If you could count on anything, it would be that our partner, Dan Markewich, would spend at least a few minutes at each monthly partner meeting talking about the Mound Cotton Newsletter. The Newsletter was something he took pride in, often reminding the partners that it had won a Burton Award for Newsletter excellence! Every month, after hearing Dan speak about the Newsletter, I would contemplate submitting an article, but somehow, I never found the time to prepare any written material. After our January 2017 meeting, however, I vowed that this was the month that I would submit an article and I could not wait to tell Dan. Sadly, on February 2, 2017, I learned that Dan had passed away. I simply had waited too long to share the news with him. Well, Dan, wherever you are, here, at long last, is my article. Sorry for the delay and please excuse any grammatical errors!
Many commercial property policies, including builder’s risk policies, contain an exclusion for “delay, loss of market, or loss of use.” Oftentimes, a property damage loss leads to some sort of delay, whether it be a delay in production, completion of a project, or in opening an insured facility. Read literally, the delay exclusion would preclude coverage for any sort of loss of revenue incurred by the insured, even if the delay or loss of use were the direct result of a covered cause of loss to covered property. Such an interpretation, however, seems to conflict with the inclusion of coverage for loss of business income. In this regard, a policy containing business income coverage obviously contemplates recovery for a loss of revenue during that period of time following covered physical loss or damage when the insured is unable to operate, produce goods, or complete a project. These types of economic, post-loss delay claims generally seem to be covered in those situations where an insured purchases business interruption coverage. Thus, it is necessary to reconcile the delay exclusion with the business income or extra expense coverage grant.
In Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 975 F. Supp. 1137 (S.D. Ill. 1997), the U.S. Coast Guard halted barge traffic on the Mississippi River because of flooding. As a result, many of the insured’s barges were delayed and the grain on the barge deteriorated. The insured, ADM, sought coverage under its Marine Policy for the damage to the grain. The insurer argued that ADM’s losses were excluded by the policy’s “Delay Clause,” which excluded “loss of market or for loss, damage or deterioration arising from delay whether caused by a peril insured against or otherwise.” ADM argued that the Delay Clause was inapplicable because the proximate cause of its loss was flood, not delay.
Citing to Brandyce v. U.S. Lloyds, 207 A.D. 665, 203 N.Y.S. 10, aff’d, 239 573 (1924), ADM contended that “mere delay” is different from a “delay caused by an insured peril.” In Brandyce, the insured had a Marine Policy that covered a cargo of potatoes in shipment from New York to Cuba. While at sea, the ship collided and had to be put into Charleston, South Carolina for repairs. While the ship was being repaired, the potatoes began to rot and had to be sold at a discount. The court in Brandyce held: “If the ship had not been damaged by reason of sea perils, the potatoes would have arrived sound. The proximate cause of the loss, therefore, was the sea peril, because it was the efficient dominant cause which, although incidentally involving delay, placed the cargo in such a condition that, because or inevitable deterioration or decay, it could not be reshipped and carried to its destination.” The court in ADM, though, distinguished Brandyce, observing that the delay clause in the policy issued to ADM specifically stated that the delay exclusion applied “whether caused by a peril insured against or otherwise.” It was noted in ADM that, “[p]rior to the addition of [the phrase ‘whether caused by a peril insured against or otherwise,’], cases such as Brandyce . . . suggested that losses caused by delay are covered if the delay was caused by an insured peril. With the addition of this language . . . it is irrelevant whether the delay was caused by an insured peril.” ADM, 975 F. Supp. at 1147.
Accordingly, in situations where the delay exclusion contains the language “whether caused by a peril insured against or otherwise,” the delay exclusion likely would operate to preclude coverage for all monetary damages arising out of a delay, even in situations where the delay was the direct result of a covered peril. The delay exclusions in most commercial property policies, however, do not include the phrase “whether caused by a peril insured against or otherwise.” Case law suggests that, in the absence of this phrase, a court likely will conclude that the monetary costs associated with a delay arising out of a covered peril would be covered, assuming, of course, that the insured has purchased business interruption insurance. By contrast, a delay exclusion would apply in situations where, unrelated to any covered cause of loss, a project is running behind schedule and the insured incurs delay penalties.
For instance, in Channel Fabrics, Inc. v. Hartford Fire Ins. Co., 2012 WL 3283484 (S.D.N.Y.), the insured shipped a number of bales of woven fabric from Shanghai, China to a buyer located in Guatemala. The insured’s shipment of fabric arrived a month late, causing the insured to have to sell the fabric at a discounted price. In addition, the insured contended that a portion of the fabric arrived in a damaged state. Citing to the policy’s exclusions for consequential loss and delay, the insurer took the position that the insured’s claim for the $156,827 discount offered to the customer was excluded. The court held that, to the extent the price discount was applied to undamaged bales of fabric, the losses attributable to this delay would be excluded under the policy. On the other hand, the court noted, to the extent the insured could demonstrate that any portion of the discounted price related to the sale of the damaged goods, that portion of the loss could be recoverable. Id. at *10.
Similarly, in Diamond Beach, V.P., L.P. v. Lexington Ins. Co., 748 F. Supp. 2d 648 (S.D. Tx. 2010), Lexington issued a builder’s risk policy for the construction of a building located in Texas. The building was under construction when Hurricane Ike made landfall in September 2008, causing physical damage to the building. As a result of the building damage, the scheduled date of completion was extended by an additional fifty-one days. After application of a thirty-day deductible, Lexington paid the twenty-one-day delay claim. Separate and apart from this initial delay claim, the insured submitted a supplemental delay claim relating to the delay in the start of roofing work because of manpower constraints following Hurricane Ike and the delay in completing the drywall because the Building Department was overwhelmed with inspections of various buildings damaged during Hurricane Ike.
The policy excluded “consequential loss, damage or expense of any kind or description including but not limited to loss of market or delay, liquidated damages, performance penalties, penalties for non-completion, delay in completion, or non-compliance with contract conditions, however the foregoing shall not exclude Delay in Completion Coverage when it is endorsed to this Policy.” The policy did, indeed, contain a Delay in Completion endorsement, but that section contained an exclusion for any “change order or other cause which results in deviation from the original progress schedule, or revisions thereto, and which is independent of insured loss or damage which gives rise to a delay, whether occurring prior to or after an insured delay.” The court noted that some damage was, indeed, a result of Hurricane Ike, but that there was no hurricane damage associated with the roof or drywall. The court concluded that the only covered delay costs would be those associated with the physical damage to the building and that delays associated with the roof installation and wallboard inspection, which were not directly the result of physical damage to the insured building, would be excluded under the delay exclusion.
In Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247 (D. Or.), the court also recognized the distinction between delay caused by a covered cause of loss and delay from an external event. In that case, the insured operated an open-air theater. During the summer of 2013, smoke from several wildfires was present in the area, resulting in soot and ash accumulation on the seats of the theater as well as poor air quality. For a period of time while the smoke was present, the insured canceled various performances because of its concern for the health effects on its patrons and the actors. The insured submitted an insurance claim for loss of income associated with the cancellation of various shows. Great American contended that there was no covered physical loss or damage and that, in any event, the delay exclusion applied to preclude coverage.
The court concluded that the accumulation of smoke and ash in the area of the theater did, indeed, constitute direct physical loss or damage. With respect to the delay exclusion, the court noted that the delay and loss of use of the theater was caused by smoke – – a covered cause of loss. The court went on to state that the delay exclusion “only makes sense in the context of the policy when a delay external to the damage causes a loss of use. For instance, in this case if the actors and production staff of [the insured] were not ready to perform at the scheduled time, causing a delay or cancellation of a show, such loss of business income would not covered by the policy. There is no contention of an external delay here.” Id. at *6. See also Blaine Richards & Co., Inc. v. Marine Indem. Co. of America, 635 F.2d 1051 (2d Cir. 1980)(where the FDA detained a shipment of beans after noticing an empty can of pesticides on the ship, the court held that, absent a showing that the beans were physically damaged by pesticides, the rejection of beans by purchasers would be excluded under the delay clause inasmuch as the loss would be attributable solely to delay caused by detention of the ship).
Despite the various cases holding that the delay exclusion applies only to delays unrelated to a covered loss, there are several cases interpreting builders’ risk policies in which the courts have held that an exclusion for “delay, loss of use or loss of market” applies even if the delay in completion of the construction project resulted directly from covered damage under the policy. In One Place Condominium, LLC v. Travelers Prop. Cas. Co. of America, 2015 WL 2226202 (N.D. Ill.), the insured was in the process of constructing a ten-story building with a one-story basement. Not long into the construction project, the builders experienced problems with the foundation that resulted in damages and the need for repairs. A stop work order was issued and lifted approximately five weeks later. The policy contained an exclusion stating that the insurer “will not pay for ‘loss’ caused by or resulting from . . . Delay, loss of use or loss of market.” The insured argued that the general delay exclusion was only for loss caused by delay and not for costs caused by delay. The court found this argument illogical inasmuch as “the only way to pay for a loss is to pay the costs associated with that loss.” The court noted that the insurer agreed that there was covered damage but simply was denying coverage for the type of costs, i.e. delay costs, sought by the insured. Thus, the court upheld the insurer’s denial of the delay claim.
Notably, the court upheld the delay exclusion, despite the fact that the delay directly arose out of the covered loss and the delay exclusion did not contain language (as discussed above in connection with Archer-Daniels) stating “whether caused by a peril insured against or otherwise.” Significant to the court’s decision was the fact that the insured had purchased soft cost coverage allowing the recovery of four types of soft costs (interest on money borrowed to finance construction, advertising expenses, realty taxes, and costs resulting from renegotiation of leases or construction loans) resulting from delay in completing the insured project because of damage to the covered property.
In sum, it appears that courts generally will allow recovery for delay costs associated with covered damage; however, if a policy provides coverage for specific delay costs, a court may be more inclined to exclude other delay costs not specifically enumerated. As always, it is important to read the policy without delay (pun intended!) in the event of a loss.
Reprinted with permission from Law360, Insurance Law, June 14, 2017