Arizona Court: Argument that All Business Income Loss Caused by a Wildfire is Covered is “Off Base”

Several weeks ago in White Mt. Communities Hosp., Inc. v. Hartford Cas. Ins. Co., 2015 WL 1755372, 2015 U.S. Dist. LEXIS 50900 (D. Ariz., Apr. 17, 2015), an Arizona federal court underscored that business interruption losses flowing from a wildfire are only covered to the extent that they stem directly from physical loss or damage to the policyholder’s property.  In other words, loss of income due to the fire in general is beyond the scope of such coverage absent a causal nexus with repairs necessitated by the blaze.

shutterstock_152341301The policyholder White Mountain owned a hospital in Springerville, Arizona.  On May 29, 2011, a blaze was started by an abandoned campfire in the nearby Bear Wallow Wilderness Area.  The wildfire ultimately burned 841 square miles in eastern Arizona and western New Mexico, and it led to the temporary evacuation of Springerville.  Residents weren’t allowed to return until June 13th, and the hospital itself was closed until the following day.

The policy afforded both property damage and business interruption coverage.  The hospital sustained soot and smoke damage that required cleaning, and some air conditioning units and carpeting had to be replaced as well.  The insurer ultimately paid approximately $40,000 for property damage claims and $683,520 for business interruption through August 6, 2011 after determining that 60 days was a reasonable period of time for effecting repairs.  The hospital contended that it had suffered additional business income losses after August 6th, however, and it brought suit when the insurer denied the claim.

Both parties filed motions for summary judgment, and on April 17th, Judge John Sedgwick granted the insurer’s.  The contract of insurance afforded business interruption coverage for the loss sustained because of “the necessary interruption of . . .  business operations during the Period of Restoration due to direct physical loss of or direct physical damage caused by or resulting from a Covered Cause of Loss to property[.]”  As the opinion explained, this meant that the policy “does not cover all income losses caused by the fire; rather, it covers only those income losses resulting from actual physical damage to the facility” that resulted from the blaze.

The hospital was unable to demonstrate that it sustained any additional loss of business after August 6th as a result of smoke contamination or other physical damage caused by the wildfire.  In the words of the court:

That is, there is nothing to show that the AC repairs, cleaning, carpet replacement or smoke inside the building, as opposed to the economic conditions in the area from the fire, caused a cessation or slowdown of business.  There is no evidence that any part of the facility was physically dysfunctional during repairs or that it lost patients because of the damage or repair work.  To the contrary, the record shows that despite the repairs and cleaning that had to be done, White Mountain did not have to turn away patients after the facility’s reopening. . . . Plaintiff presents no evidence from which a jury could find that physical damage or smoke contamination kept people away from White Mountain’s facility.

The hospital’s claims that extended period of indemnity language afforded coverage after August 6th were rejected as well because that provision also required a causal nexus to property damage.  As Judge Sedgwick stated, “[a]s with the Business Income Coverage provision, this extension in coverage only applies to business income loss that results from physical property damage.”

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For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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