No Indemnification When Net Loss Exceeds Operating Expenses

Commercial Property	Profit and Loss
Business Interruption	Actual Loss Sustained

A United States District Court ruled that a corporation could not recover under its business interruption insurance policy after extensive tornado damage because its net loss was greater than the ongoing normal operating expenses after the damage occurred. The insured appealed, arguing that net income (profit or loss) and ongoing normal operating expenses should be considered separately, with the latter paid regardless of the former. The amount of these expenses was significant.

The matter rested with the Tennessee Supreme Court, as the Sixth Circuit Court of Appeals had asked it to resolve the issue. The court observed that the policy provided for recovery only if the insured sustained an "actual loss of business income, which is defined as net income that would have been earned had the business not been interrupted and continuing normal operating expenses that were incurred during the interruption of business."

The court cited several cases in point, underscoring "actual loss sustained" as crucial to a conclusion. It stated that the amount of business income is to be determined by adding net income, which could be a net profit or a net loss, and continuing normal operating expenses incurred.

The court stated the insured's contention that "net income" should be ignored whenever there is a net loss "would put the insured....in a better economic position from having its business interrupted than it would have occupied had there been no interruption of its business operations."

In summary, if there had been a net profit, that amount would be added to the ongoing normal operating expenses, and the insured would be entitled to recover that sum. However, if there was a net loss, the amount of ongoing normal operating expenses would be reduced by that same amount. Therefore, the state high court informed the federal appeal court that the insured in this case was not entitled to recover the amount of its "continuing normal operating expenses," as defined in the policy.

Continental Ins. Co., Plaintiff, Respondent v. DNE Corp., Defendant, Petitioner. Tennessee Supreme Court, at Nashville. No. 01S01-9203-OT-00038. July 20, 1992. CCH 1992 Fire & Casualty Cases, Paragraph 3861.