Business Interruption for Future Business
Business Interruption for Future Business
Can you get business interruption for future business that the company would have done but has not done yet?
I am sometimes asked if a business owner who has had a loss can claim a business interruption loss for new business in which there is no signed contract and the insured has not conducted that type of business before prior to the loss. This last came up when the business owner submitted a business interruption claim and their basis for such a claim is the business that has been lost would have been derived from a relationship with a travel agency who would recruit Greece citizens to vacation here and attend the insured’s therapy clinic. However, prior to the claim, the business owner did not have a signed contract with the travel agency in this regard and had never had a similar venture in which he treated vacationers from other countries as part of their vacation package similar to the business clientele he is claiming he lost due to vandalism.
Typical business interruption coverage looks something like the following:
- Business Income
(1) We will pay for the actual loss of “Business Income” you sustain due
to the necessary suspension of your “operations” during the “period
of restoration.” The suspension must be caused by direct physical “loss”
to property at the described premises, including personal property in the
open (or in the vehicle) within 100 feet, caused by or resulting from any
Covered Cause of Loss.
(2) We will only pay for loss of “Business income” for a maximum of 12
consecutive months after the date of direct physical “loss.” This
Additional Coverage is not subject to the Limits of Insurance.
- Extended Business Income
If the necessary suspension of your “operations” produces a “Business
Income” loss payable under this policy, we will pay for the actual “loss”
of “Business Income” you incur during the period that:
(1) Begins on the date property except finished stock is actually repaired,
rebuilt or replaced and “operations” are resumed; and
(2) Ends on the earlier of:
(a) The date you could restore your “operations” with reasonable
speed, to the level which would generate the “Business Income”
amount that would have existed if no direct physical “loss” or
damage had occurred; or
(b) 30 consecutive days after the date determined in h.(1) above.
However, Extended Business Income does not apply to “loss” of “Business
Income” incurred as a result of unfavorable business conditions caused by
the impact of the Covered Cause of Loss in the area where the described
premises are located.
Loss of “Business Income” must be caused by direct physical “loss” or
damage at the described premises caused by or resulting from any Covered
Cause of Loss.
Under the definitions section of the policy, “Business Income” is defined as follows:
“Business Income” means the:
- Net Income (Net Profit or Loss before income taxes) that would
have been earned or incurred; and
- Continuing normal operating expenses, including payroll, incurred.
It is a basic concept of Florida law that Plaintiffs have the burden of proving their damages and that such damages must be proven with certainty before they are entitled to recover. According to 17 Fla. Jur. 2d, Damages § 16, (1999), “damages must be shown with a degree of certainty that satisfies the mind of a prudent and impartial person and cannot be left to speculation and conjecture, since damages which are uncertain, speculative, or conjectural cannot be recovered….” Furthermore, Florida law requires that damages not only be certain but the proof of such damages must be sufficient. According to 17 Fla. Jur. 2d, Damages §138 (1999), “evidence of specific facts and circumstances from which damages may be ascertained with certainty is a prerequisite to their recovery.” More specifically, when a business is claiming a loss of anticipated profits, Florida law requires profits must be established with reasonable certainty before they will be allowed. 17 Fla. Jur. 2d., Damages § 83, (1999)
These same general requirements for proving damages in Florida also apply to proving loss of income or profit under a Business Interruption policy or claim. According to Couch on Insurance, § 185:17, “[i]n order to recover under a business interruption policy, the insured need not prove some profit prior to loss, and loss may be based on profit expectancies, where such expected profits are not based on speculation but on real circumstances.” For this requirement, Couch cites a Florida case, National Union Fire Ins. Co. v. Scandia of Hialeah, Inc., 414 So.2d 533 (Fla. 3DCA, 1982), for the holding that business interruption claims for expected profits cannot be based on speculation but must be based on real circumstances. Given these general principals of Florida law, we must analyze similar cases regarding business interruption to determine how much proof is required to make the damages certain and specific.
In Dictiomatic, Inc. v. United States Fidelity & Guaranty Co., 958 F. Supp. 594 (U.S. Dist Ct. S. Dist. Fla., 1997), the court denied a business interruption claim for lost profits where the court determined the claim was too speculative. In this case, the insured was a manufacturer of translators whose office building was damaged by Hurricane Andrew. Prior to Hurricane Andrew, the evidence established that the company was in debt with an overstock of undesirable products (a new translator) and attempting to sell these products through a speculative marketing scheme which had never proven successful. Furthermore, the company did not have sufficient capital to finance the development, manufacture, or marketing of the new model translator.
The insured claimed that the companies poor sales would have been rejuvenated by the sale of their new translator, as well as a palm top computer which had also not yet been manufactured, had Hurricane Andrew not damaged and interrupted their business. The court found that the claim was speculative because the insured did not have a realistic basis to prove that the projected sales of the translator and computer, calculated for four months after the hurricane, would meet the figure claimed. The insured only submitted as proof of their claim summaries of projected sales and sworn statements under oath which proved to be unreliable. The court reviewed the general law of recovering lost profits in Florida and found that “a claim for lost profits must be shown with a reasonable degree of certainty.” Because the insured had failed to adequately meet their burden of proof, the business interruption claim for the above was denied.
Given this general rule of law, the issue then becomes would the claim for loss of the business be considered speculative in the absence of a signed contract to that effect under general insurance principles regarding business interruption coverage. According to American States Ins. Co. v. Creative Walking, Inc., 16 F. Supp.2d 1062 (U.S. Dist. Ct. E. Dist. MI, 1998) where an insured argued that it’s losses of business income were greater because it lost the opportunity to procure valuable contracts during two months in 1996, the court held that this was too speculative as a matter of law. The insured argued that it lost the opportunity to procure valuable contracts for two months due to the loss while the business was suspended, but the court held “proof of actual facts which present a basis for a rational estimate of damages without resorting to speculation is required.” The court went on to find that “[i]t is impossible to say with a degree of assurance what contracts Defendant would have procured or how much income any contracts that were procured would have generated” and therefore the court found no basis for the business interruption claim.
The Tenth Circuit similarly found that a lack of a contract in a new business venture, absence other proof, would preclude a business interruption claim in Travelers Ins. Co. v. D&D Contracting, 962 F.2d 971 (10th Cir. 1992). This case involved an insurer who brought a declaratory judgment action against the insured and the trial court granted summary judgment in favor of the insurer. This judgment was appealed but upheld by the appellate court when they found that the affidavit submitted by the insured, among other things, did not support the speculative claim of over $9 million for business interruption in connection with gas line work. The court found, referring to the gas line business, that such a business was prospective and that the insured “had no contracts for such work nor had ever done such work in the past in the area involved. Such a speculative projection falls short of the standards set forth in the policy calling for “due consideration” of the “expenses” of the insured’s business prior to the fire.”
This case makes it clear that an insured cannot speculate as to the amount of business that may be derived from future business where there is no contract for such work nor had this type of work ever been done in the past. If the business owner does not have a signed contract the claim would likely be considered speculative and would not be considered a proper basis for damages under a business interruption claim. Furthermore, if the business owner has never had a similar business relationship for that type of business, it is likely that a court will find that the business owner has failed to meet its burden of proof with certainty and specificity as require by Florida law.
Courts generally will not allow claims for business interruption that are considered “speculative” in that there are no real circumstances by which to base a claim for business interruption for determining how much the insured would have actually made had the business not suffered the loss. Failing to have a signed contract and not having actually done the same or similar work in the past means that the estimation of damages under the business interruption claim is only a guess at best. Therefore, it is possible that the business interruption claim presented for future business that the business has never done before would be considered speculative for having no genuine basis for evaluation and be considered invalid under principles and cases of insurance law due to a lack of proof or foundation to prove such damages accurately.