Fire On the Mountain: Non-Replacement Valuation First Party Coverage Disputes Arising From Fire Policies


By: Richard E. Wirick
This blog, second in a series of three, deals with coverage issues arising from fire losses in the first party context which do not deal with dwelling replacement cost (loss settlement) disputes. The two main areas of remaining first party issues are (1) business interruption and (2) ingress/egress.
A. Loss of Use [Economic Losses]
Fire losses suffered by commercial, as opposed to residential, insureds, usually present loss of use issues. Policies purchased by businesses often contain coverages for loss of use. Unlike loss of use resulting from flood and water damage, loss of use resulting from fires have formed a fairly pro-insured trend throughout the country, and in California.
Business interruption coverage has been defined by California courts as follows. In Pacific Coast Engineering Co. v. St. Paul Fire & Marine Ins. Co., 9 Cal. App. 3d 270 (1970), the court of appeal stated that it was well settled that “[T]he purpose and nature of ‘business operation’ or ‘use and occupancy’ insurance is ‘to indemnify the insured against losses arising from his inability to continue the normal operation and functions of his business, industry, or other commercial establishment . . .’” The court went on to say that business interruption insurance (“BIC”) was to ‘indemnify the insured for any loss sustained by the insured because of his inability to continue to use specified premises  . . .[that is]  for loss caused by the interruption of a going business consequent upon the destruction of the building, plant, or parts thereof.’” One Texas court enumerated the purpose and time span of BIC when confronted with a restaurant policyholder’s windstorm loss. When the restaurant was rebuilt, it nevertheless did not return to the same volume of business for nine months. Lexington Ins. Co. v. Island Recreational Development Corp. 706 S.W. 2d 764 (Tex. App. 1986). The dispute was whether the BIC indemnified the policyholder just up until the time it reopened, or until the time it recovered its lost business volume. The Island Recreational court reasoned that since the policy did not explicitly exclude the period of recovery after the restaurant reopened, coverage continued up until the point that business was restored to its prior volume. Id. at 768.
Though no California cases have addressed this, a federal Third Circuit case examined a BIC loss for a medical imaging company. In American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F. 2d 690 (3d Cir. 1991), a diagnostic facility had purchased a business policy whose BIC provisions covered the “necessary or potential suspension” of operations, and required the carrier to indemnify the insured until it returned to “normal business operations.” (Emphasis supplied). The insured had reopened its CT/MRI operations at an entirely new location, but as quickly as possible. The Third Circuit held that relocation costs were recovered as part of the insured’s attempt to minimize its losses, and to deny indemnification for same would give the insured no incentive to mitigate.
B. Ingress/Egress Issues
California’s hilly terrain presents ingress and egress obstacles in the event of a fire loss. Are the costs of surmounting them covered under most BIC coverage parts? Most property policies cover losses when ingress to, or egress from, an insured premises is “prevented” because of a covered peril. Are losses from road closures covered? Again, one must look to other jurisdictions for guidance. In National Children’s Exposition Center Corp. v. Anchor Ins. Co., 279 F. 2d 428 (2d Cir. 1960), a court recognized that “prevent” could embrace the milder verb concept of “hinder.” Accordingly, if road closures hindered travel, this coverage part could provide indemnity.
Some extra-jurisdictional decisions have interpreted ingress-egress clauses even if the insured’s property (including private roads and driveways) were not destroyed by fire. In Fountain Powerboat Industries Inc. v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D.N.C. 2000), an insured argued that a floodplain prevented ingress-egress to the insured’s boat-building business such that only heavy trucks could pass through. The insurer’s position was that since the insured’s actual facility had not been damaged, there was no coverage. The argument did not fare well with the court, which ruled “[T]he meaning of the ingress-egress clause is exceedingly clear. Loss sustained due to the inability to access the Fountain Facility and resulting from a hurricane is a covered event with no physical damage to the property required.” Id. Analogous arguments could be made for a fire loss.
If you have any questions or would like more information, please contact Richard E. Wirick at [email protected].