Daily Development for
By: Patrick A.
Randolph, Jr.
Elmer F. Pierson Professor of
Of Counsel: Blackwell Sanders Peper Martin
Kansas City,
prandolph@cctr.umkc.edu
Readers are encouraged to respond to or criticize this
posting.
INSURANCE; BUSINESS INTERRUPTION INSURANCE; LAW PRACTICE: A
law firm may not claim under its business interruption coverage for flooding
conditions that impair, but do not prevent, lawyers from working, even when the
lawyers divert considerable non-billable hours dealing with the consequences of
the flooding.
Buxbaum v.
When employees came to work at the law office following the
weekend, they found two inches of standing water on the floor, ruined carpets
and furniture, and the computer system crashed due to the flooding.
The insurer promptly paid the property damage claim under
its policy, but balked at the firm's claim under the business interruption
coverage provided in the policy.
Ultimately it agreed to pay $3,200 of the firm's claimed $6,800 in
damages on this score, although the company continued
to maintain that it owed nothing at all.
The law firm sued for breach of contract and bad faith
failure to settle the claim. A trial
court granted summary judgment to the insurer, and the law firm appealed.
On appeal: Held: Affirmed.
The appeals court concluded that coverage was available
under the business interruption insurance only when it was clear that the
insured law firm had "suspended operations." That did not happened here. The attorneys in the office worked through
the flooded conditions. Although they
billed far fewer hours to client work than normal, they did bill some work to
client files.
Here is the language of the policy:
"[The insurer] wioll pay for
the actual loss of Business
income [the insured] sustain[s] due to the necessary suspension
of [its] operations during the 'period of restoration'" The suspension
must be caused by direct physical loss of or damage to property at the premises
. . . "
"The insurer will reduce the amount of [the insured's]
Business income loss . . . to the extent [the insured] can resume its
operations, 'in whole or in party, by using damaged or undamaged property . . .
"
The court noted that the term "necessary suspension of
operations" is not defined in the policy.
Citing Webster's Dictionary, the court noted that suspension is commonly
understood to mean a complete cessation of activity, albeit temporary. The court cited cases in
In one case cited by the court, a motel did not recover for
interruption in business when a local volcano (St. Helen's) erupted and the
motel was covered with six inches of ash.
Rooms remained available for rent.
The court cited a large number of other cases (undoubtedly
supplied by the insurer) that also involved interference with the conduct of
business, but not a complete cessation.
Here, even though the three affected attorneys devoted most
of their working hours during the three days following the flood to coping with
the flood damage, and even though one of the attorneys did work at all on one
of those days, the court concluded that, taken as a whole, the firm remained in
business during that time. Some client
billing went on.
In response to the argument, made in one case cited by the
insured, that to read the clause as to pay only for cessation of business would
encourage the insured to stay closed to create damages, the court noted that
the policy required the insured to make reasonable efforts to resume business
as promptly as possible, and that failure to do so would reduce coverage to
that time when business actually was stopped as a consequence of the insured
event.
Comment 1: The
insured in this case had another office in another nearby city, but the court,
and the attorneys, of course, could have worked from home or that office. But the court makes nothing of that
fact. It appears that if this office had
been completely closed, and the attorneys rendered unable to function, the
court likely would have awarded damages.
This, however, is only the editor's speculation.
Comment 2: The
catalogue of cases reviewed by the court gives us a nice insight into the
insurer's precedent file, and is worth studying for anyone engaged in this type
of litigation.
Comment 3: It
appears that business interruption insurance of the type involved here is
wholly inappropriate for a law firm setting.
Lawyers who seriously wish to be insured for business interruption, and
who are paying an insurer to provide it, ought to demand some alternative and
much clearer phrasing of when a claim arises and to what degree.
Comment 4: The editor, on general principles, is uncomfortable with the law firm taking an appeal in this case over the question of $3000 claim lost at the trial court level. The burden borne by the public in the resolution of this case must have exceeded by some multiple the $3000 at issue. But that equation is probably true in a large number of cases, so the editor won't carp all that much.
Readers are urged to respond, comment, and
argue with the daily development or the editor's comments about it.
Items in the Daily Development section
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