Valuing Business Interruption Claims in the Post-Sandy Rapidly Changing Economy

December 12, 2012

Legal Research: Insurance hurricane SandyAs a result of rapidly evolving technology and an increasingly global business model, the method of valuing business interruption claims discussed in our last post with its reliance on past production, sales and cost experience, may not accurately predict expected future performance.

In such circumstances, the insured can recover business interruption benefits for projected increases in earnings provided the projected increases are “proven with reasonable certainty.” Safeguard Storage Properties, LLC v. Donahue Favret Contractors, Inc., 60 So.3d 110 (La. App., 4th Cir., 2011) (Insured’s proffer of business plans for the new facilities together with expert testimony on the prospects for success was sufficient to allow the case to go to the jury).

The Special Problem of Valuing Business Interruption Claims in a Devastated Economy

Reliance on past economic performance is even more problematic in the dramatically changed economic conditions of a post-catastrophe economy. What if the insured could show that, in a post-catastrophe economy, it would have increased its net earnings? For example, suppose an influx of temporary rescue and reconstruction workers into a devastated region would have increased demand for an insured hotel’s services had the hotel not been destroyed. Should the hotel be able to recover its “lost opportunity,” or to use the term found in most insurers’ briefs, its lost “windfall” profit?

On the other hand, what if the insurer could show that, post-catastrophe, the insured would have done little or no business? Suppose, for example, that the damaged property is a high end department store inAtlantic City. It is doubtful that the store would have done much, if any, business in the economic environment left in the wake of Hurricane Sandy. Should the department store recover nothing, in effect, giving the insurer a “windfall” caused by the destruction of the City’s economy?

Very few cases examine these questions, and those that do are sometimes difficult to reconcile. Compare Levitz Furniture Corp. v. Houston Casualty Co., (insured can recover increased profits it would have earned had it been open during a period when many people were having to buy new furniture because of flood damage) with Prudential LMI Comm’l Ins. Co. v. Colleton Enterprises, (previously money-losing hotel cannot recover increased profits it could have made by housing some of the army of adjusters dispatched in response to Hurricane Hugo); and, Catlin Syndicate Limited v. Imperial Palace of Mississippi, Inc., (5th Cir. 2010) (Mississippi casino’s business interruption losses following Hurricane Katrina must be determined based on the casino’s historical sales figures and the casino’s projected probable sales had no hurricane occurred, not the casino’s projected sales if it had been able to remain open following the hurricane when most of its competitors were shut down).

We will discuss these cases, together with recent Insurance Services Office policy language designed to address how to value claims in a post-catastrophe economy, in a Webinar sponsored by West Legal Ed Center on December 17, 2012, “Business Interruption  Claims Arising Out of Superstorm Sandy.”