Every Word Matters in a Property Insurance Policy

“No matter what people tell you, words and ideas can change the world.”
—Robin Williams

Carefully reading your insurance policy is crucial because the interpretation of just one word can impact whether a policy provides coverage for your loss. Sometimes coverage can turn on a simple conjunction such as the word “and.”

This was the situation before a California federal district court in Mullins v. N.Y. Marine & General Insurance Company.¹

In this case, the insured was the owner and operator of the nine-hole Adams Springs Golf Course in Cobb, California. A fire destroyed a portion of the property in September 2005 damaging the golf course property, buildings, and personal property.²

After the fire, the insured filed a claim for loss of business income in the amount of $584,206 under the commercial property insurance policy, which provided coverage for business income loss with a $500,000 limit for business income and extra expense combined.

The insurance carrier issued the following payments:

Business Income  $   2,709.98
Business Income  $107,708.35
Extra Expense       $266,603.95

After this payment of $377, 022.28, there was $122,977.72 remaining as the policy limit applicable to the business income claim.

The policy’s Business Income coverage provided:

A. Coverage
1. Business Income
Business Income means the:
a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and
b. Continuing normal operating expenses incurred, including payroll. . . .
We [the insurance company] will pay for the actual loss of Business Income you [the named insured] sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’

The parties’ dispute was over the interpretation of the word “and” in the above provision, and the insured’s entitlement to $122,977.72.

The insured argued that business income meant two distinct components of business income: (1) net income and (2) continuing operating expenses, and that recovery of one did not offset the other.

The insurance carrier’s contrary position was that net income and continuing operating expenses should be added together to determine business income. The insurance carrier also argued that any net loss should be deducted from the amount of continuing operating expenses when calculating the payout for lost business income.

After cross-motions for summary judgment, the district court ruled in favor of the insured and held the insured was entitled to $122,977.72. The district court relied on a California Court of Appeals case, Amerigraphics, Inc. v. Mercury Casualty Company,³ where the court interpreted policy language nearly identical to the policy here and held “that under the plain meaning of this policy, an insured is entitled to be paid under both subparts without having to offset the two amounts in the event operating expenses exceed net income.”⁴ The court of appeal explained that the policy did “not use the words ‘plus,’ ‘offset,’ ‘subtract,’ ‘minus,’ or the like” but used the word “and.”⁵ Thus, the district court agreed with the court of appeal and reasoned that the policy covered “two distinct components”: net profits and continuing operating expenses.⁶

The lesson to be learned from this case is not only to “Read the Full Policy” (RTFP) as Chip Merlin always tells us to do, but to RTFP carefully. Just one word can make a difference.
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¹ Mullins v. N.Y. Marine & General Ins. Co., No. 17-CV-02518, 2017 WL 6539800 (N.D. Cal. Dec. 21, 2017).
² https://www.record-bee.com/2015/09/18/watching-the-start-of-the-valley-fire-at-adams-springs/
³ Amerigraphics, Inc. v. Mercury Casualty Co., 182 Cal. App. 4th 1538 (2010).
⁴ Id. at 1542.
⁵ Id. at 1552.
⁶ Mullins, 2017 WL 6539800 *3.