George's, Inc. v. Allianz Global Risks US Ins. ( 2010 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 09-2220
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George’s Inc., *
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Appellee, *
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v. *
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Allianz Global Risks US Insurance Co., *
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Appellant. *
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Appeals from the United States
No. 09-2248 District Court for the
___________ Western District of Arkansas.
George’s Inc., *
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Appellant, *
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v. *
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Allianz Global Risks US Insurance Co., *
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Appellee. *
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Submitted: January 12, 2010
Filed: March 9, 2010
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Before LOKEN, Chief Judge, JOHN R. GIBSON, and WOLLMAN, Circuit Judges.
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WOLLMAN, Circuit Judge.
George’s Inc. brought this diversity lawsuit against its insurer, Allianz Global
Risks US Insurance Co., arguing that Allianz failed to indemnify George’s for
business expenses and personal property losses as required under the terms of its
insurance policy. The district court denied Allianz’s motion for summary judgment
on the contested business expenses and granted summary judgment for Allianz on
George’s personal property claims. Both parties appealed. Because we conclude that
the policy unambiguously excludes coverage for both claimed losses, we reverse the
district court’s denial of summary judgment on the business expenses claim and affirm
the grant of summary judgment on the personal property claim.
I.
George’s, a poultry processing company with facilities in Cassville, Missouri,
has both property insurance and business interruption insurance through Allianz. In
January and March 2007, ice storms caused a break in electrical service to George’s
Cassville plant, which disrupted production and resulted in a loss of business income.
The power outage also led to the premature deaths of a number of chickens that were
stored in a holding shed before processing. George’s filed a claim under the policy,
and Allianz conceded liability for lost business income and extra expenses totaling
$309,676, minus the deductible.
At issue in this appeal is George’s claim for $154,984 of business expenses in
the form of fixed labor and overhead costs, and $29,989 in personal property losses
from the chickens that perished in its holding shed. According to George’s, the labor
and overhead costs are recoverable under the “extra expense” portion of the policy.
George’s undisputed accounting records show that as a result of the business
disruption, its cost-per-pound of chicken increased from $.0457 per pound to
$.0527—that is, the company produced less chicken relative to its fixed costs.
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George’s derived the figure of $154,984 by multiplying its increased cost-per-pound
by the number of pounds that it produced during the coverage period. It argued that
those costs were recoverable under the following provision:
EXTRA EXPENSE
1) Measurement of Loss:
The recoverable EXTRA EXPENSE loss will be the reasonable and
necessary extra costs incurred by the Insured of the following during the
PERIOD OF LIABILITY:
a) Extra expenses to temporarily continue as nearly normal as practicable
the conduct of the Insured’s business; and
b) Extra costs of temporarily using property or facilities of the Insured
or others, less any value remaining at the end of the PERIOD OF
LIABILITY for property obtained in connection with the above.
2) EXTRA EXPENSE Exclusions. As respects EXTRA EXPENSE, the
following are also excluded:
a) Any loss of income.
b) Costs that normally would have been incurred in conducting the
business during the same period had no direct physical loss or damage
occurred.
The district court concluded that because George’s utilizes a cost-per-pound
accounting system, an ambiguity existed regarding whether the extra expense
provision covered an increase in cost-per-pound. It therefore denied Allianz’s partial
motion for summary judgment on George’s claim for business expenses.
George’s also maintained that the personal property provisions of the policy
covered its lost chickens. The parties disagreed, however, about the effect of the
following two exclusions to the personal property coverage:
C. animals, standing timber, growing crops.
....
O. stock or materials when loss is caused by manufacturing or processing
operations which result in damage to such property while being
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processed, manufactured, tested or otherwise being worked upon (work
in progress).
Allianz contended that the exclusion of animals—expanded in a later exclusion
endorsement to “animals (including eggs)”—unambiguously excluded live chickens
from coverage. The district court agreed with this interpretation and granted Allianz’s
partial motion for summary judgment on the claim for the chickens that perished prior
to processing.
II.
We review the district court’s summary judgment rulings de novo, viewing the
evidence in the light most favorable to the nonmoving party. Source Food Tech., Inc.
v. U.S. Fid. & Guar. Co., 465 F.3d 834, 836 (8th Cir. 2006). The parties agree this
case is governed by Arkansas law.
Interpretation of an insurance policy is ordinarily treated as a legal question by
Arkansas courts. See Elam v. First Unum Life Ins. Co., 57 S.W.3d 165, 169 (Ark.
2001). When the language of the policy is unambiguous, courts will follow the plain
meaning of the policy without resorting to rules of construction. Id. If an ambiguity
exists, the policy is construed in favor of the insured and against the insurer. Smith
v. Prudential Prop. & Cas. Ins. Co., 10 S.W.3d 846, 850 (Ark. 2000). This rule of
construction, however, should not be used to make an insurer liable where the plain
language of the insurance contract denies coverage. Smith v. S. Farm Bureau Cas.
Ins. Co., 114 S.W.3d 205, 206 (Ark. 2003). Rather, an insurance policy should be
construed in its plain, ordinary, and popular sense, and if possible the various clauses
of the contract must be read together, so as to harmonize all of the provisions. Id. at
206-07.
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A.
We turn first to George’s argument that it is entitled to recover as extra
expenses the $154,984 in fixed labor and overhead costs. As discussed above,
George’s does not dispute that it would have had to pay these labor and overhead
costs irrespective of the plant shutdown. Instead, it contends that it experienced an
increase in cost-per-pound because the business disruption caused it to process less
chicken relative to its fixed expenses. Allianz argues that these fixed expenses fit
squarely within the extra expense provision’s exclusion of “[c]osts that normally
would have been incurred in conducting the business during the same period had no
direct physical loss or damage occurred.” We agree.
A straightforward reading of the policy language makes it clear that the extra
expense provision was intended to cover unanticipated outlays related to a business
disruption. Fixed labor and overhead costs do not fit that description. The extra
expense provision is focused instead on unforseen expenditures such as overtime pay
or additional expenses associated with using different facilities, both of which Allianz
concedes are covered. George’s argues that because the term “costs” is not defined
in the policy, coverage for its extra expenses might reasonably be understood to
include an increase in cost-per-pound. It contends that the increased cost-per-pound
is not a normal cost incurred in conducting its business, because the increase is
directly attributable to the interruption caused by the ice storms. George’s further
urges that its interpretation of the policy is augmented by the general accounting
practices of the poultry industry, wherein expenses are commonly expressed in terms
of cost-per-pound.
We find George’s argument to be unpersuasive. A term in an insurance policy
is not ambiguous simply because it is undefined. See Smith, 114 S.W.3d at 207.
Looking only at the words themselves, the ordinary meaning of “costs” is distinct
from the concept of “cost-per-pound,” which as its wording suggests, is an equation
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representing the relationship between cost and total production. A company’s overall
expenditures do not necessarily increase simply because it experiences an increase in
the per-unit cost of its product. But as George’s interprets the policy, it would incur
an extra expense any time that it slowed or stopped production. Moreover, the terms
in the policy must be interpreted in context, and the exclusion of costs that “normally
would have been incurred in conducting the business” plainly precludes recovery of
fixed costs. Although it is undisputed that George’s uses a cost-per-pound allocation
in its own accounting, that is not the language used in the contract. When, as here, the
language of an insurance policy is clear, it is improper for a court to “strain the
construction of ordinary terms in the contract to create ambiguity where one does not
appear.” Arkansas Burial Ass’n v. Dixon Funeral Home, Inc., 751 S.W.2d 356, 357
(Ark. App. 1988).
Our interpretation also harmonizes the various provisions in the policy. At
bottom, George’s claim is one for lost production, not increased expenses; in George’s
own words, “[f]ewer birds processed results in larger labor and overhead cost per
pound to operate a processing plant.” Appellee’s Br. 16. The purpose of business
interruption insurance is to put the insured in the financial position that it would have
occupied if the covered peril had not occurred. See Associated Photographers, Inc.
v. Aetna Cas. & Sur. Co., 677 F.2d 1251, 1253 (8th Cir. 1982). Conceptually, there
are two components to such indemnification: payment for losses in gross earnings and
compensation for unanticipated expenses. The present policy contains separate,
mutually exclusive provisions addressing both categories of liability. The formula for
indemnifying losses in gross earnings—which is not at issue here—does not include
additional, unforseen expenses caused by an insured event; and conversely, the
provision covering extra expenses explicitly excludes “[a]ny loss of income.” By
reading the extra expense provision to cover what is actually a claim for lost
production, however, George’s interpretation eliminates the distinction between the
two provisions, suggesting that one is superfluous. We think the various provisions
of the policy are best harmonized by reading the extra expense provision to exclude
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coverage for a decrease in production relative to fixed costs. Accordingly, the district
court erred in denying Allianz’s motion for summary judgment on this claim.
B.
George’s also claims that the policy’s personal property coverage entitles it to
recover the $29,989 in losses that it sustained from chickens that died in its holding
shed prior to processing. As discussed above, the personal property coverage
excludes “animals (including eggs).”
In an attempt to avoid the clear import of this exclusion, George’s argues that
the chickens in its holding shed should be treated as processing stock and thus
subjected only to the more-limited work in progress exclusion. George’s contends
that there is a jury question on whether, under the terms of the policy, the chickens
ceased to be animals and became stock or materials when transported to its factory for
processing. It cites for support Dyer v. Royal Ins. Co., 150 A.2d 915 (Md. 1959), in
which the Court of Appeals of Maryland concluded that an exclusion for “growing
crops” applied to barley that was still standing in a field but no longer growing.
According to George’s, Dyer suggests that farm goods change their character when
taken off the farm. Whether or not that is a fair characterization of the holding in
Dyer, it is clear that the term “animals” includes live chickens, regardless of their
location. The policy makes no distinction based on the animals’ proximity to the
processing facility, and we will not add a condition that is unsupported by the plain
language of the contract.
Alternatively, George’s maintains that the existence of both the animal
exclusion and the work in progress exclusion creates an ambiguity regarding which
exclusion should apply. This argument mistakenly assumes that there is a conflict
whenever multiple exclusions may apply to the same claim. The presence of two or
more potentially overlapping exclusions, however, is unremarkable. A problem would
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arise only if there were a conflict between an exclusion and a specific grant of
coverage. Because chickens clearly fall into the policy’s exclusion of animals, it is
immaterial whether the work in progress exclusion might also apply and to what
extent it would limit Allianz’s liability. Accordingly, the district court did not err in
granting Allianz summary judgment on the claim for lost chickens.
III.
The grant of summary judgment on the personal property claim is affirmed.
The denial of summary judgment on the business expenses claim is reversed, and the
case is remanded to the district court for entry of judgment dismissing that claim.
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