Interpreting a policy that provided business interruption coverage for net income “and” continuing normal operating expenses, the California Court of Appeal has held that even if the insured was operating at a net loss, the insured is still entitled to its operating expenses, which are not offset by the net loss. ( Amerigraphics, Inc. v. Mercury Cas. Co. (2010) 182 Cal.App.4th 1538)
Facts
Amerigraphics, Inc. (“Amerigraphics”) is a printing and graphics design company. Although it was financially successful until September 11, 2001, its business fell off sharply in 2002. In 2003, its premises were completely flooded, causing damage to all its equipment and forcing Amerigraphics to temporarily relocate.
Amerigraphics submitted a claim to its business personal property insurer, Mercury Casualty Company (“Mercury”). Amerigraphics’ policy with Mercury included business interruption coverage, whereby Mercury agreed to pay for Amerigraphics’ lost “business income” during the “period of restoration.” The policy defined “business income” as “(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred …; and (ii) Continuing normal operating expenses incurred, including payroll.” Mercury denied Amerigraphics’ business interruption claim on the grounds that Amerigraphics’ projected expenses exceeded its projected income, resulting in a projected net loss.
Amerigraphics sued Mercury for breach of contract and bad faith and sought a judicial interpretation of the policy’s business interruption provision. The trial court held that Amerigraphics was entitled to recover both its net income and its continuing operating expenses, without having to offset one against the other. Mercury appealed.
Holding
The Court of Appeal affirmed. It first noted that the word “and” used between subparts (i) and (ii) of the policy’s definition of “business income” indicates that Mercury must pay its insured for lost income in addition to continuing normal business expenses. Thus, to the extent there is no lost income (i.e., when there is a net loss), the amount paid under subpart (i) would be zero, but the insured would still be entitled to its operating expenses under subpart (ii).
Mercury argued that the word “and” is the equivalent of the mathematical operator “plus.” Under Mercury’s interpretation, if the insured was operating at net loss (i.e., a negative number) greater than its operating expenses, the insured would be paid nothing. The Court of Appeal rejected this interpretation because the policy does not use the words “plus,” “offset,” “subtract,” “minus,” or the like. According to the Court, the plain language of the policy does not support subtracting the net loss from the operating expenses. Instead, the insured is entitled to its operating expenses (a positive number), in addition to its net income (which would be zero if the insured was operating at a loss).
Mercury contended that this interpretation would read the “Net … Loss” language out of the policy’s definition of “business income.” The Court rejected this argument, noting that in the event of a net loss, the insured’s entitlement to benefits of “net income” is zero, thus taking into account the phrase “Net … Loss.”
The Court further noted that even if Mercury’s interpretation were reasonable, an ambiguity would exist, and that ambiguity would have to be resolved in the sense the insurer believed the insured understood the policy when the contract was made. Given the language of the provision, it would be objectively reasonable for the insured to believe the policy covered both its lost income stream and the costs of ongoing expenses, since those problems are to be expected following a loss and are mentioned in the policy language. Thus, any ambiguity would be resolved in favor of the insured.
Finally, the Court noted that a business should not have to be concerned that poor performance for one or two years prior to a covered loss will eliminate coverage under a business interruption provision. Such would make it pointless for the business to purchase the additional coverage.
Comment
Considering that this case involved an issue of first impression in California, that it dealt with policy language common to most business interruption policies, and that a number of insured businesses are likely operating at net losses as a result of the economic recession, this decision could have significant pro-insured consequences for business interruption claims made in California over the months and years to come.