(NOTE: There will be no Tuesday @ 2 with Chip today due to the windstorm conference. Tuesday @ 2 will return next week)
Although there are many issues that consistently form the basis of a dispute between insurers and insured persons in real estate insurance claims (coverage issues, causation, notice requirements, etc.), is a general principle generally accepted on both sides: The insured, if he can do so, has the obligation to reasonably mitigate damages for to reduce their loss.
This is not a new principle. Virtually every state / insurance company imposes this obligation on the insured in one way or another. Whether relying on the general legal obligation to mitigate damages, or a specific provision in the current policy that imposes this obligation, courts generally enforce the obligation to minimize losses. However, this is usually not a problem, as it is almost always in the insured's interest to mitigate the damage by making temporary roof repairs (to protect the interior of the home) or resuming their business (to avoid further loss of income). In other words, insured people generally have good motivation to mitigate their own losses. But what happens if an insurance company tries to use the insured's efforts to mitigate damages against them?
The facts that give rise to this type of situation usually mean that the insurer tries to deny payment of mitigating costs or excludes the recovery of business income. The first example is demonstrated in Metalmasters of Minneapolis v. Liberty Mutual 1
These additional costs of production were relief costs. [The Insurer] can not have it both ways. If the insured, as far as they strictly request, have both a contractual and a common legal obligation to mitigate damages, the costs of this measure must be covered. If the mitigation measures take longer than the interruption period, the business interruption clause cannot limit the coverage to that period, as the business is in the insurer's interest. In this case, the expense continued after the four weeks during which the clean rooms did not work. Mitigation is an obligation that the insured performs for the benefit of the insurer. Mitigating costs can be recovered as long as it is reasonable and less than the damages would have been without it. In this case, the cost of mitigation is undoubtedly less than the damage would have been without the extra production cost. (My emphasis added.) 2
As this case, the courts show to punish the insured for trying to mitigate damages. A similar result occurred in Duane Reade, Inc. v. Paul Fire & Marine Insurance Company . 3 In this case, the court was instructed to examine the district court's interpretation of a "Period of restoration". The insured ran a pharmacy that was destroyed in the 9-11 terrorist attacks. The district court ruled in favor of the insured by determining that the hypothetical recovery period was extended until the insured resumed his business in a “functionally equivalent” manner to his business before 9-11. The district court also stated that the length of the restoration period was linked to the time it would take to build the pharmacy on the World Trade Center website.
To reverse the district court's interpretation of the restoration period, Second Circuit. The Court of Appeal ruled that the "functionally equivalent" language was a misinterpretation. In particular, the Board of Appeal pointed out:
The recovery period clause stipulates that BI coverage only lasts for the reasonable time it takes [the insured] “exercises [ing] … due diligence and dispatch to rebuild, repair or replace such property as has been destroyed or damaged. Courts have consistently interpreted this or similar language as entitling the insured to continue to recover their lost profits until they can build a reasonably equivalent store in a reasonably equivalent location. See e.g. Lee R. Russ, 12 Couch on Insurance §§ 183: 55, 185: 7 (3d ed. 1998 & Supp.2003); Beautytuft, Inc. v Factory Ins. Ass’n 431 F.2d 1122, 1128 (6th Circle 1970) (claimed that the insured's resumption of partial business in inferior, temporary premises did not terminate the coverage for business interruptions); see also Anchor Toy Corp v. Am. Eagle Fire Ins. Co. 4 Other 364, 155 N.Y.S.2d 600, 603 (N.Y.Sup.Ct.1956) (believes that the insured had the right to modernize premises during redevelopment). The motivation behind such holdings has generally been that insured persons have no incentive to resume partial operations in temporary places or in other worse circumstances to mitigate damages if such measures would terminate their BI coverage e. 4
Although the ultimate holding in Duane Reade points to a difference in rule application, the language set out therein supports the view that attempts to mitigate damages should not terminate the insured's business interruption coverage, as such interpretation would penalize the insured to act in the best interests of the insurer.
Several courts have disadvantaged decisions that would justify the insured's mitigating efforts. I American Medical Imaging Corp v. St. Paul Fire & Marine Insurance Company 5 instructed the court to interpret whether the insured suffered from a "necessary or potential suspension." 6 A fire at AMIC's headquarters resulted in smoke and water damage making it impossible to use the facilities. AMIC immediately rented space in an alternative location and moved there the next day. Subject Policy stated:
We pay your actual loss of income as well as additional costs that result from the necessary or potential closure of your business during the recovery period caused by direct physical loss or damage to property in a covered location. The loss or damage must occur while this coverage is in effect and must be due to a covered cause of loss. We pay your income and extra losses from the date the property is damaged to the earliest of the following:
• the date you resume normal business operations;
• as long as it should reasonably take to repair, rebuild or replace the damaged property, plus 30 consecutive days; or
• 12 months, regardless of the expiration date of your insurance.
The District Court concluded that because the policy required this necessary suspension, and the policy defined "operation" as "the type of business activities that occur at the insured's loss were not covered by business interruptions because they could resume business operations, albeit at a lower level than normal 7 Due to the resumption of operations, the district court ruled that there was no necessary suspension, and the insured was not entitled to coverage.
By reversing the district court's decision, the Court of Appeal ruled that such a holding would deprive the insured The Court rationalized its position, stating that "[c] continuing the business at any level would prevent recovery as the insured would continue with the same type of activities that took place on We do not accept the proposal that this was the intention of the parties. " While the policy in question in this case imposed on the insured an obligation to mitigate its losses, the court held that the district court's decision would lead to a different result:
According to the district court's reading, this provision would have imposed on AMIC a duty would have forfeited their right to recover under the policy. We are convinced that such a deviating result was not intended and choose to read the policy terms for St. Paul's obligation to replace those who comply with AMIC's obligation to mitigate. In addition, as stated in the previously cited part of the policy, St. Paul's obligation to reimburse until normal business resumes. This necessarily means that the liability for damages may arise while the business continues, albeit at a lower level than normal. 9
This case (especially across several jurisdictions) supports the general / universal principle that an insured person exercises an obligation to mitigate under the policy does not forfeit the right to recover. Introducing an obligation to mitigate while arguing that satisfying the obligation abolishes the right to recover during a business interruption is disadvantageous, as it would again justify relief and ultimately lead to a "deviating" result.
1 Metalmasters of Minneapolis v. Liberty Mutual 461 NW 2d 496 (Minn. App. 1990).
2 Id. at 501.
3 Duane Reade, Inc. v. Paul Fire & Marine Ins. Co. 411 F.3d 384 (2d Cir. 2005).
4 Duane Reade, Inc. 411 F.3d at 392-393.
5 Am. With. Imaging Corp. towards St. Paul Fire & Marine Ins. Co. 949 F.2d 690, 691 (3d Cir. 1991).
6 Id. at 692.
9 Id. at 692-693.