The Fifth Circuit Court of Appeals recently issued an opinion in the case of WMS Industries v. Federal Insurance Co., affirming the U.S District Court for the Southern District of Mississippi’s ruling in favor of the carrier in a business interruption/extra expense coverage dispute that arose in the aftermath of Hurricane Katrina, which struck the Mississippi Gulf Coast on August 29, 2005.

The Court made the following factual findings:

WMS manufactures electronic slot machines and provides different options for continuing services for those slot machines. Casinos can lease from WMS (1) stand alone slot machines, which operate individually; (2) “local-area progressive” (“LAP”); (3) “wide-area progressive” (“WAP”) slot machines, which are networked across multiple casinos and centrally monitored by WMS. Each class of WMS’s WAP machines participates in a single progressive jackpot, with WMS taking all wagers from a central monitoring location and paying out from that location. In Mississippi, WMS operated its WAP machines from a central facility known as “Premises 24” in Gulfport, which was connected to the actual slot machines at participating casinos by T-1 data lines provided by a third party.

WMS had a $100 million limit under its business income and extra expense coverage, but only $1 million under its dependent premise coverage. WMS was able to resume operations of its Premises 24 on December 2, 2005, but many of its casino customers took much longer to resume operations, if at all.

Concluding that the bulk of WMS’s losses resulted from WMS’s casino customers’ delay in reopening rather than from damage to WMS’s own premises, Federal paid the policy limits under the dependent business premise coverage. WMS’s losses, however, were much larger.

WMS’s relevant policy provisions read as follows: 

Property means: building; personal property; personal property of employees; electronic data processing property; valuable papers; fine arts or research and development property.

Premises Coverages-

The following Premises Coverages apply only at those premises for which a Limit Of Insurance applicable to such coverage is shown in the Declarations.

Except as otherwise provided, direct physical loss or damage must:

• be caused by or result from a covered peril; and

• occur at, or within 1,000 feet of, the premises, other than a dependent business premises, shown in the Declarations.

Business Income And Extra Expense

We will pay for the actual:

• business income loss you incur due to the actual impairment of your operations; and

• extra expense you incur due to the actual or potential impairment of your operations,

during the period of restoration, not to exceed the applicable Limit of Insurance for Business Income With Extra Expense shown in the Declarations [$100,000,000].

This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property, unless otherwise stated. (emphasis added)

Dependent Business Premises-

We will pay for the actual:

• business income loss you incur due to the actual impairment of your operations; and

• extra expense you incur due to the actual or potential impairment of your operations,

during the period of restoration, not to exceed the applicable Limit Of Insurance for Dependent Business Premises show under the Business Income in the Declarations [$1,000,000].

This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property or personal property of a dependent business premises at a dependent business premises.

The Fifth Circuit Court of Appeals agreed with Federal in finding that the business income/extra expense provision at issue unambiguously required that the losses in question flow from the damage to one of the listed premises and not just to property damage anywhere.

Although not clear, it appears that the Court decided that the term “property” in the business income/extra expense provision is limited to the premises listed in the declarations page. But after reviewing the appellate briefs from both sides, it is clear that the court refused to address crucial and meritorious arguments raised by WMS’s attorneys.

WMS essentially argued that the “Premises Coverage” section is a “trigger” provision which requires property damage at the defined premises, but that the “scope” of coverage is actually defined within the business income/extra expense provision, which would include property located elsewhere [not just at the described premises]

WMS argued in its appellate briefs that Federal’s failure to explicitly limit the scope of its business income coverage, as limited elsewhere in the policy, was an implicit grant of broad coverage:

Federal attempts to defend its interpretation by arguing that it is “absurd” to provide coverage to WMS for damage to the property of casinos because BI/EE coverage is a “Premises Coverage” because it is triggered by damage to the premises. The fact that BI/EE coverage is a “Premises Coverage" does not mean that only damage to property at the premises is compensable under the Policy. Imposing such a limitation would render [other] Premises Coverages such as Ingress and Egress and New Product Delay equally “absurd”. The Policy’s Ingress and Egress coverage protects against damage to property “at a location contiguous to” a covered premise. The Policy’s New Product Delay coverage protects against damage to any property that “results in a delay in the introduction of any new product” irrespective of where that property is damaged. Both are nonetheless Premises Coverages.

The WMS Industries v. Federal Insurance opinion is scant in length. As a federal law clerk, I always felt that parties deserved a detailed and lengthy explanation as to why the court ruled one way or the other. It is the least a court can do, to consider exhausted parties that have long battled for a court resolution and to also consider the concept of stare decisis, since opinions are likely to become the mantras of many attorneys for generations to come.

Click here to read the full opinion by the Court and Reply brief.by WMS Industries.