A federal district court in California has awarded more than $122,000 to an insured golf course based on the district court's interpretation of the word “and” in a commercial property insurance policy.

The Case

In September 2015, a fire destroyed portions of the Adams Springs Golf Course in Cobb, California. Its owner and operator, Edwards Mullins, made a business income claim for $584,206 under the commercial property insurance policy Mr. Mullins had acquired from New York Marine and General Insurance Company. The policy included coverage for business income loss, with a “limit of $500,000 for business income and extra expense claims combined.”

New York Marine paid $2,709.98 toward that claim on November 10, 2016, and agreed to pay an additional $107,708.35 on October 31, 2017. It also paid $266,603.95 toward extra expenses, leaving $122,977.72 as the remaining policy limit applicable to Mr. Mullins' business income claims.

The parties disputed Mr. Mullins' entitlement to the remaining $122,977.72 under the commercial property policy, and he sued New York Marine.

In particular, the parties disputed how to interpret the policy's use of the word “and” between the two components of “Business Income”: “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.” (Emphasis added).

Mr. Mullins contended that “and” meant that the policy covered two distinct components of business income – net income and continuing operating expenses – without one offsetting the other and, therefore, that he could recover continuing operating expenses without any consideration of net profit or loss.

For its part, New York Marine argued that “and” meant that net income and continuing operating expenses had to be added together to determine business income, and that any net loss had to be deducted from the amount of continuing operating expenses when calculating the payout for lost business income.

The parties filed cross-motions for partial summary judgment, asking the district court to interpret the policy terms governing loss of business income. Mr. Mullins also asked the district court to find that he was entitled to payment of $122,977.72.

The New York Marine Policy

The New York Marine policy 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 District Court's Decision

The district court granted Mr. Mullins' motion and ruled that he was entitled to recover an additional $122,977.72.

In its decision, the district court relied on Amerigraphics, Inc. v. Mercury Casualty Co., 182 Cal. App. 4th 1538 (2010), disapproved of on other grounds, Nickerson v. Stonebridge Life Ins. Co., 63 Cal. 4th 363 (2016), where the California court of appeal interpreted policy language nearly identical to the New York Marine policy language 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.” The court of appeal noted that the policy did “not use the words 'plus,' 'offset,' 'subtract,' 'minus,' or the like” but used the word “and.”

The district court agreed with the court of appeal and reasoned that the New York Marine policy covered “two distinct components”: net profits and continuing operating expenses. New York Marine, the district court continued, had cited no California authority for the proposition that both components had to be considered together as a single insurable interest, rather than as two distinct insurable interests. The district court rejected New York Marine's argument that its policy language interpretation resulted in a potential “windfall” for policyholders because a business that was losing money before an interruption potentially could recover more in insurance proceeds after the interruption than it would have earned had the business kept operating. 

Indeed, the district court concluded, under New York Marine's interpretation, if a catastrophic event damaged an insured's business premises and prevented the insured from being able to operate, it would face two distinct problems: (1) a loss of money coming into the business (loss of income), and (2) payment of ongoing fixed expenses, even though no money was coming in. 

The district court then rejected the position put forth by New York Marine and granted partial summary judgment in favor of Mr. Mullins.

The case is Mullins v. N.Y. Marine & Gen. Ins. Co., No. 17-cv-02518-JST (N.D. Cal. Dec. 21, 2017). Attorneys involved include: For Edward Mullins, doing business as Adams Springs Golf Course LLC, Plaintiff: Brian Paul Brosnahan, LEAD ATTORNEY, Kasowitz, Benson, Torres & Friedman LLP, San Francisco, CA; Veronica Nauts, Kasowitz Benson Torres LLP, San Francisco, CA. For New York Marine & General Insurance Company, Defendant: Andrew B. Downs, Bullivant Houser Bailey PC, San Francisco, CA. 

FC&S Legal Comment

Courts in other states have reached the opposite conclusion. The leading cases are Continental Ins. Co. v. DNE Corp., 834 S.W.2d 930 (Tenn. 1992), and Dictiomatic, Inc. v. U.S. Fid. & Guar. Co., 958 F. Supp. 594 (S.D. Fla. 1997)).

See, also, Polymer Plastics Corp. v. Hartford Cas. Ins. Co., 389 Fed. Appx. 703 (9th Cir. 2010) (applying Nevada law); HTI Holdings v. Hartford Cas. Ins. Co., No. 10-6021-AA (D. Or. Dec. 8, 2011); Verrill Farms, LLC v. Farm Family Cas. Ins. Co., 18 N.E.3d 1125 (Mass. Ct.App. 2014); Liberty Mutual Ins. Co. v. Sexton Foods Co., 854 S.W.2d 365 (Ark. Ct.App. 1993); Cohen Furniture Co. v. St. Paul Ins. Co. of Ill., 573 N.E.2d 851 (Ill. Ct.App. 1991); United Land Investors, Inc. v. N. Ins. Co. of Am., 476 So. 2d 432 (La. Ct.App. 1985).