Bard's Apparel Manufacturing, Inc. v. Bituminous Fire and Marine Insurance Company
1988 U.S. App. LEXIS 8160, 849 F.2d 245, 1988 WL 60052 (1988)
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Rule of Law:
The duration of a business interruption loss under an insurance policy is determined by an objective, theoretical standard of the time required to repair or replace the damaged property with due diligence, not by the actual time it takes the insured to reenter business if that time is prolonged by the insured's unique financial condition.
Facts:
- On August 10, 1985, Bard's Apparel Manufacturing, Inc. (Bard's), an apparel manufacturer, suffered extensive vandalism to its machinery and equipment, primarily industrial sewing machines.
- At the time of the loss, Bard's was insured by Bituminous Fire and Marine Insurance Company (Bituminous) for property damage and resulting business interruption.
- Prior to the vandalism, Bard's had filed for reorganization under Chapter 11 of the Bankruptcy Act, leading Bituminous to be uncertain about whom to pay for the loss.
- Shortly after the incident, a repair company estimated that fixing the damaged equipment would cost $34,252 and take six weeks to complete.
- In January 1986, Bituminous issued checks to Bard's for contents loss and business interruption loss.
- Bard's returned the checks because they included Bard's attorney and a creditor as named payees, in addition to Bard's itself.
- Bard's subsequently disposed of the damaged machinery.
- On February 18, 1986, Bard's submitted a formal Sworn Statement in Proof of Loss to Bituminous, claiming $75,000 for contents and $50,000 for business interruption.
Procedural Posture:
- On November 25, 1985, Bituminous filed an interpleader complaint in the U.S. Bankruptcy Court for the Eastern District of Tennessee.
- The bankruptcy proceeding was dismissed on December 26, 1985.
- On March 11, 1986, Bituminous made a demand for an appraisal of the loss.
- On March 20, 1986, Bard's sued Bituminous in the U.S. District Court for the Eastern District of Tennessee.
- The district court denied Bituminous's pretrial motion for summary judgment on the appraisal issue, finding Bituminous had waived its right.
- Following a trial, a jury returned a verdict in favor of Bard's for $75,000 (contents), $50,000 (business interruption), and $6,250 (bad faith penalty).
- The district court entered a judgment against Bituminous for $131,250.
- Bituminous, as appellant, appealed the judgment to the United States Court of Appeals for the Sixth Circuit; Bard's is the appellee.
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Issue:
In calculating the duration of a business interruption loss, does a jury instruction that permits consideration of the insured's poor financial condition constitute a legal error?
Opinions:
Majority - Cohn, J.
Yes. Allowing a jury to take into consideration the insured's unique financial condition when determining the length of a business interruption period is an error. The proper measure is a theoretical replacement time, which establishes an objective standard based on the time required to repair or replace property 'with the exercise of due diligence and dispatch.' This standard is meant to be computable in advance and not subject to the vagaries of an insured's specific circumstances, such as poor financial condition, which are not part of the risk assumed by the insurer. Citing precedent like Beautytuft, Inc. and Hampton Foods, the court reasoned that the policy language creates a theoretical, not actual, standard for replacement time. Instructing the jury to consider Bard's financial condition improperly allowed them to measure the loss based on a circumstance unique to Bard's, rather than the objective time needed for repairs.
Analysis:
This decision solidifies the principle that business interruption insurance indemnifies against an objective, theoretical loss of business, not the actual, subjective loss experienced by a financially distressed insured. It establishes a clear boundary, protecting insurers from liability for delays caused by an insured's pre-existing vulnerabilities unrelated to the covered event. The ruling creates a more predictable framework for calculating such losses but also leaves open a path for insureds to claim extended damages if the insurer's own unreasonable delay in payment directly causes an inability to resume business operations.
