18 N.E.3d 1125
Mass. App. Ct.2014Background
- Verrill Farms, LLC operated a retail farm store insured by Farm Family under a Businessowners Advantage Policy (Aug 4, 2008–Aug 4, 2009). A fire on Sept. 20, 2008 damaged the premises.
- Verrill resumed operations at temporary/alternate locations within two days, later at near-full capacity; no ordinary-payroll employees were laid off and payroll continued from business revenues.
- Verrill claimed loss of business income (net profit/loss) for the year after the fire, including ordinary payroll as an operating expense to offset revenue earned during the partial resumption of operations. Verrill claimed $626,219; Farm Family paid $317,825 and disputed the remainder.
- The policy included (1) Business Income coverage defined to include net income and continuing normal operating expenses ("including payroll") and (2) an "ordinary payroll" endorsement limiting direct payment of ordinary payroll to 60 days when operations do not resume.
- Superior Court granted summary judgment for Farm Family, concluding ordinary payroll could only be recovered via the 60-day direct-payment limitation and could not be deducted as an expense against revenue earned during resumed operations.
- The Appeals Court vacated and remanded, holding ordinary payroll and other unreimbursed continuing expenses necessary for resumed operations must be included in calculating net profit or loss for loss-of-business-income purposes in these circumstances.
Issues
| Issue | Plaintiff's Argument (Verrill) | Defendant's Argument (Farm Family) | Held |
|---|---|---|---|
| Whether ordinary payroll can be included as an operating expense in calculating net profit/loss when the business partially resumes at temporary locations | Ordinary payroll are legitimate continuing operating expenses and must be deducted from gross revenue to compute actual net profit/loss; policy aims to make insured whole | Ordinary payroll is recoverable only as a direct payment limited to 60 days under the endorsement and cannot be used to reduce revenue in the net profit/loss calculation | Held: Yes. Ordinary payroll and unreimbursed continuing expenses required by resumed operations must be included as deductions in calculating net profit/loss for loss-of-business-income recovery |
| Whether the policy’s business-income formula (which assumes no resumption) governs when operations resume | The business-income measure should reflect what actually occurred (partial resumption), so expenses incurred to earn that revenue must reduce gross income | The formula’s separate direct-payment for ordinary payroll (60 days) shows insurer did not intend ordinary payroll to reduce projected net income | Held: Policy must be read as a whole; when operations resume, the calculation compares actual net profit/loss (revenue minus necessary expenses) to the projected net absent the loss |
| Whether allowing payroll deductions would result in double recovery | Verrill did not seek direct payment under the 60-day payroll endorsement; it only sought to deduct payroll in computing net income | Farm Family argued permitting payroll deduction plus (potential) direct payment risks double recovery | Held: No double recovery here — Verrill did not claim direct payroll payment; deducting payroll from revenue prevents artificial inflation of net income and is consistent with indemnification aim |
| Proper interpretation standard for insurance contract ambiguity | N/A — Verrill contends reasonable insured expectations and contract purpose support its reading | Farm Family relies on text of payroll endorsement and the separation of payments | Held: Contract interpreted de novo; read as a whole to effect indemnity and insurer’s purpose — favoring construction that makes insured whole when operations resume |
Key Cases Cited
- Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (contracts of insurance interpreted as law questions)
- Gordon Chem. Co. v. Aetna Cas. & Sur. Co., 358 Mass. 632 (business-interruption insurance aims to do what the business would have done absent loss)
- Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486 (de novo review of insurance contract interpretation)
- Consolidated Cos. v. Lexington Ins. Co., 616 F.3d 422 (5th Cir.) (when partial resumption generates revenue, expenses to earn that revenue should reduce loss; avoid double recovery)
- Amerigraphics, Inc. v. Mercury Cas. Co., 182 Cal. App. 4th 1538 (Cal. Ct. App.) (policy language that assumes no resumption can conflict with resumption requirement; treatment of continuing expenses)
- Metropolitan Property & Cas. Ins. Co. v. Morrison, 460 Mass. 352 (policy language given its usual and ordinary meaning)