Reading cases and learning hard lessons where other lawyers lose cases is much cheaper than me losing cases. So I study the losing cases as much as the winning ones. A recently lost case has an obvious lesson and a secondary lesson worth remembering when faced with the situation.
Commercial policyholders are often faced with a mountain of document requests when business income and expense claims are made. The vast majority of all policies allow the insurance companies to inspect the policyholder’s books and records, and these documents should be handed over as a matter of course as long as they are relevant to the reason for the request.
What if the policyholder cannot find all the documents, claims that some of the requested documents were destroyed in the loss or cannot be found? How can the policyholder support the financial claim without supporting documents? What if the insurer says the supporting documents were simply not submitted and the policyholder cannot collect or prove damage without them?
Those were the questions raised in a recent case1 where the court referred to the underlying dispute as follows:
Plaintiff alleges that the Underwriter’s refusal to extend payment for the disputed claims constitutes a violation of the policy. Crawford and the Underwriters, on the other hand, have consistently based the denial of coverage on the fact that CENA has failed to provide supporting documentation substantiating its alleged losses.
The basic rule is that the policyholder must prove that a covered damage occurred during the insurance period and the size of the damage. The insurer can avoid liability by proving that the damage is excluded or exempt from payment.
In the most recent case, the insurer won because the policyholder was unable to prove the extent of the damage because it was unable to produce documents before litigation or after litigation began to support a viable damage claim. The court noted:
Defendant challenges CENA’s evidentiary record of damages in this case, which consists primarily of a large spreadsheet purporting to determine the total value of the company’s losses. Defendant contends that the spreadsheet, which summarizes in list format the hundreds of items and expenses constituting the Company’s alleged losses of water products and overhead costs, is inadmissible under Federal Rule of Evidence 1006. Accordingly, Defendant contends that without this list of unverified amounts and items articulated in the spreadsheet, is plaintiff’s evidence nothing more than an unhelpful collection of documents from which no jury could reasonably discern the existence of CENA’s alleged losses—a position supported by defendant’s forensic accounting expert’s opinion and which CENA does not dispute.
Based on our independent review of the available record, we find that CENA has failed to meet its burden of proof with respect to the alleged damages because the unverified summary upon which it principally relies is inadmissible. The company’s vague, unspecific, and non-affirmative references to a massive and mostly unhelpful record do not raise a genuine, evidence-based dispute of material fact regarding its alleged damages.
Note that the insurance company had an accounting expert who said there were no corroborating documents to support a spreadsheet of claimed damages. Where was the policyholder’s accountant?
Auditing of books and documents is one of the basic areas accountants do and give opinions on. Business registers and document investigation is something accountants do all the time. When faced with this situation, a policyholder should hire an accountant to prepare the disclosure of financial documents and prepare an estimate of the damages in the dispute.
The quality of the lawyers hired by policyholders matters. In this case, the judge criticized the attorney’s brief for failing to answer a number of questions raised by the insurance company. The court also criticized the lawyer for presenting evidence of spreadsheets made by the company’s owners and managers.
Hiring a chartered accountant to investigate and then issue a loss statement is what was needed in this case. In most situations, this type of evidence is needed in all business income and extra expansion losses.
If I have an accountant who just reports that I just invested $10 million in my business, and he doesn’t exactly specify where each expense goes, that raises a flag to the government. They want to make sure that the reason I’m not paying taxes is because I’m reinvesting in these companies and not trying to hide things.
— Damon Dash
1 CE North America, LLC v. Certain Underwriters at Lloyd’sLondon, No.20-20446-Civ (SD Fla. March 30, 2023).