Fifth Circuit Confirms That Post-Loss Sales Figures Should Not Be Used To Calculate A Business Interruption Loss
April, 2010
In Catlin Syndicate Ltd. v. Imperial Palace of Miss., Inc., No. 09-60209, 2010 U.S. App. LEXIS 5389 (5th Cir. Mar. 15, 2010), the United States Court of Appeals for the Fifth Circuit affirmed a summary judgment ruling in favor of the insurer, holding that post-storm favorable business conditions should not be used to calculate a business interruption loss under Mississippi law.
Facts
Hurricane Katrina damaged the insured’s casino, which was subsequently shut down for several months. However, the casino reopened prior to its competitors, and with few gaming alternatives available, the insured’s post-storm revenues were higher than prior to the storm.
The insurer and the insured disagreed over how to calculate the amount of the insured’s business interruption loss. The relevant part of the policy’s business interruption provision provided:
Experience of the business - In determining the amount of the Time Element loss as insured against by this policy, due consideration shall be given to experience of the business before the loss and the probable experience thereafter had no loss occurred. (Emphasis added.)
The insurer argued that only historical sales figures should be considered when calculating the business interruption loss. In other words, the business interruption calculation should be based on net profits that the insured would probably have earned if Hurricane Katrina had not occurred.
The insured, however, argued that its sales figures after reopening should also be taken into account. Thus, the insured argued that the business interruption calculation should be based on an assumption that Hurricane Katrina occurred and damaged others, including its competitors, but did not cause damage to the insured’s casino.
Analysis
Although decided under Texas and not Mississippi law, the Fifth Circuit relied on its prior decision in Finger Furniture Co., Inc. v. Commonwealth Ins. Co., 404 F.3d 312 (5th Cir. 2005), which addressed a materially identical business interruption provision. In Finger Furniture, the insurer argued that post-storm profits should be considered to show that the insured did not have an actual loss sustained. Rejecting the insurer’s position in Finger Furniture, the Fifth Circuit stated that “[t]he strongest and most reliable evidence of what a business would have done had the catastrophe not occurred is what it had been doing in the period just before the interruption.” In Imperial Palace, the Fifth Circuit rejected the insured’s position and reaffirmed its holding in Finger Furniture, holding that a business interruption loss should be based on historical sales figures and not on post-storm sales figures.
Learning Point
Under Mississippi law, when a catastrophe disrupts the entire local economy but creates favorable business conditions and a post-storm economic uplift for the insured, the insured’s business interruption loss should be calculated based on the insured’s historical sales and the assumption that the storm did not occur. The insured’s post-storm increase in sales should not be allowed to increase the insured’s claimed business interruption loss, nor should the calculation be based on an assumption that the storm occurred but did not damage the insured.
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