomes meaningful only if the contract terms are ambiguous. Id. The District Court concluded that the relevant contract provisions were not ambiguous, and therefore that extrinsic evidence was irrelevant. We agree. As the District Court noted, Fincore's policy "unambiguously caps lost business income coverage at $ 2.6 million." The "Limits of Coverage" provision of the contract states that the most St. Paul will "pay for loss in any one event.

Thus, the principle of contract interpretation will only be applicable if the Court determines the policy to be ambiguous, that is, capable of being given more than one reasonable meaning.  So what happens if a policy is deemed ambiguous?  This was the issue facing the Court in the case of RTG Furniture Corp. v. Indus. Risk Insurers, 616 F. Supp. 2d 1258 (S.D. Fla. 2008). 

The RTG furniture case involved a business interruption claim to the insured business associated with Hurricanes Charley, Frances and Jeanne.  There, the Court explained that an insurance policy is considered ambiguous when the language is subject to more than one reasonable interpretation, one providing coverage and the other limiting coverage. The Court also stated that the lack of a definition of an operative term does not, by itself, however, create an ambiguity. Nor does an ambiguity exist merely because the policy is complex and requires analysis for one to fully understand 

Ultimately, the RTG Furniture Court determined that a key term, “ensuing loss” was ambiguous. The Court then determined that the reasonable interpretation of same was likely to turn, at least in part, on the inferences to be drawn from extrinsic evidence.  Moreover, because the Court concluded that the language of the insurance policy was ambiguous, extrinsic evidence could be considered to determine the intent of the parties and clarify the ambiguity.

Conclusion

Time will tell what the cost of the spill in the Gulf will be and the number of businesses ultimately involved.  In the interim, under no circumstances should one attempt to make a coverage decision without seeking the assistance of counsel experienced in the field of insurance contract disputes.

Kathleen Bonczyk, Esq.

Rubinton & Laufer, LLC