Alleged costs to avert business interruption loss rejected (US)

Patrick Bracher from Norton Rose Fulbright.

In July 2012 a fire damaged equipment vital to the production of a steel pipe manufacturing plant in Arkansas. The fire was a covered peril and loss of business income and extra expenses were also covered. The court rejected the insured’s claim for an additional $14 million in mitigation costs incurred allegedly as ‘necessary expenses’ in moving production overseas.

After the fire the insured suspended operations, but to meet delivery dates (and to preserve a client relationship) transferred production to an affiliate in India and undertook to pay the Indian manufacturer’s costs associated with the shift in production.

The policy covered actual loss of business income incurred during a period of restoration directly resulting from the damage by the peril insured against and necessary expenses the insured incurred in excess of normal operating expenses to reduce loss of business income during that period.

The insured claimed the costs of producing the replacement pipes in India.

After the insurer settled its admitted portion of the business income and extra expenses losses of $23 million, the insured sued for an additional $14 million in mitigation costs. The insurer said that the costs were ‘extra expenses’ which had already been settled up to the limit, not mitigation costs.

It was held that the insured had not proved that the extra expenses incurred helped prevent business income losses during the business interruption period. The insured had not shown that if it had not spent the extra money to shift production to India it would have suffered a specific loss during that period.

Although the insured alleged it shifted the production to save a long-term contract with a major customer, this did not prove that the expenses were incurred to save a loss during the interruption period.

The policy language did not require the insurer to mitigate all business losses, regardless of when those losses were expected to occur.

The case is Welspun Pipes, Inc. v Liberty Mutual Fire Insurance Company.

First published by Financial Institutions Legal Snapshot.