Verrill Farms, LLC v. Farm Family Casualty Insurance Co.

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13-P-1747 Appeals Court
VERRILL FARMS, LLC vs. FARM FAMILY CASUALTY INSURANCE COMPANY.
No. 13-P-1747.
Middlesex. May 2, 2014. - November 4, 2014.
Present: Trainor, Fecteau, & Carhart, JJ.
Insurance, Business owner's policy, Amount of recovery for loss,
Construction of policy. Contract, Insurance.
Civil action commenced in the Superior Court Department on
September 17, 2010.
The case was heard by Kimberly S. Budd, J., on motions for
summary judgment.
Barry P. Fogel for the plaintiff.
William A. Schneider for the defendant.
TRAINOR, J. The plaintiff, Verrill Farms, LLC (Verrill
Farms), owns and operates a retail farm store in Concord. The
defendant, Farm Family Casualty Insurance Company (Farm Family),
issued a "Businessowners Advantage Insurance Policy" (policy)
effective August 4, 2008, to August 4, 2009, to Verrill Farms.
On September 20, 2008, Verrill Farms suffered a fire loss to its
2
farm store. Within two days of the fire, Verrill Farms reopened
its business at alternate locations at reduced capacity. Within
another month, the business had resumed nearly full capacity in
temporary facilities at nearby locations. After the fire and
during the process of restarting the business at the alternate
locations, no employees were laid off. All employees who
remained on the payroll were involved in operations that allowed
Verrill Farms to maintain its business and generate income.
Verrill Farms submitted a claim under the policy for loss
of business income, based on its loss of net income (net profit
or loss) in the year after the fire, which it believed the
policy covered under the loss of business income coverage. Farm
Family paid a sum considerably less than the claim made by
Verrill Farms, based on its interpretation of what expenses can
be included in a calculation of net profit or loss in order to
determine loss of business income under the policy.1 Farm Family
describes the question as whether it has to "pay" Verrill Farms
for the cost of its ordinary payroll expense during the period
1
On January 30, 2010, Verrill Farms made a claim of
$626,219 to Farm Family for loss of business income, on which
Farm Family paid $317,825. Verrill Farms filed a complaint
seeking the balance of that claim, and a declaration that its
interpretation of the Policy was correct. Farm Family filed a
counterclaim for declaratory relief. The parties filed cross
motions for summary judgment, stipulating that "this case does
not concern any dispute between the parties over the amount of
the loss, and that issue is not before the Court. . . . After
the Court interprets the policy the parties can revisit the
issue concerning the amount of loss and conclude the claim."
3
of restoration, beyond the sixty-day limit contained in the
policy. See note 7, infra. The Superior Court judge declared
that Farm Family did not have to pay the cost of ordinary
payroll beyond the sixty-day limit and granted summary judgment
in Farm Family's favor. This, however, is not what Verrill
Farms was seeking to recover and misapprehends what the policy
provision was intended to accomplish.
Verrill Farms never made a claim for a direct payment of
the cost of its ordinary payroll; it sought only to include the
cost in its calculation of net profit or loss for the
appropriate time period. The sole question before us,
therefore, is whether the cost of ordinary payroll can be
included in the calculation of net profit or loss in order to
determine the loss of business income, when the business has
resumed operations at temporary locations during the restoration
period. We conclude that it can, and that under the factual
circumstances of this case, loss of business income can only be
determined by including the expense of ordinary payroll, and
other unreimbursed continuing expenses required by the
resumption of operations, in the calculation of net profit or
loss.
Standard of review. The interpretation of an insurance
contract is a question of law, Boston Gas Co. v. Century Indem.
4
Co., 454 Mass. 337, 355 (2009), which we review de novo.2 See
Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486, 495 (2012).
"The interpretation of language in an insurance contract 'is no
different from the interpretation of any other contract, and we
must construe the words of the policy in their usual and
ordinary sense.'" Metropolitan Property & Cas. Ins. Co. v.
Morrison, 460 Mass. 352, 362 (2011), quoting from Boston Gas Co.
v. Century Indem. Co., supra. "Every word in an insurance
contract 'must be presumed to have been employed with a purpose
and must be given meaning and effect whenever practicable.'"
Allmerica Fin. Corp. v. Certain Underwriters at Lloyd's, London,
449 Mass. 621, 628 (2007), quoting from Jacobs v. United States
Fid. & Guar. Co., 417 Mass. 75, 77 (1994). "The objective is to
'construe the contract as a whole, in a reasonable and practical
way, consistent with its language, background, and purpose.'"
Massachusetts Property Ins. Underwriting Assn. v. Wynn, 60 Mass.
App. Ct. 824, 827 (2004), quoting from Gross v. Prudential Ins.
Co. of America, 48 Mass. App. Ct. 115, 119 (1999). "If the
meaning of the contract language is unclear, we 'consider what
2
In an action with cross motions for summary judgment,
"[w]e ask whether the evidence, in the light most favorable to
the party losing the contest of cross motions, and the
controlling law entitle the prevailing party to judgment."
Audubon Hill S. Condominium Assn. v. Community Assn.
Underwriters of America, Inc., 82 Mass. App. Ct. 461, 465
(2012). The parties assert there are no issues of material
fact, and as a result, we review the pure issue of law.
5
an objectively reasonable insured, reading the relevant policy
language, would expect to be covered.'" Metropolitan Life Ins.
Co. v. Cotter, 464 Mass. 623, 635 (2013), quoting from Hazen
Paper Co. v. United States Fid. & Guar. Co., 407 Mass. 689, 700
(1990).
Discussion. We begin our analysis with a brief outline and
explanation of the relevant policy provisions. The specific
policy at issue here is termed a business owners special
property coverage form. In addition to coverage for physical
loss or damage to the covered party, the policy contains, as
relevant to our inquiry, additional coverage for loss of
business income and extra expense.
In its most basic form, a commercial property casualty
policy insures against the risk of damage or loss of a
business's real and personal property. See 1 Cozen, Insuring
Real Property §§ 1.05 & 3.01 (2014). When a business's property
is damaged or lost, it often incurs additional consequential
losses such as increased costs or lost profits which are the
direct result of their inability, or partial inability, to
conduct their business operations. Id. at § 3.01. Additional
coverage can be negotiated to cover those economic losses.
6
Loss of business income.3 The general nature of loss of
business income, or business interruption,4 insurance is that it
acts in concert with, and as a supplement to, commercial
3
Section A.5.f. of the policy reads in pertinent part:
"Business Income
"(1) Business Income
"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 of or
damage to property at the described premises.
". . .
"We will only pay for loss of Business Income that you
sustain during the 'period of restoration' and that occurs
within 12 consecutive months after the date of direct
physical loss or damage. We will only pay for ordinary
payroll expenses for 60 days following the date of direct
physical loss or damage.
"Business Income means the:
"(i) Net Income (Net Profit or Loss before income taxes)
that would have been earned or incurred if no physical loss
or damage had occurred, but not including any Net Income
that would likely have been earned as a result of an
increase in the volume of business due to favorable
business conditions caused by the impact of the Covered
Cause of Loss on customers or on other businesses; and
"(ii) Continuing normal operating expenses incurred,
including payroll."
4
See, e.g., Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App.
4th 434, 437 (2002) ("The policy also provided coverage for loss
of business income, commonly called business interruption
insurance"); Wood Goods Galore, Inc. v. Reinsurance Assn. of
Minnesota, 478 N.W.2d 205, 207 (Minn. Ct. App. 1991) (using both
terms to describe coverage in a property loss policy).
7
property casualty insurance. Cozen, supra at §§ 1.06(4) & 3.01.
The business income or business interruption insurance is
designed to do for the business what the business would have
done for itself had no loss occurred. See Gordon Chem. Co. v.
Aetna Cas. & Sur. Co., 358 Mass. 632, 636 (1971) (acknowledging
that "'the policy [of insurance (Business Interruption)] is
designed to do for the insured in the event of business
interruption caused by fire, just what the business itself would
have done if no interruption had occurred —- no more.' No more
certainly, but also no less" [citation omitted]). See also
National Union Fire Ins. Co. of Pittsburgh v. Anderson-Prichard
Oil Corp., 141 F.2d 443, 445 (10th Cir. 1944) ("The purpose,
scope and legal effect of the insurance contract is to protect
the prospective earnings of the insured business only to the
extent that they would have been earned if no interruption had
occurred . . . . In other words, the policy is designed to do
for the insured in the event of business interruption . . . just
what the business itself would have done if no interruption had
occurred -- no more"). Usually the additional coverage is tied
to the underlying property damage coverage because only business
interruptions or income losses resulting directly from physical
loss or damage to the insured property will be covered.
8
Extra expense.5 Extra expense coverage is intended for
businesses that cannot allow their operations to cease because
of damage to their property. Verrill Farms is typical of the
kind of business "that [would] suffer a permanent loss of
customer goodwill as a result of even the temporary curtailment
of operations. Continuity of service is the key to success for
[these] businesses . . . . Extra expense insurance meets this
need for it reimburses the insured for those expenditures in
excess of normal operating costs that are required to keep the
business going while repairs to the physical property are made"
5
Section A.5.g. of the policy reads in pertinent part:
"Extra Expense
"(1) We will pay necessary Extra Expense you incur during
the 'period of restoration' that you would not have
incurred if there had been no direct physical loss or
damage to property at the described premises. The loss or
damage must be caused by or result from a Covered Cause of
Loss.
". . .
"(2) Extra Expense means expense incurred:
"(a) To avoid or minimize the suspension of business and to
continue 'operations':
"(i) At the described premises; or
"(ii) At replacement premises or at temporary locations,
including relocation expenses, and costs to equip and
operate the replacement or temporary locations.
"(b) To minimize the suspension of business if you cannot
continue 'operations.'"
9
(emphasis in original). Cozen, supra at § 3.04[1], at 3-82 to
3-83. Additionally, the policy includes the appropriate adjunct
requirement that Verrill Farms "[r]esume all or part of [its]
'operations' as quickly as possible."6
Most businesses obtain either business interruption
coverage or extra expense coverage. There are situations,
however, where a business would want to have both types of
insurance protection. Cozen, supra at § 3.04[3]. Verrill Farms
purchased coverage, by virtue of these additional endorsements,
that would allow it to resume operations as quickly as possible
as well as cover any loss of income suffered for a maximum of
twelve months when operations were resumed at a temporary
location.
Ordinary payroll endorsement.7 The policy provision
providing for loss of business income contains an additional
endorsement providing direct payment to Verrill Farms for the
cost of "ordinary payroll expenses." It is the interpretation
6
This duty is reinforced throughout the policy by means of
economic incentives and disincentives. Here, Verrill Farms
immediately moved to a temporary location, following the
policy's directive, and resumed operations elsewhere on a
temporary basis.
7
The provision for "ordinary payroll expenses" contained in
section A.5.f. of the policy reads: "We will only pay for
ordinary payroll expenses for 60 days following the date of
direct physical loss or damage."
10
and application of this provision that is the focus of the
dispute between the parties.
In these types of insurance contracts there are basically
two types of payroll expenses. First, there are a business's
key employees -- directors, executives, managers, employees
under contract, and other employees who are so important that
they must be retained even if the business does not immediately
resume operations. Second, there are ordinary payroll
employees, which are generally all other employees.8 For many
8
The policy here contains the following definition:
"Ordinary payroll expenses mean payroll expenses for all
your employees except:
"(a) Officers;
"(b) Executives;
"(c) Department Managers;
"(d) Employees under contract; and
"(e) Additional Exemptions shown in the Declarations as:
"(i) Job Classifications; or
"(ii) Employees.
"Ordinary payroll expenses include:
"(a) Payroll;
"(b) Employee benefits, if directly related to payroll;
"(c) FICA payments you pay;
"(d) Union dues you pay; and
"(e) Workers' compensation premiums."
11
businesses there is no need to purchase additional insurance to
cover the cost of "ordinary payroll" during a prolonged shut
down.
"In many firms, there are some employees for whom the
employer will not feel a need to continue wages or salary
during an extended interruption. . . . Two endorsements are
generally available that give the insured flexibility with
regard to 'Ordinary Payroll.' These are: (1) ordinary
payroll exclusion endorsement, and (2) ordinary payroll
limited coverage endorsement" (emphasis added).
Huebner, Black, & Cline, Property & Liability Insurance 244 (3d
ed. 1982). Here, Verrill Farms, apparently in an abundance of
caution and business planning, purchased an ordinary payroll
limited coverage endorsement. "With the Ordinary Limited
Payroll Coverage Endorsement, it is possible to add back
ordinary payroll coverage for a limited period of time [here for
60 days]. The reasoning here is that the insured may not desire
to continue to pay employees in the ordinary payroll
classification should the interruption be of long duration; but
if it were relatively short, it would be advantageous to keep
the work force together." Ibid. The purpose of this coverage
is to make a direct payment to the insured of the cost of
ordinary payroll, for a specified period of time, in the event
that the business cannot resume its operations immediately or
not at all during the period of restoration. When the business
is able to restart its operations, a direct payment of the
expense of ordinary payroll is no longer necessary because the
12
business is generating income which pays its payroll expenses.
Cf. Cozen, supra at § 3.02[3][d].
Here, Verrill Farms was able to resume its business
operations at alternate locations, within two days of the fire
at its store. If the business had been unable to resume
operations immediately and therefore unable to generate revenue
to cover the cost of these employees, the limited ordinary
payroll endorsement would have allowed Verrill Farms to receive
direct payment for the cost of ordinary payroll employees, not
to exceed sixty days. If there had been no resumption of
operations and the ordinary payroll employees had been laid off,
there would have been no continuing ordinary payroll expense.
However, because business operations resumed almost immediately,
it was not necessary to lay off any employees. Since the
salaries of ordinary payroll employees were being paid, at all
times, from revenues generated by the resumption of operations,
Verrill Farms made no claim for direct payment pursuant to the
limited ordinary payroll endorsement.
Calculating loss of business income. Both parties agree
that operations covered by the policy were suspended for the
entire period of restoration and that the suspension was the
direct result of physical loss or damage to property at the
13
described premises.9 Both parties also agree that the policy not
only requires the resumption of operations as soon as possible,
see notes 5 & 6, supra, but also that such a resumption of
operations does not prevent a recovery for loss of business
income. The only issue before us, as we have stated earlier, is
therefore the method of calculating loss of business income.
The policy sets out two seemingly contradictory provisions.
First, the policy provision that provides the methodology to
calculate loss of business income presumes that Verrill Farms
will not resume operations during the period of restoration.
See note 3, supra. The policy defines business income as net
profit or loss that would have been earned if there had been no
fire and "continuing normal operating expenses incurred,
including payroll." By defining business income as net profit
or loss and "continuing normal operating expenses incurred,
including payroll" (but not including ordinary payroll), the
policy is providing two separate payments, one for each
category. In this scenario, loss of net income is not
calculated but is determined by projecting what net profit or
loss would have been if there had been no damage to the business
9
The policy defines "operations" as "your business
activities occurring at the described premises." Verrill Farms
was therefore able, and required, to restart operations at an
alternate location and still be covered for loss of business
income until it was able to restart operations at the covered
premises.
14
property. Since net profit or loss is not calculated by
subtracting expenses from gross income, an additional direct
payment is provided for the costs of continuing normal operating
expenses, which is allowed by the policy when business
operations do not resume during the period of restoration. In
an operating business, however, net profit or loss is always
determined by subtracting the costs of materials, wages
(including ordinary payroll), and other charges from gross
income.10 The policy's payment plan must presume that there has
been no resumption of business operations. The policy here
would pay the amount of the projected net profit or loss and an
additional payment of unavoidable continuing expenses during the
period of restoration. See Amerigraphics, Inc. v. Mercury Cas.
Co., 182 Cal. App. 4th 1538, 1554 (2010). Ordinary payroll
expenses are not included in this calculation because they have
presumably been paid separately for a period not to exceed sixty
days and, since the business has not resumed operations, the
10
Gross income has been "distinguished from 'net income,'
which is that portion of the receipts which remain after paying
wages and paying for materials." Black's Law Dictionary 832
(4th ed. 1968). Net profit is "that which remains as clear gain
of [the] corporation, after deducting from its income all
expenses incurred and losses sustained in the conduct and
prosecution of its business." Id. at 1192. Net profit is now
defined as "[t]otal sales revenue less the costs of the goods
sold and all additional expenses." Black's Law Dictionary 1404
(10th ed. 2014).
15
employees have been laid off.11 The policy does not provide a
methodology to calculate loss of business income in the event
that Verrill Farms is able to resume operations at an alternate
location.
Second, and at the same time, the policy requires Verrill
Farms to resume operations as soon as possible, at the same or
alternate location. This requires Verrill Farms to incur the
actual expense of ordinary payroll because these employees are
necessary to continue operations once they have resumed.
The United States Court of Appeals for the Fifth Circuit,
when considering the same apparent contradiction in a policy,
repeated the trial judge's observation that "[t]he policy does
not address 'charges and expenses' in the event of a resumption
of operations and does not clearly state the effect that a
resumption of operations has on the calculation of charges and
expenses." Consolidated Cos. v. Lexington Ins. Co., 616 F.3d
422, 429 (5th Cir. 2010). The court had already noted that the
policy required the resumption of operations as soon as
possible.12 Id. at 427. The court concluded that "[t]he proper
11
If the business did not resume operations within sixty
days but chose to continue paying its ordinary payroll
employees, that expense would similarly not be covered as an
additional expense and could not be used to reduce any projected
net profit. The business would bear the cost entirely of any
retained ordinary employees.
12
The facts in Consolidated Cos. differ from ours only in
that the insured was attempting to use the expenses in "charges
16
reading of a policy term is the one that gives it the meaning
that 'best conforms to the object of the contract.'" Id. at
430, quoting from In re Katrina Canal Breaches Litigation, 495
F.3d 191, 207 (5th Cir. 2007). "The fundamental principle of a
property insurance contract is to indemnify the owner against
loss, that is to place him or her in the same position in which
he would have been if no [fire] had occurred." Ibid., quoting
from Bradley v. Allstate Ins. Co., 606 F.3d 215, 227 (5th Cir.
2010). "This represents 'the reasonable expectations of the
parties in light of the customs and usages of the industry,' In
re Katrina Canal Breaches Litig., 495 F.3d at 207, and the
policy should be construed in accordance with them." Ibid. The
court in Consolidated Cos. determined that
"[i]f the charges and expenses had already been paid by the
revenue of the business, requiring the policy also to pay
them is not placing [the insured] in the same position it
would have been had no damage been suffered. In other
words, the only 'reasonable' reading of the policy in the
light of the goal of making [the insured] whole is that the
policy requires reduction of 'actual loss' by income earned
during the partial resumption of operations. Just as [the
insured] would have paid the charges and expenses out of
its revenue if Katrina had never struck, the policy
provides for [the insured] to pay them, to the extent it
could do so, out of the revenue from partially resumed
operations. Only if revenue did not offset the charges and
expenses would the insurance policy be called upon for
payment."
and expenses" in the calculation of lost profits while also
being paid separately for the same expenses by the insurer. The
insured was, in effect, attempting to be paid twice for the same
expenses; once in the calculation of net profit by reducing
gross income and again by a direct payment for those expenses.
17
Ibid.
Here, Farm Family argues that the necessary expense of
ordinary payroll cannot be included as a deduction from gross
revenue earned during the resumption of operations by Verrill
Farms in order to calculate net profit or loss. The judge
agreed and concluded that the cost of ordinary payroll could
only be reimbursed directly by Farm Family for a sixty-day
period and could not be included as an expense to offset revenue
earned during the period of restoration when Verrill Farms had
resumed operations. The judge's conclusion would have been
correct if Verrill Farms had been unable to resume operations
during the period of restoration. See Amerigraphics, Inc. v.
Mercury Cas. Co., 182 Cal. App. 4th at 1552. The judge's
interpretation, however, does not "construe the contract as a
whole, in a reasonable and practical way, consistent with its
language, background, and purpose." Massachusetts Property Ins.
Underwriting Assn. v. Wynn, 60 Mass. App. Ct. at 827, quoting
from Gross v. Prudential Ins. Co. of America, 48 Mass. App. Ct.
at 119. The judge's interpretation would not put Verrill Farms
in the position it would have been in if no fire had occurred.
This interpretation also does not account for the policy
requirement that Verrill Farms resume operations as soon as
possible. The policy requires Verrill Farms to resume
18
operations as soon as possible but only provides a methodology
to calculate loss of business income which assumes that business
operations would not be resumed. The policy provides no
methodology to calculate loss of business income in the event,
as required by the policy, that Verrill Farms resumed
operations.
By refusing to include the cost of ordinary payroll as a
deduction from gross revenue in the calculation of net profit or
loss, which is the basis to determine loss of business income,
Farm Family is artificially inflating Verrill Farms's net
revenue for the year after the fire. The artificial increase to
net revenue also incorrectly decreases Verrill Farms's actual
loss of business income. Unlike the claim made in Consolidated
Cos. by the insured, Verrill Farms made no claim for direct
payment of the cost of ordinary payroll. Instead it used the
cost of ordinary payroll as an operating expense to offset its
revenue in determining net profit or loss during the period of
restoration.
The only rational reading of the policy, considering the
contract as a whole as well as its purpose of making Verrill
Farms whole, is that it requires the loss of business income to
be determined by the difference between the amount of net profit
or loss earned during the partial resumption of operations and
the amount of net profit or loss that Verrill Farms would have
19
earned had no fire occurred. The gross income earned during the
period of partial resumption of operations (the restoration
period) has to be reduced by the amount of legitimate and
necessary expenses for that period, including ordinary payroll,
in order to determine net profit or loss. Simply put, gross
income must be reduced by the expenses required to earn it in
order to determine net income. Just as Verrill Farms would have
paid the cost of its ordinary payroll (and other continuing
expenses) out of income earned if the fire had never occurred,
the policy requires Verrill Farms to pay these expenses, to the
extent possible, out of income earned during the partial
resumption of operations. Only if the net profit or loss for
this period was less than the net profit that Verrill Farms
would have earned if no fire had occurred would the policy be
called upon to make the payment for loss of business income.13
The judgment is vacated, and the matter is remanded to the
Superior Court for entry of a new judgment allowing Verrill
Farms's motion for summary judgment and denying Farm Family's
motion for summary judgment. The new judgment shall include a
declaration that in the circumstances of this case, loss of
13
Here Verrill Farms claims a net loss in its business
income when compared to the previous year. Even if Verrill
Farms had realized a net profit during the period of
restoration, the policy may still have been required to make up
any short fall of net profit when compared to the net profit of
the previous year.
20
business income can only be determined by including the expense
of ordinary payroll, and other unreimbursed continuing expenses
required by the resumption of Verrill Farms's operation, in the
calculation of net profit or loss.
So ordered.