Insured Not Entitled to a Windfall Under Cyber Policy’s Business Interruption Insuring Agreement

In a win for Wiley’s client, the United States District Court for the Eastern District of Arkansas, applying Arkansas law, has held that a cyber policy’s business interruption coverage should not result in a windfall for an insured and that the relevant policy language unambiguously established the proper methodology for calculating “Business Income Loss.” Heritage Co., Inc. v. Hudson Excess Ins. Co., No. 4:22-cv-82-JM (E.D. Ark. May 22, 2024). The court also granted the insurer’s motion to exclude certain opinions of the policyholder’s expert witness, holding that expert testimony as to the meaning of an insurance policy is unnecessary where the contractual language is unambiguous.

The insured telemarketing company was the victim of a ransomware attack that impacted its operations. The telemarketing company sought coverage under its cyber policy, including for “Business Income Loss” under the policy’s business interruption insuring agreement, which afforded specified coverage for “Business Income Loss and Extra Expenses incurred during the Interruption Period directly as a result of the total, or partial, or intermittent interruption or degradation in service of an Insured's Computer System caused directly by a Privacy Breach, Security Breach, Administrative Error or Power Failure.”

The policy defined “Business Income Loss” in relevant part to mean:

  1. The net profit before income taxes that the Insured is prevented from earning during the Interruption Period; and
  2. Normal operating expenses incurred by the Insured (including payroll), but solely to the extent that such operating expenses must continue during the Interruption Period and would have been incurred had there been no interruption or degradation in service.

Business Income Loss, as used in item a. [s]hall mean:

For manufacturing operations, the net sales value of production less the cost of all raw stock, materials and supplies used in such production.

The insurer paid certain amounts to the insured as “Business Income Loss” covered under the policy. However, the telemarketing company brought a coverage action against the insurer seeking additional sums as “Business Income Loss,” including all lost revenues plus all of the telemarketing company’s normal operating expenses incurred during the “Interruption Period.”

Both parties sought partial summary judgment as to the correct methodology for calculating “Business Income Loss” under the policy. Ruling on the motions, the court agreed with the insurer that the policy’s definition of “Business Income Loss” was unambiguous. The court held that the plain meaning of the phrase “net profit” means total revenue minus expenses. In so holding, the court stated that “section (a) of the Business Loss coverage is meant to insure any lost profit incurred during the Interruption Period resulting from a covered loss, as if the loss had not occurred.” Further, the court rejected the telemarketing company’s argument that the policy’s language addressing “net profit” in the context of manufacturing operations was an illustrative example of how to calculate net profit across all industries; rather, the court agreed with the insurer that the language did not apply because the telemarketing company was not a manufacturer.

The court also held that business interruption coverage is not intended to result in a windfall for the insured and, consequently, the reference to “normal operating expenses” in section (b) of the policy’s “Business Income Loss” definition must be read as meaning “normal operating expenses ... that were not paid using any revenue actually earned during the Interruption Period.” The court concluded that, under section (b) of the “Business Income Loss” definition, the “correct methodology to determine [the insured’s] covered business income loss is to subtract from covered ‘normal operating expenses’ those that [the insured] was able to pay from revenue it received during the Interruption Period.” The court reasoned that, otherwise, the insured would be placed “in a better position than it would have been in had there been no interruption in business.”

The court also granted the insurer’s motion to exclude any opinions offered by the insured’s expert as to the meaning of the policy’s terms, concluding that such testimony was unnecessary given the court’s conclusion that the policy was unambiguous.

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