The word “And” in policy language forces insurer to pay additional amount to policyholder

In a recent case, a Federal district court in California held that a commercial property policy’s use of the word “and” entitled the insured to the remainder of the policy limits, amounting to an additional $122,000 in coverage. Mullins v. N.Y. Marine & Gen. Ins. Co., No. 17-CV-02518-JST, 2017 WL 6539800 (N.D. Cal. Dec. 21, 2017).

In late 2015, the insured’s golf course was partially destroyed by a fire. The insured then made a business income claim on the policy amounting to more than $500,000.

Here, the policyholder’s and the insurer’s dispute arose in the context of how to interpret the business income section of the policy. The relevant portion read:

1. Business Income
Business Income means the:
a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred;
and
b. Continuing normal operating expenses incurred, including payroll....
We [the insurance company] will pay for the actual loss of Business Income you [the named insured] sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ . . .

The insurer argued that the use of the word “and” between subsections (a) and (b) meant that both net income and operating expenses must be calculated together. Essentially, the insurer argued that because these clauses must be read together, because the golf course at the time of the fire was operating at a net loss, then that should offset any amount the insurance company owed towards covering normal business expenses.

Not surprisingly, the policyholder saw things differently. The insured argued that the use of the word “and” did not indicate that the two subsections should not offset each other and instead the use of the word ‘and’ meant subsections (a) and (b) were distinct parts of the business income coverage and that there was no indication in the policy that one could offset the other.

The court sided with the policyholder, finding first that the use of the word “and” in no way indicated that the subparts were meant to offset each other. The court noted the policy failed to contain more specific language, such as the words “offset,” “plus,” or “minus,” that would indicate such a result.

The court highlighted the absurdity of the insurer’s position by pointing out that many businesses purchase insurance with these same provisions even as they are just starting out and trying to make a name for themselves. “A business that is just starting out may operate at a temporary loss until it becomes established and secures a customer base. If that business knew that there would be no coverage under the ‘Business Income’ provision of the policy for ongoing expenses if it suffered a catastrophic loss under the policy, there would be no point for that business to purchase the additional coverage.”

Ultimately, the court’s decision reflects a time-honored maxim of insurance law; that any ambiguity in a policy should be decided in favor of how the insured reasonably understood the policy at the time it was entered into.

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