A recent California appellate court ruling overturned a long-held understanding and application of business income policies in situations where an insured that was completely shut down after an insured event was projected to operate at a net loss during the period of restoration. The ruling will potentially have an impact on Calif. insurers and insureds, and it may also have an impact on claims outside of the state.

In Amerigraphics, Inc. v. Mercury Casualty Company, the insured suffered flood damage to its leased premises and printing equipment and made a claim for its continuing operating expenses during the period of restoration. An analysis of the insured’s operating history and other information regarding anticipated sales determined that absent the flooding, Amerigraphics’ operating expenses would have exceeded revenues resulting in a projected operating loss of approximately $159,000. The actual operating results during the period of restoration produced an operating loss of approximately $47,000. Based on these projections and actual results, Mercury determined that the insured had not suffered a business income loss because the actual operating loss was less than the projected operating loss and that the actual restoration period operating expenses were less than the projected operating loss.

Faulty Interpretation

The claim and other issues were not resolved to Amerigraphic’s satisfaction, and a lawsuit was filed against Mercury. As to Mercury’s interpretation of the business income policy, a pre-trial judicial determination ruled that Mercury’s evaluation was incorrect and that the projected operating loss should not have been offset against the actual continuing operating expenses. The court ruled that the insured should have been paid its actual restoration period operating expenses and that the projected operating loss should have been ignored. The ensuing appeal asked for clarification of the policy language of the business income coverage.

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