Valuing Commercial Insurance Claims Arising from Superstorm Sandy

Jared Zola

Zola, JaredOn April 4, 2013, I spoke at the @NYLawJournal and @JAMSADR event “Commercial Insurance Claims Arising from Super Storm Sandy: Is There a ‘New Normal’?” I was the policyholder attorney voice on the second panel, which focused its discussion on “Quantum: Provisions & Proof” in connection with Sandy claims.

The moderator began our panel discussion by asking me the following question:

Jared, based on what you have seen to date, what do you expect will be the most contentious valuation issue arising from Sandy claims?

image by Creative Commons licenseWhile “most contentious” is difficult to predict, I responded that we expect to see significant disputes calculating insureds’ “actual loss sustained.” Commercial property insurance policies typically contain provisions stating how business interruption losses are to be measured. They often address the issue in terms of the “actual loss sustained,” which is frequently measured in terms of either (i) the net reduction in gross earnings minus expenses that do not necessarily continue, or (ii) the net profit that is prevented from being earned plus necessary expenses that continue during the period of interruption.

To measure “actual loss sustained,” insurers frequently rely on an insured’s internal projections and historical profit and loss data. While projections and historical data may be useful factors in connection with certain business interruption claims, these factors may not provide enough information to properly assess an insured’s business loss. An insured’s pre-loss projections are often conservative. Many companies follow the old adage that they prefer to “under promise and outperform,” rather than “over promise and underperform.” Likewise, historical profit and loss data may not account for an insured’s recent upgrades, marketing efforts, advertising campaigns, or changes in market conditions—all of which may result in higher future profits and earnings than an insured realized historically. By way of example, many service-based companies in the Greater New York area expected record sales in early November 2012 stemming from what was expected to be the most heavily attended New York City Marathon in history. An insured’s augmented earnings stemming from the marathon would not be reflected in historical data.

Measuring an insured’s “actual loss sustained” following Superstorm Sandy may be thorny because of the diverse array of businesses impacted. A single Manhattan city block may house manufacturing facilities, hotels, restaurants, event production spaces, mid-construction real estate projects, and retail stores—just to name a few. Measuring an insured’s “actual loss sustained” is inherently subjective because no one can know for certain what an insured’s earnings or profits would be had its operations not been affected by Sandy. Thus, absolute precision typically is not required of an insured, but rather a reasonable approach to projecting the loss. Policyholders and their counsel should endeavor to educate insurers about the nature of their business and illustrate that “actual loss sustained” is not a one size fits all measurement.

When policies indicate that the “actual loss sustained” measurement is the difference between actual earnings or profits and, in essence, what otherwise would be expected, insureds frequently measure their loss by comparing the income they would have generated without the related disaster occurrence to the income they actually generated. This measurement may result in a lower insurance recovery than the law permits. An insured should consider measuring its loss not based on what it would have made but for Sandy, but based on what it would have made had its operations not been affected by Sandy. In Levitz Furniture Corp. v. Houston Casualty Co., the court explained that the policy “does not exclude profit opportunities due to increased consumer demand created by” an insured peril. In other words, the measurement may not properly be characterized as the income that an insured would have generated but for Sandy. Absent a clear exclusion, policy language describing “actual loss sustained,” in part, as the “probable experience” thereafter had no loss occurred supports a conclusion that an insured’s loss should be measured based on what it would have made had its operations not been affected by Sandy. Interpreting this clause as meaning the income that an insured would have generated but for Sandy would conflate the separate and distinct concepts of “loss” and “occurrence.” We recognize that at least one court post-Katrina rejected this position, but this issue may be ripe for adjudication in New York or New Jersey following Sandy.