Coverage Quiz (Q2 2022)


By Al Haverkamp of Lucas & Haverkamp

1Amerigraphics Inc.’s (“AGI”) business premises flooded causing suspension of business operations for about 6 months. At the time of the flood, AGI had a property insurance policy with Mercury Insurance. Mercury’s policy included “Business Income” coverage. This coverage provided that Mercury would, during the period of suspension of operations, pay AGI (i) “its net income that would have been earned” but for the flood and (ii) continuing normal operating expenses incurred. For a few years AGI had been profitable, but just before the flood the business had a downturn. As a result, projected expenses ($300k) exceeded projected income ($150k) during the suspension period for a projected loss of $150k. Actual expenses ($76k) exceeded actual income during the suspension period by $46k. Mercury denied coverage, noting these figures showed AGI did not sustain additional operating losses during the period of suspension. In actuality, AGI lost less during the flood suspension period than if the flood hadn’t occurred. Is there coverage?
Yes. The Court found Mercury’s obligation to cover “normal operating expenses” was independent from whether or not AGI was projected to or did have positive net income during the suspension period. The Court noted any insured facing the prospect of a catastrophic event would face two distinct problems: (1) a loss of money coming into the business; and (2) payment of ongoing fixed expenses even though no money is coming in. There was nothing in the policy which suggested to an insured that if the business is not earning a profit it should not expect coverage for its continuing expenses. The Court noted it is not unusual for business income to fluctuate and a business should not have to be concerned that if it does poorly prior to a catastrophic event then it will not be paid anything under the Business Income coverage. See Amerigraphics, inc. v Mercury Ins. (2010) 182 Cal. App. 4th 1538