What Hurricane Katrina and a Hardware Store Can Tell You About Insurance Law

Lessons from a Hurricane about Binders, Net Lost Profits, Attorney’s Fees, and Other Mississippi Insurance Topics.

Imagine this scenario. July 2005. Coastal Hardware’s “named-risk” policy does not name flood or wind as a covered peril. The policy expires at the end of the month.

Negotiating new insurance, Coastal Hardware receives a quote from Certain Underwriters at Lloyds, London, for an “all-risk” policy that: (1) excludes flood and mold; (2) does not expressly list wind as an excluded peril; and (3) states wind is “excluded” or “not required” when discussing deductibles. After asking the Underwriters’ agent if wind is covered, Coastal Hardware’s insurance agent is referred to the quote’s language.

Coastal Hardware accepts the new policy and pays a premium. The Underwriters bind coverage, and its agent issues a binder for an “all-perils” policy listing mold as the only exclusion and containing the following language:

. . . .

August 24, 2005. The Underwriters’ agent receives an electronic copy of the formal policy. The Underwriters’ agent mails the policy to Coastal Hardware’s insurance agent, who never receives it. The formal policy contains a wind exclusion.

Five days later, Hurricane Katrina destroys the nearby post office, the insurance agent’s office, and Coastal Hardware. Coastal Hardware makes a claim with the Underwriters’ agent and learns the policy does not cover wind.

What if Coastal Hardware sues the Underwriters for breach of contract based on the alleged failure to pay damages caused by wind? What if Coastal Hardware seeks extra-contractual damages for lost income under alleged bad faith?

In Coastal Hardware and Rental Company, LLC v. Certain Underwriters at Lloyds, London, 120 So. 3d 1017 (Miss. Ct. App. 2013), the jury awarded $1.17M to Coastal Hardware for breach of contract, and the Underwriters received a directed verdict on the issue of extra-contractual damages for bad faith. The Mississippi Court of Appeals affirmed, and a closer look at its analysis offers insight into how similar factual scenarios might play out in a Mississippi courtroom.

Under Mississippi law, a binder can be an enforceable insurance contract.

“A binder is not an insurance policy but is generally taken to be a contract providing for interim insurance effective as of the date of the application and terminating at either completion or rejection of the principal policy.” Coastal, 120 So. 3d at 1023 (quoting 1A Stephen Plitt, Daniel Maldonado, & Joshua D. Rogers, Couch on Insurance § 13:1 (Rev. ed. 2010)). The court recognized a binder can be an enforceable insurance contract, found the Underwriters agreed to cover wind damage through the insurance binder, and affirmed partial summary judgment for Coastal Hardware on coverage. Id.

A Mississippi court looks to circumstances surrounding binder formation and written language in it to determine coverage.

Circumstances surrounding binder formation and written language in it will inform a court’s decision on scope of coverage. Id. at 1024 (quoting Miss. Farm Bur. Mut. Ins. v. Todd, 492 So. 2d 919, 930 (Miss. 1986)). Essential terms may also be implied but only if readily inferable from the parties’ prior course of dealings. Id. (quoting Todd, 492 So. 2d at 930). The court declined to infer that the Underwriters intended to exclude wind based on the parties’ prior dealings because its agent had referred Coastal Hardware’s agent to the quote’s language. Id. The binder said it remained effective until delivery; it was undisputed the policy had never been delivered. Id.

A Mississippi court construes A binder using canons of construction applicable to an insurance contract.

Canons of construction applicable to an ordinary insurance contract also apply to interpreting a binder, including: (1) plain, unambiguous words are afforded plain, ordinary meaning and applied as written; (2) ambiguities are construed against the insurer, for the insured, and for coverage; and (3) coverage limitations or exclusions are liberally construed for the insured and most strongly against the insurer. Coastal, 120 So. 3d at 1025 (citing Shelter Mut. Ins. v. Simmons, 543 F. Supp. 2d 582 (S.D. Miss. 2008)). The court agreed with the trial judge that ambiguity existed regarding whether wind was an excluded risk. Id. at 1025. The binder excluded flood and mold; the quote excluded mold. Id. Neither specifically excluded wind, but both stated “wind” was “excluded” or “not required” whenever deductibles were discussed. Id. Resolving ambiguity in favor of Coastal Hardware, the court affirmed the $1.17M jury verdict in contract damages. Id.

Under Mississippi law, net lost profits may be recoverable as extra-contractual damages for bad faith.

Lost profits are recoverable as extra-contractual damages if based on more than speculation or conjecture and proven with reasonable certainty. Id. (quoting Lovett v. E.L. Garner, Inc., 511 So. 2d 1346, 1353 (Miss. 1987)). Proof of lost profits must also be net rather than gross and must include deductions for overhead, depreciation, taxes, inflation, and similar items. Coastal, 120 So. 3d at 1025 (quoting Lovett, 511 So. 2d at 1353). Coastal Hardware asked for extra-contractual damages for alleged bad faith in the form of income it would have made upon using insurance proceeds to rebuild a bigger store. Id. at 1026-27. The Underwriters obtained a directed verdict after the trial judge excluded Coastal Hardware’s accounting expert from testifying about extra-contractual damages in the form of lost net profits. Id. at 1027.

A Mississippi trial judge acts as gatekeeper with discretion to admit or REFUSE expert testimony.

Acting as gatekeeper, a trial judge has discretion to admit or refuse expert testimony. Id. (quoting Webb v. Braswell, 930 So. 2d 387, 397 (Miss. 2006)). Expert testimony must be relevant and reliable–e.g., assists the trier of fact in understanding the evidence or a fact at issue. Id. (citing Miss. R. Evid. 702). It is if it assists the trier of fact in understanding the evidence or a fact in issue. Id. (quoting Miss. R. Evid. 702). Coastal Hardware’s expert failed to connect projected lost profits to the Underwriters’ failure to pay insurance benefits; could not easily distinguish between lost net profits and business interruption losses; and failed to give a clear explanation of net loss compared to gross loss. Coastal, 120 So. 3d at 1027-28. In addition, the expert’s calculations had not been disclosed in his pretrial report or deposition. Id. at 1029. The court affirmed directed verdict for the Underwriters on extra-contractual damages for alleged bad faith. Id.

Under Mississippi law, attorney’s fees and expenses may not be awarded post-judgment absent a statutory authority, contractual provision, or proof sufficient to support punitive damages.

Attorney’s fees may be awarded as extra-contractual damages when there is no arguable basis to deny coverage even if circumstances do not warrant punitive damages. Id. (citing Universal Life Ins. Co. v. Veasley, 610 So. 2d 290, 295 (Miss. 1992)). But not post-judgment absent a statute or contract or the proof would support punitive damages. Id. The trial judge lacked authority to award attorney’s fees collaterally post-judgment because the jury had not awarded punitive damages and because no statute or contract provided for them. Id.

A Mississippi court may award prejudgment interest for breach of an insurance contract where the amount was liquidated or denied in bad faith but may decline to do so if there is a bona fide dispute as to damages and liability.

If the amount to which an insured is entitled is withheld after due, interest can be awarded as damages. Coastal, 120 So. 3d at 1030 (quoting Arcadia Farms P’ship v. Audubon Ins., 77 So. 3d 100, 105 (Miss. 2012)). The amount must have been liquidated when the claim was originally made or the denial must have been frivolous or in bad faith. Id. (quoting Arcadia, 77 So. 3d at 105). Interest may be denied if a “bona fide” dispute exists as to damages and liability. Id. (quoting Simpson v. State Farm Fire & Cas. Co., 564 So. 2d 1374, 1380 (Miss. 1990), abrogated on other grounds by Upchurch Plumbing, Inc. v. Greenwood Utils. Comm’n, 964 So. 2d 1100, 1118 (Miss. 2007)). Prejudgment interest should compensate an insured for the time value of money rather than penalize wrongdoing, and the decision of whether to award it rests within the trial judge’s discretion. Id. (citing Arcadia Farms P’ship, 77 So. 3d at 105). Coastal Hardware was not entitled to prejudgment interest because the Underwriters had not acted frivolously or in bad faith in denying coverage given ambiguity in the binder and quote regarding wind coverage. Id.