Opinion
Civil Action No. 99-1053-CM
November 15, 2000
MEMORANDUM AND ORDER
This matter is presently before the court on cross-motions for summary judgment (Docs. 32 and 36). The court finds that the language of the insurance policy at issue is ambiguous and construes the language in favor of the plaintiff. Finding genuine issues of material fact regarding whether the plaintiff can show any loss of net profits and whether the plaintiff properly calculated the amount of any loss allegedly sustained, the court denies both the defendant's and the plaintiff's motions.
Facts
Plaintiff, Vinyl-Tech Corporation, is a plastics manufacturer insured during the period relevant in this action under a policy of insurance issued by defendant Continental Casualty Co. The relevant facts are largely stipulated to by the parties.
On April 9, 1997, certain equipment in the plaintiff's manufacturing plant experienced an electrical failure, interrupting operations at the plaintiff's manufacturing plant for nine days. Plaintiff made claims under its insurance policy for direct damage to the equipment which experienced the failure and for losses resulting from the interruption in its business. Plaintiff did not make any claim for extra expenses in operating its business during the interruption period. Defendant paid the claim for direct damage to the equipment but denies that plaintiff experienced any covered loss resulting from the business interruption.
During the nine days of lost production, plaintiff was able to meet all of its ordinary sales obligations by using existing inventory. Further, the plaintiff has not identified any lost sales or unfilled orders occurring during the interruption period. In its response, and in support of its motion for summary judgment, plaintiff provides the additional uncontroverted fact that plaintiff's net income was increasing in March and April of 1997, but decreased dramatically in May and June, 1997.
In its "Additional Uncontroverted Facts," plaintiff alleges that its plant runs 24 hours a day, 365 days a year, that the plaintiff lost $164,251.62 in expenses during the interruption, and that plaintiff lost net profits of $60,773.50 as a result of the shut down (Pl.'s Mem. at 2). Each of these allegations is controverted by the defendant in accordance with D. Kan. Rule 56.1 by citing to the record. Defendant presents production reports arguably showing that plaintiff's plant does not operate at certain times. Defendant produced plaintiff's response to requests for production, which indicate amounts of expenses different than those alleged in the plaintiff's "facts." Finally, defendant produced a portion of plaintiff's Rule 26(a)(1)(c) disclosure which indicates a different amount of total damages. Accordingly, the court finds questions of fact regarding each of these allegations.
Legal Standards Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates that there is "no genuine issue as to any material fact" and that it is "entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In applying this standard, the court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). A fact is "material" if, under the applicable substantive law, it is "essential to the proper disposition of the claim." Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). An issue of fact is "genuine" if "there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way." Id. (citing Anderson, 477 U.S. at 248).
The moving party bears the initial burden of demonstrating an absence of a genuine issue of material fact and entitlement to judgment as a matter of law. Id. at 670-71. In attempting to meet that standard, a movant that does not bear the ultimate burden of persuasion at trial need not negate the other party's claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party's claim. Id. at 671 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)).
Once the movant has met this initial burden, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256; see Adler, 144 F.3d at 671 n. 1 (concerning shifting burdens on summary judgment). The nonmoving party may not simply rest upon its pleadings to satisfy its burden. Anderson, 477 U.S. at 256. Rather, the nonmoving party must "set forth specific facts that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant." Adler, 144 F.3d at 671. "To accomplish this, the facts must be identified by reference to affidavits, deposition transcripts, or specific exhibits incorporated therein." Id.
Finally, summary judgment is not a "disfavored procedural shortcut," but an important procedure for "the just, speedy and inexpensive determination of every action." Celotex, 477 U.S. at 327.
Construction and Interpretation of an Insurance Contract
The construction of an insurance contract is a question of law and, if the relevant facts are admitted, the court may decide whether they come within the terms of the contract. City of Salina v. Md. Cas. Co., 856 F. Supp. 1467, 1475 (D.Kan. 1994) (citing Wing Mah v. United States Fire Ins. Co., 218 Kan. 583, 586, 545 P.2d 366, 369 (1976)). The court must take unambiguous language in its plain and ordinary meaning, must enforce an unambiguous contract as made, and may not make another contract for the parties. Id.
"[T]he court should not strain to create an ambiguity where, in common sense, none exists." Id. (citing Miner v. Farm Bureau Mut. Ins. Co., 17 Kan. App.2d 598, 613, 841 P.2d 1093, 1105 (1992)). "To be ambiguous, a contract must contain provisions or language of doubtful or conflicting meaning, as gleaned from a natural and reasonable interpretation of its language." Id. (quoting Catholic Diocese of Dodge City v. Raymer, 251 Kan. 689, 693, 840 P.2d 456, 459 (1992)). "Ambiguity does not arise until the application of the rules of interpretation to the face of the contract leaves it uncertain which of two or more meanings is proper." Id.
Where a contract is ambiguous, however, the construction most favorable to the insured prevails. Id. Coverage clauses are interpreted broadly and exclusionary clauses are interpreted narrowly. Boyd Motors, Inc. v. Employers Ins., 880 F.2d 270, 274 (10th Cir. 1989) (citing United States Fid. Guar. Co. v. Hokanson, 2 Kan. App.2d 580, 582, 584 P.2d 1264, 1266 (1978)). Exceptions, exclusions and limitations are narrowly construed because the insurer, having affirmatively expressed coverage in broad terms, assumes a duty to define any limitations in clear and explicit terms. Boyd Motors, 880 F.2d at 274 (citing Baugher v. Hartford Fire Ins. Co., 214 Kan. 891, 900, 521 P.2d 401, 409 (1974)).
Defendant's Motion
The defendant argues several reasons that summary judgment is proper on its behalf. Defendant alleges that (1) the plaintiff cannot show any loss of net profits, (2) any lost net profits which plaintiff may be able to show were not incurred within the interruption period or "period of restoration" as defined by the policy, and, (3) plaintiff's calculation of its alleged lost net profits are not in accordance with the terms of the policy.
Actual Loss of Net Profits
Plaintiff has not identified any sales that were lost or any orders that were not filled during the interruption period. Plaintiff was able to satisfy all of its ordinary sales obligations during the interruption period from inventory. Defendant argues that, under the terms of the insurance policy, plaintiff has a duty to make up lost business within a reasonable time by every available means including sales from inventory. According to defendant, plaintiff made up any lost business through sales of available inventory and is, therefore, unable to show any actual loss of net profits. Plaintiff argues that "the Plaintiff's plant operates 24 hours a day, 365 days per year, and sells all of the product it can produce. The Plaintiff's profits come from the production of product which is then sold, so the loss of production necessarily leads to an eventual loss of sales and an actual loss of profit." (Pl.'s Mem. at 1).
Defendant also contends that any lost net profits, in order to be recoverable under the insurance policy, must have occurred during the period of restoration as defined in the policy. That argument will be addressed later in this opinion. For the moment, the court considers only whether it is possible for the plaintiff to show any actual loss of net profits.
Defendant argues that the policy language requires actual lost profits, not merely "lost production, resulting (through the use of inventory, for example) in no actual loss of profits." (Def.'s Mem. at 8). If however, as plaintiff contends, plaintiff's factory works 24 hours, 365 days a year, is able to sell all of its production, and makes a net profit from each marginal unit of production, any interruption in production will produce an actual loss of net profit. Although use of inventory is a condition of the insurance policy's coverage, in the circumstances alleged by plaintiff, such use will not prevent an actual loss of net profits because any product, including inventory, could have been sold at a net profit.
Defendant cites Dictiomatic, Inc. v. United States Fid. Guar. Co., 958 F. Supp. 594, 604 (S.D.Fla. 1997) for the proposition that business interruption insurance may not be used to place the plaintiff in a better position than it would have been absent the accident. That argument is unavailing here because the plaintiff alleges an actual loss of net profits caused by the accident and the resulting business interruption. Recovery of the alleged loss will only restore the plaintiff to the position in which it would have been without the accident.
The court has found a question of fact concerning the amount of net profits allegedly lost. The plaintiff was able to satisfy all of its ordinary sales obligations during the interruption period from available inventory and has shown no sales that were lost nor any orders unfilled during the interruption period. Those facts do not prevent the plaintiff from showing at trial that it could have sold all of the inventory on hand when the accident occurred and all of the output it could have produced during the interruption period or that, due to business requirements, the plaintiff had to replenish its inventory after the interruption and lost profits on the production that was diverted to replenish inventory. That the amount of lost profits may not be shown precisely will not prevent recovery if the plaintiff makes the amount of its loss reasonably certain by competent evidence. E.g., Avery v. City of Lyons, 183 Kan. 611, 621, 331 P.2d 906, 913 (1958). The court finds a genuine issue of material fact regarding whether the plaintiff can show a loss of net profits. Therefore, summary judgment is not appropriate.
Interruption Period
The defendant argues that, under the terms of the insurance policy, lost profits are not recoverable unless they are incurred during the interruption period. Plaintiff responds that the sales from inventory, combined with the lost production "result[ed] in reduced profits in the months of May and June, 1997." (Pl.'s Mem. at 4). Plaintiff appears to argue that the policy does not preclude recovery of lost profits caused by the business interruption when those losses occur shortly after production resumes. The court must determine whether the policy is ambiguous, and, if so, what was the intent of the parties to the contract. "However, the test is not what the insurer subjectively intended the terms to mean, but rather what a reasonable person in the insured's position would have understood the disputed terms to mean." City of Salina, 856 F. Supp. at 1476 (citing Westchester Fire Ins. Co. v. City of Pittsburg, 768 F. Supp. 1463, 1467 (D.Kan. 1991)).
Is the Insurance Policy Ambiguous?
The insurance policy provides for the following "coverage:"
We will pay you for your "Actual Loss" and "Extra Expense" during the "period of restoration" provided all of the following requirements are met:
The interruption must be caused solely by an "accident" to an "object";
The loss must be as a result of direct physical damage to Covered Property;
The "accident" must occur during the time this coverage is in force;
The "object" that has the "accident" must be [covered by the policy, at the location, and in use].
We will pay:
Your "actual loss" from a total or partial interruption of business; and
The "Extra Expense" you necessarily incur to operate your business as nearly "normal" as practicable during the "Period of Restoration" following an "accident".
We will consider the actual experience of your business before the "accident" and the probable experience you would have had without the "accident" in determining the amount of our payment.
(Stipulated Facts, Ex. B, Endorsement 2, p. 2) (emphasis added).
Defendant rests its argument upon the language in paragraph 1, above, while plaintiff's argument seems to rely upon the language in paragraph 2. The proper interpretation of the policy can be determined only by deciding whether, in paragraph 1, the clause "during the `period of restoration'" applies to both actual loss and extra expense, or only to extra expense. Defendant argues that the policy provides coverage only for an actual loss that occurs during the period of restoration. Plaintiff's argument, that the policy covers an actual loss that occurs outside the period of restoration, assumes without saying that the clause applies only to extra expense and not to actual loss.
Plaintiff's argument finds support in paragraph 2. Paragraph 2, without a stated limitation, provides payment for an actual loss, but allows payment for extra expense only if the extra expense was incurred during the period of restoration. Paragraph 1 can be reasonably understood as providing a list of prerequisites to coverage while paragraph 2 can be reasonably understood to express the losses for which payment will be made. Under that rationale, plaintiff's interpretation would be correct.
Either the defendant's or the plaintiff's interpretation of the policy is reasonable. Both interpretations give full effect to all the terms of the policy. In light of the purpose of business interruption insurance to place the insured in the position it would have been absent the accident, neither interpretation results in surplusage nor in a strained or ridiculous application of any of the terms of the policy. The court finds that a natural and reasonable interpretation of the policy language leads to two potentially conflicting meanings of paragraph 1 of the "Coverages" section of the policy.
Therefore, the court finds that the language is ambiguous and must be given the construction most favorable to the plaintiff. E.g., City of Salina, 856 F. Supp. at 1475. The court must determine the meaning of the policy from the intent of the parties reflected in the policy terms as a reasonable person in the insured's position would have understood them. Id. at 1476.
Interpretation of the Insurance Policy
Defendant argues that very similar policy language has been found to allow recovery only of lost profits incurred during the period of interruption. Pennbarr Corp. v. Ins. Co. of N. Am., 976 F.2d 145 (3d Cir. 1992) In Pennbarr, a typewriter distributor's subsidiary manufacturing plant in Italy had been shut down during two periods of time due to earthquakes. During the times the plant was shut down, the retailer was able to continue sales in America from inventory. After production was resumed, about a month following the second earthquake, the manufacturing plant was closed pursuant to an Italian bankruptcy proceeding unrelated to the earthquakes. The American distributor subsequently filed a claim under its business interruption policy claiming lost profits as a result of the earthquakes. Pennbarr, 976 F.2d at 148.
The distributor argued that its business of selling typewriters was not interrupted until it sold all of the typewriters in inventory, that the inventory was depleted approximately two months after the bankruptcy proceedings closed its plant, that the plant would have produced about 14,900 typewriters during the periods it was closed due to the earthquakes, and that the distributor could have sold the potential production during any three-month period after its inventory was depleted. Id. The insurance policy at issue in Pennbarr provided that the insurance company was "liable for the ACTUAL LOSS SUSTAINED by the Insured resulting directly from such interruption of business . . . for only such time as would be required . . . to rebuild, repair or replace such contributing properties." Id. at 147. The Pennbarr court found that the policy terms were not ambiguous, that the policy provided coverage only for sales lost simultaneously with the interruption of production, and that, therefore, the distributor could not recover on its insurance policy. Id. at 155.
The policy at issue in Pennbarr and the policy here both require as a condition of coverage that the insured utilize existing inventory to reduce or prevent loss. Further, the "period of restoration" here and the "time . . . required to rebuild . . ." in Pennbarr are essentially identical. The policy here defines "Period of Restoration" to be the period of time that:
Begins at the time of the commencement of liability; and
Ends on the date when the damaged property at the described "location" is repaired or replaced.
(Stipulated Facts, Ex. B, Endorsement 2, p. 4). The distributor in Pennbarr and the plaintiff here both utilized existing inventory to reduce or prevent the loss. The alleged lost profits or sales in both instances did not occur during the period of interruption of the insured's business. However, the policy in Pennbarr permitted recovery of the actual loss sustained "for only such time as would be required . . . to rebuild, repair or replace." Pennbarr, 976 F.2d at 147 (emphasis added). The policy at issue here, while it may be reasonably read to limit actual loss to that incurred during the "period of restoration," may also be reasonably read to cover any actual loss resulting from a total or partial interruption of business without stating a limitation regarding the time during which the loss must occur.
While it might be argued that the plaintiff's interpretation of the policy provides for no outer limit on the time for which lost profits might be asserted, the plaintiff, in its memorandum and in the stipulated facts, has limited its claim for lost profits to May and June, 1997, less than three months after the end of the "period of restoration." This is not a case, therefore, where the time frame was unreasonable or unforeseeable in the contemplation of the parties when they entered the contract.
Furthermore, the text below subparagraph (b) in paragraph 2 provides factors to consider in calculating the amount of payment. The factors are (1) the actual business experience before the accident, and (2) the probable experience the business "would have had without the `accident'" (Stipulated Facts, Ex. B, Endorsement 2, p. 2). The clause, "the probable experience the business would have had without the accident," could refer either to the probable experience only during the period of restoration or to the probable experience both during and subsequent to the period of restoration. The policy's use of that clause as a factor in calculating the amount of payment for the loss seems to support the application of a "reasonable or foreseeable" time limit on any claim for lost profits. Such considerations are frequently applied by the courts in determining the proximate cause of a loss.
Because the court must interpret any ambiguity in favor of the insured, and because a reasonable person in the insured's position would have understood the disputed terms to provide coverage for actual loss incurred within a reasonable or foreseeable time after the interruption and for extra expense incurred during the period of restoration, the court finds that such is the interpretation contemplated when the parties entered the contract. Therefore, summary judgment is not proper on defendant's claim that any loss must be shown to have occurred during the period of business interruption.
Calculation of Losses
Defendant argues that the plaintiff has failed to properly calculate its alleged losses pursuant to the policy for three reasons. First, defendant argues that plaintiff has not shown any orders it was unable to fill or sales it failed to make during the interruption period. As the court noted above, the plaintiff does not argue that it lost profits because it failed to make sales or fill orders during the interruption period. As the court has found, the interruption period is not the only period for which the policy provides coverage for "actual loss."
"Actual loss," as defined in the policy, "means the sum of:"
The net profits you fail to earn because of business interruption resulting from an "accident"; and
Whatever part of the following fixed charges and expenses the business failed to earn but would have earned if there had been no "accident";
Salaries and wages . . .; and
Manufacturing, selling, administrative expenses and any other items contributing to your overhead expenses.
In calculating the "actual loss", we will take into account the actual experience of your business before the "accident" and the probable experience you would have had without the "accident".
(Stipulated Facts, Ex. B, Endorsement 2, p. 4).
The court recognizes that the plaintiff will be required, at trial, to show it could have filled orders, or it could have made sales, "but for:" (1) the interruption of its business, or (2) a business necessity to replenish its stock after the interruption. Without such evidence, the plaintiff will be unable to recover on its claims for lost profits or for fixed charges and expenses the business failed to earn. Nevertheless, the alleged lost sales or unfilled orders do not have to be shown to have occurred during the period of interruption. The court is aware that causation will be difficult for the plaintiff to establish in this case. However, the defendant does not argue, and the court cannot find, a total lack of admissible evidence of causation in the record.
Second, the defendant argues that because the plaintiff's net sales and net income in April 1997 was higher than any other month during the first half of 1997 and, consequently, higher than the average for any group of months in the first half of 1997, plaintiff cannot demonstrate any lost profits resulting from the interruption. To the extent that defendant's argument relies upon its assertion that the lost profits must have occurred during the period of restoration, that argument carries no weight because, under the terms of the policy, any lost profits incurred in May or June, 1997 may be recovered.
Furthermore, the court finds a genuine issue of material fact whether the plaintiff sustained any lost profits resulting from the business interruption. Plaintiff has provided a self-serving affidavit asserting lost expenses and profits. Defendant directs the court to evidence in the record that the plaintiff has asserted various amounts of loss at various times. However, neither party has sought to demonstrate whether the sales and income to which the parties have stipulated reflect a pattern typical of the business in which the plaintiff operates. Neither party has attempted to establish why the net profits and sales "dramatically decreased" in May and June, 1997 other than by drawing an inference that they were caused by the business interruption. Determination of the facts will have to wait until the evidence is presented at trial.
Finally, defendant argues that the plaintiff fails to properly account for "the actual experience of [plaintiff's] business before the `accident' and the probable experience [plaintiff] would have had without the `accident'" (Stipulated Facts, Ex. B, Endorsement 2, pp. 2, 4). Defendant argues that the plaintiff bases its calculations upon 1996 data in some of its documents and upon projected 1997 data in other documents. Defendant further argues that using the 1996 data is improper because the data does not include available information for 1997, specifically April 1997. Finally the defendant argues that using the 1997 projections is improper because that data assumes profits without showing an actual loss.
The defendant's argument relies upon the defendant's understanding that any covered loss must occur during the period of restoration and, to that extent, is without merit. However, as the court has noted above, the actual experience of the plaintiff's business, before, during, and after the period of interruption, is relevant to determining lost profits, as are the plaintiff's projections for business before, during, and after the period of interruption. While no individual piece of the data by itself will be dispositive, it is all relevant to the actual experience of the business before the accident and the probable experience of the business absent the accident. Any calculation of actual loss under the policy must account for all such evidence (perhaps as explained by a witness qualified as an expert in the plaintiff's business, in plaintiff's line of business, or in such calculations). The court finds a genuine issue of material fact in calculating any loss allegedly sustained by the plaintiff.
Plaintiff's Motion
In its motion the plaintiff argues, based upon an affidavit from the chairman of the plaintiff's board of directors, that it has shown actual loss as a matter of law and is entitled to summary judgment in the amount of $225,213.12. Plaintiff argues that "[a]t the very least, the Plaintiff has established a question of fact regarding its actual loss." (Pl.'s Mem. at 5). As the court explained previously in this opinion, it has found genuine issues of material fact whether the plaintiff can show any loss of net profits and whether the plaintiff properly calculated the amount of any loss allegedly sustained. The court will not repeat its analysis here. The defendant has properly controverted a number of the plaintiff's statements of fact and summary judgment is not proper on the plaintiff's claims.
In the final clause of its memorandum, the plaintiff asserts a claim for $212,213.12. However, based upon its review of the plaintiff's submissions, the court believes the lower figure is a typographical error.
Orders
IT IS THEREFORE ORDERED that the defendants motion for summary judgment (Doc. 32) is denied.
IT IS FURTHER ORDERED that the plaintiff's motion for summary judgment (Doc. 36) is denied.
Dated this day of November 2000, at Kansas City, Kansas.