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August 2010

Consolidated Companies, Inc. v. Lexington Insurance Company ? Interpretation of "Charges and Expenses" Under A Business-Interruption Provision

"Charges and Expenses" Should Be Reduced By Revenues Earned During Partial Operations Under Business-Interruption Provision of an Insurance Policy

No. 09-30178, ___ F. 3d ___ (5th Cir. August 17, 2010)

This case involves a dispute between Consolidated Companies, Inc. ("Conco"), a food and food-related products distributor, and Lexington Insurance Company ("Lexington"), its commercial-property insurer.  Asked to consider the interpretation of the phrase "charges and expenses" in a business-interruption loss provision of an insurance policy, the Fifth Circuit held, among other things, that the district court erred by not instructing the jury to reduce Conco's charges and expenses by the revenues it earned during the 15-month period that it partially resumed operations.

Like others in the surrounding area, Conco was one of the many businesses that suffered damage as a result of Hurricane Katrina.  In this case, Conco sustained damages to one of its warehouses and equipment.  Ten days after Katrina, Conco was able to resume partial operations.  Full operations resumed within 15 months.  During this 15-month period, Conco earned $205,840,489 in revenues and incurred $205,561,483 in expenses, resulting in minimal profit. 

Conco filed a claim under its commercial-property insurance policy.  Lexington initially paid Conco $3 million under the policy.  Lexington then attempted to pay Conco $247,070 in full satisfaction for Conco's claim under the policy.  Conco rejected Lexington's tender of $247,070, and filed suit against Lexington for breach of contract and insurance bad faith. At trial, Conco claimed $24,970,551 in losses under the policy, including $19,379,642 for business-interruption loss, which consisted of $7,071,120 for lost profits and $12,308,522 for "charges and expenses."

At trial, before the United States District Court for the Eastern District of Louisiana, the jury awarded Conco $19,586,239 in business-interruption losses, $2.5 million in bad faith damages, and $5,365,797.50 in statutory penalties.  Lexington appealed on multiple grounds, including that the district court erred by not instructing the jury to reduce Conco's "charges and expenses" ($12,308,522) by the revenue that Conco incurred during the 15-month period it was operating.  Based on an alleged ambiguity in the policy language, the district court failed to instruct the jury regarding any reduction in the "charges and expenses" that resulted from the resumption of Conco's operations. 

On review, the United States Court of Appeals for the Fifth Circuit applied the insurance policy's definition of "actual loss" to the term "loss," as it appeared in the resumption-of-operations clause, and held the policy language was unambiguous.  The Fifth Circuit stated, "when partial resumption in operations reduces the 'actual loss,' i.e., anticipatable profits and unavoidable costs, so substantially as to create some profit, all charges and expenses have, by definition, been covered by income. The only recovery in such an event is for the diminished profit."  Applying its conclusion to the amounts claimed by Conco, the Fifth Circuit held the "charges and expenses for which the policy would pay had there been no resumption of operations" were "not independent of the costs that are incurred during usual operations, but are a subset of them," and thus, the "roughly $12 million in expenses must be part of the $205 million in expenses that were incurred during resumed operations," such that all of Conco's "expenses were recouped from the income of the business and are not a 'loss' to be compensated under the policy." 

The Fifth Circuit held that Conco would receive a windfall under the district court's interpretation of "charges and expenses," and the only reasonable interpretation of the policy "requires reduction of 'actual loss' by income," such that "[o]nly if revenue did not offset the charges and expenses would the insurance policy be called upon for payment."  Thus, "[b]ecause "Conco was able to pay all of its charges and expenses with revenue during the restoration period," the Fifth Circuit vacated the jury's award of $12,308,522 in "charges and expenses."

The Fifth Circuit then considered Lexington's claim that Conco's proof was insufficient to support the lost-profits portion of its business-interruption damages.  Relying on prior case law, the Fifth Circuit held "Conco was not required to draw a bright line in its evidence between loss stemming from property damage and loss stemming from market conditions," and refused to consider the issue further. 

The Fifth Circuit also evaluated Lexington's challenge to the district court's imposition of $2.5 million in statutory damages pursuant to La. Rev. Stat. § 22:1220 and $5,265,797.50 in statutory penalties pursuant to La. Rev. Stat. § 22:658.  (Both of these statutes have been recodified at La. Rev. Stat. §§ 22:1973 and 22:1892, respectively).  The Fifth Circuit considered whether these provisions were mutually exclusive and held that based on the mandatory language in Section 22:1220(A), both damages and penalties were recoverable by Conco.  The Fifth Circuit stated, "[d]amages are awarded to compensate the insured for losses caused by the insurer's refusal to pay" and penalties "are assessed to punish the insurer for its bad faith," and the award was consistent with the statutory scheme.  Thus, the Fifth Circuit held "the two statutory awards based on arbitrariness or bad faith must be reversed and reconsidered on remand in light of the remaining sums that Lexington failed to properly pay." 

The Fifth Circuit then considered Conco's claim that the district erred in entering a remittitur to correct the jury's failure to deduct the $3 million dollars initially paid by Lexington to Conco under the policy.  Based on review of the jury's award, the Fifth Circuit affirmed the holding of the district court on this point.  

 Click here for the Fifth Circuit's opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the Supreme Court. These events would render the opinion unavailable for use as legal authority.
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