Appellate Division Affirms In Favor Of Insurer On Issues Of Business Interruption Loss And Consequential Damages

The New York State Appellate Division, Third Department, recently affirmed a lower court decision granting defendant's motion for summary judgment on the issues of business interruption loss and consequential damages. See Yar-Lo, Inc., d/b/a Merle Normal Cosmetics v. Travelers Indemnity Company, et al, 130 A.D.3d 1402 (3d Dep't 2015). It should be noted that William C. Foster, of Barclay Damon's Insurance Coverage and Regulation team, successfully handled the case for Travelers.

In Yar-Lo, Inc., plaintiff, Yar-Lo, was a franchise business specializing in the sale of cosmetics. Yar-Lo commenced an action in December 2006 against Travelers Indemnity Company ("Travelers"), its insurer, seeking damages related to a sewage flood on the premises located in Stuyvesant Plaza in the City of Albany. Specifically, Yar-Lo alleged that the system used to eject sewage water from Yar-Lo's business malfunctioned in or around December 2004, causing substantial damage to portions of its premises, ultimately causing it to terminate its rental lease and vacate. Yar-Lo further alleged it was forced to suspend all business operations as of April 2005. Yar-Lo claimed $183,435 in lost business income and over $6M in consequential damages.

Travelers moved for summary judgment, which motion was granted by the Supreme Court, Schenectady County, on the basis that Yar-Lo's cessation of its business was not directly related to the covered loss under the terms of the subject policy.

The Third Department affirmed, holding that under the terms of Yar-Lo's insurance policy, Yar-Lo is entitled to compensation for lost business income only if it is forced to suspend its operations due to a hazard against which it is insured. The Third Department relied upon the Court of Appeals decision in Howard Stores Corp. v. Foremost Ins. Co., affirming the First Department holding which opined that "the purpose of the business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against." Howard Stores Corp., 82 A.D.2d 398, 400 (1st Dep't 1981), aff'd, 56 N.Y.2d 991 (1982).

On this law, the Third Department found Travelers presented prima facie evidence that Yar-Lo was never forced to close as a result of the malfunction and that the damage was repaired by the end of December 2004. The Court further ruled in favor of Travelers on the issue of consequential damages, holding there is no issue of fact as to whether the parties contemplated consequential damage in the event Yar-Lo decided to close the business when its operations could have continued.

This holding is testament to the narrow interpretation of business interruption loss coverage and an incentive to insurers to defend claims of business interruption loss and consequential damages absent evidence that an insured was forced to suspend operations due to a covered hazard.