A New York trial court has ruled that a mass tort law firm could recover its lost business income from its insurance company, as determined from the clients who would have retained the firm's services but for a fire in its offices that led it to stop its marketing efforts for several months.
The Case
A fire on August 22, 2013 destroyed the 28th floor of the offices of Bernstein Liebhard LLP, on which its mass tort law practice, personnel, files, firm-wide computer servers, and telephone switches were located. As a result, the firm shut down its marketing efforts (mass tort television advertising) from August 2013 to March 2014.
On July 23, 2014, the firm submitted a claim for lost business income to its insurer, Sentinel Insurance Company Limited, under a policy that covered the period August 1, 2013 to August 1, 2014. The firm's claim was for $27 million, based on what it said was lost income from several hundred mass tort clients who failed to retain the firm during the 12-month period after the fire.
Sentinel denied the claim, and the firm sued.
The firm moved for partial summary judgment on its sole cause of action for breach of the lost business income provision of the Sentinel insurance policy.
The parties agreed that the Sentinel policy provided that income had to be "earned" during the applicable 12-month cutoff period. The parties disputed, however, when the firm "earned" a fee.
The Sentinel Policy
The Sentinel policy defined:
Business Income
as:
Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no direct physical loss or physical damage had occurred.
The policy limited recovery for business income losses to 12 months after the date of the damage.
The Trial Court's Decision
The trial court granted the firm's motion.
In its decision, the trial court explained that the firm had the capacity, lawyers, and staff to prosecute the cases for which it would have been retained during the applicable period, but the equipment damaged by the fire prevented it from taking those cases. Thus, the trial court said, but for the fire, the firm "would have earned its fees when those cases settled or were tried to verdict, possibly years later."
The trial court rejected Sentinel's argument that because every contract provision had to be given meaning, such an interpretation rendered the 12-month limitation period ineffectual. The trial court reasoned that an economist or other expert "could identify the relevant existing mass tort cases during the 12-month period, and opine as to the present value of those cases, despite the fact that the amount of the loss may not have been determinable until years after the fire."
In the trial court's opinion, to deny the firm coverage "would be to punish it for its business model" – a "mass tort business" paid "on a contingency-fee basis, as opposed to a traditional hourly basis."
The trial court found that none of the firm's business concluded in one year, and that Sentinel had issued the policy, accepted the firm's premium payments, and insured its business income losses knowing that the firm was in the business of representing mass tort clients on a contingency-fee basis.
The trial court concluded that the firm's losses incurred during the 12-month period following the fire could be "calculated as the expected revenue that would have resulted by way of settlement or award from the clients' cases that [the firm] would have initiated during those 12 months."
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].