Business Income Loss Must be Caused by Covered Peril – Understanding Business Interruption Claims

First party property insurance litigation is sometimes an all or nothing affair. In Scottsdale Ins. Co. v. Sally Group, LLC, 2012 WL 1144577 (S.D. Tex. April 3, 2012), a cigar bar operator discovered mold in its humidor and reported a claim to its insurer. The bar, humidor and inventory were eventually demolished to remediate the mold conditions.

According to the testimony taken during the litigation, the bar’s humidification system never worked properly, and the owners knew of the failure prior to the policy’s inception. The water damage, however, was discovered during the policy period. Scottsdale denied payment for the property damages and business income loss, asserting that the loss was not the result of a fortuitous or accidental event.

The bar argued that although they knew that the humidifier did not operate properly, the system failed and leaked causing the excess humidity and mold. The court found that there was not enough evidence that the mold or humidity was caused by a breakdown or failure of the equipment, but rather as the result of the humidifier’s improper installation and operation.

With respect to the bar’s business income loss, the bar claimed reimbursement for ongoing operational expenses that it incurred and would continue to incur in order to mitigate any continuing damages to the premises.

The Policy’s Business Income (And Extra Expense) Coverage Form (Form CP 00 30 06 07), provides:

A. Coverage

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 premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.

The court denied the bar’s business income claim, holding that recovery of business income loss requires the damages to be caused by a covered peril and not excluded under the policy:

The Business Income (and Extra Expenses) Coverage Form (CP 00 30 06 07) only covers loss or damage “caused by or result[ing] from a Covered Cause of Loss.” Therefore, the exclusions in the Cause of Loss—Special Form (CP 10 30 06 07) apply. Loss to personal property cannot be recovered if due to dampness or dryness of atmosphere, as occurred in this case. Furthermore, Scottsdale will not pay for loss or damage caused by or resulting from “[c]ontinuous or repeated seepage or leakage of water, or the presence or condensation of humidity, moisture or vapor, that occurs over a period of 14 days or more.” Both of these scenarios occurred here, thus exempting Rio 24’s loss from coverage.