February 21, 2014 Articles

Greater Effects of Hurricanes in Business Interruption Claims

Parties have disputed, and courts have addressed, whether the valuation of a business interruption claim should consider the effects that a hurricane or other catastrophic event had on the surrounding region, positive or negative, including its effect on the policyholder’s competitors and on the local economy

by Erica J. Dominitz and Gregory M. Jacobs

In the classic film Forrest Gump, after Forrest returned from the Vietnam War, he honored a wartime promise he had made to his deceased friend Bubba by buying a shrimp boat (that he named Jenny), moving to the Bayou, and launching The Bubba Gump Shrimp Company. Although Bubba Gump Shrimp initially struggled to stay in business (Forrest caught only five shrimp), the company was extremely profitable after Hurricane Carmen decimated every shrimping boat in the region except for Forrest’s Jenny, and Forrest’s competitors thus went out of business. As Forrest explained, “people still needed them shrimps for shrimp cocktails and barbecues and all, and we were the only boat left standing.” In addition to being a lucrative twist for Forrest, this scene addresses a scenario that has been the subject of many coverage disputes regarding hurricane-related (or other catastrophe-related) business interruption insurance claims.

Specifically, parties have disputed, and courts have addressed, whether the valuation of a business interruption claim should consider the effects that the hurricane (or other catastrophic event) had on the surrounding region, positive or negative, including its effect on the policyholder’s competitors and on the local economy. Some courts have held that the business interruption claim calculation should take into account real-world economic conditions that exist after, and were caused by, the hurricane. In other words, the assumption should be that the hurricane hit but did not damage the policyholder’s property. Other courts, by contrast, have held that the business interruption calculation should assume that the hurricane never happened at all and thus should be based on pre-loss sales, projections, and economic conditions.

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