Use Of Reserve Inventory Not Considered Lost Income

Commercial Property	Business Income
Equipment Breakdown	Finished Inventory

An insured business was involved in purchasing scrap metal, shredding it, and selling the shredded metal. A motor breakdown on a machine used in the metal shredding operations prevented the shredding of metal for 32 days. To fill orders during the month when the machine was being repaired, the company used 5,500 tons of its reserve stock of shredded metal. This was adequate to meet the sales demand; consequently, there was no loss of gross income. The inventory was restored to its former level within 60 days after the machine was back in operation.

Business interruption coverage in the insured's policy, in addition to paying daily indemnity for prevention of business, made provision for payment of "that amount of expense which is reasonably incurred by the insured or the company to reduce or avert prevention of business" to the extent that the total amount that would otherwise have been paid is thereby reduced. The coverage was subject to a condition that the insured must "....utilize every available means, including.... surplus or reserve stock....which might reduce the amount for which (the insurer) would otherwise be liable...."

The issue, in this case, was whether or not the cost of the reserve stock was an "expense reasonably incurred to reduce or avert a prevention of business." The cost of raw materials used to replenish the inventory was $154,000. The insured filed a suit for declaratory judgment, seeking a finding that the insurer was liable for such expense. It appealed the trial court judgment for the insurer.

The insured argued that the cost of the raw material used to prevent a loss of income was an "expense" within the policy meaning of the term. The appeal court disagreed, believing that the insured would be in a better position than it was before the breakdown if recovery were allowed for the cost of materials used to replenish the inventory.

The court stated that the policy would cover any additional expenses, such as costs above those for routine labor, utilities and other overhead necessary in the shredding process to rebuild the inventory. However, it concluded that the cost of the raw materials was not an "additional expense" covered under the policy.

The trial court's judgment was affirmed in favor of the insurance company and against the insured.

A. Miller & Company, Plaintiff, Appellant v. The Cincinnati Insurance Company, Defendant, Appellee. Illinois Appellant Court, Third District. No. 3-90-0681. August 23, 1991. CCH 1991-92 Fire and Casualty Cases, Paragraph 3395. See also 577 North Eastern Reporter 2d 885.