The general rule of the measurement of damages under an insurance contract should be the amount that is sufficient to put the insured in the same position as if the insurer had fully performed its contractual obligations. This failure can result in two forms of extra-contractual damages — punitive or exemplary damages and tort damages arising from the breach of the covenant of good faith and fair dealing. Here we address the tort damages.
Extra-contractual damages if awarded by a court against an insurance carrier will be for an amount of money that is other than amounts owed under the express terms of the insurance contract. They may, in the event of a low limits policy exceed the facial liability limit. Or in the event that the policy has a high facial limit, the damages could fall within the dollar value shown as the policy limit, however, the rationale for the award will be tort-based rather than controlled by the terms and conditions of the insurance contract.
Extra-contractual damages when pled open the door to three key additional economic considerations:
- Consequential Losses
- Inclusion of Certain Recovery Costs
Affected period — The period within which extra-contractual economic damages are measured is often longer than the period of indemnification called for in business interruption coverage unless a lengthy “extended period” provision is included.
Most economists and other economic damage evaluators will first focus their review on the period within which economic losses have occurred. A chronology of events and recovery timeline are often established. Several factors affect this recovery timeline and measurement period for capturing economic losses such as physical recovery, and restoration of pre-event assets and financial position.
Extra-contractual damage measurement periods are typically longer because they consider the days, weeks, months, or sometimes even longer period it takes to return a business to its pre-event condition. This condition considers more than just the physical restoration of the business in allowing for the time it takes to restore other factors such as lost projects, customers and accounts.
An example of this is Bi-Economy Market, Inc. v. Harleysville Insurance Co. of New York. The insured, a meat market, suffered a fire that resulted in a complete loss of food inventory and heavy damage to both the building and equipment. In addition to the replacement cost coverage for the building and equipment, the insured policy provided for up to one year of business interruption. The carrier offered to pay for only seven months of lost business income. The insured never resumed business. The court held that the failure on the part of the carrier to promptly pay the loss so that the insured could get back into business subjected it to those consequential damages that were “capable of measurement based on known reliable factors without undue speculation.” These could include future losses well in excess of the 12 months coverage.
Consequential losses — Consequential economic losses arising from factors beyond the contract are often specifically excluded from damage consideration in an insurance policy but can be substantial when considering extra-contractual obligations. Prime examples of consequential losses are the loss of a one-time project opportunity, the loss of a supplier, or loss of an account connected to the event. Paragraph 3 of the ISO Property form CP 10 10 06 07 excludes extra expense caused by or resulting from “suspension, lapse or cancellation of any license lease or contract beyond the ‘period of restoration.’” If, however, that period is extended as a result of failure on the part of the carrier, this expense could escalate significantly.
Inclusion of Certain Recovery Costs — Insurance coverage may only provide for certain extra expenses that “reduce the loss otherwise payable.” These can include the cost of relocating to temporary quarters and obtaining replacement equipment so as to remain in business while a damaged building is repaired. In the event of a failure on the part of the insurer to pay these extra expenses resulting in a failure of the business to re-open, the insured could include all reasonable business expenses connected with the event regardless of whether they result in actual short-term loss mitigation. Examples of these extra-contractual losses connected with an event might include reasonable expenses or loss of gross margin connected with a project to restore a customer or account, to obtain a follow-on project or to restore a supply channel.
In any event, the non-breaching party seeking extra-contractual damages will typically turn from the underlying insurance contract itself and instead look to satisfy these four damage considerations:
- Proximate Cause
- Reasonable Certainty
- Loss Mitigation
Proximate Cause — The damage measure must be connected with the event or conduct giving rise to the claim. Lost profits are recoverable only when they can be shown to have resulted directly from and can be clearly traced to the wrongful act. Segregation of losses resulting from other causes and economic factors must occur.
Reasonable Certainty — Consequential damage recovery does not require mathematical certainty or absolute exactness. However, recovery does require the individual measuring the damages to assemble a sufficient foundation on which to opine. See for example, Coastal Hardware and Rental Co., LLC v. Certain Underwriters at Lloyds, London, where the court held that lost profits are recoverable as extra-contractual damages so long as such profits are proved with reasonable certainty and not based on speculation or conjecture. The particular lost profits that must be proved are net profits. The claimant must deduct overhead, depreciation, taxes, and inflation.
Foreseeability — When an insurer tortuously breaches its contract of insurance in a manner that is not so egregious as to give rise to punitive damages, it may still be liable for extra-contractual damages that were reasonably foreseeable. In order to recover extra-contractual, special, or consequential damages the burden falls on the non-breaching party to show that the circumstances giving rise to the loss were communicated or could reasonably have been known to the breaching party.
Loss Mitigation — Generally speaking, an insured who is injured as the result of an insurer’s failure to timely pay benefits due under the policy may not recover for damages that could have been avoided by reasonable conduct, including reasonable expenditures from other personal funds to offset or eliminate the damage. However, the burden is on the insurer to demonstrate that the insured failed to take reasonable action to mitigate their damages.