In GBP Partners Ltd. v. Maryland Casualty Company, 2013 U.S.App.LEXIS 563 (5th Cir. Jan. 4, 2013), the U.S. Court of Appeals for the Fifth Circuit reviewed the entry of summary judgment by the trial court in favor of the insurer. GBP arose out of damage to the roof of a shopping center caused by the winds from Hurricane Ike. The insured, GBP, was the owner of the shopping center, and made claim with its insurer for the cost of replacing the roof, loss of rent under the rental income/business interruption coverage, loss of rent in the form of rent abatements for tenants, management fees, and window damage. The insurer paid $2.3 million for the replacement of the roof but denied the remaining claims. The federal district court for the Southern District of Texas entered summary judgment in favor of Maryland Casualty. On appeal, the Fifth Circuit found that: 

1) there was no coverage under the rental income/business interruption coverage because there was no complete cessation of the insured’s operations. The Fifth Circuit noted that several tenants remained doing business in the shopping center and continued paying rent. The court cited to Apartment Movers of Am., Inc. v. One Beacon Lloyds, 170 Fed.Appx. 901, 2006 WL 678675 (5th Cir. 2006); H&H Hospitality LLC v. Discover Specialty Ins. Co., 2011 U.S.Dist. LEXIS 146055 (S.D. Tex. 12/20/11); and Quality Oilfield Prods.Inc. v. Mich. Mut. Ins. Co., 971 S.W.2d 635, 637 (Tex.App. – Houston, 1998) in support of this proposition. 

2) coverage was potentially available for rent abatements under the Extra Expense coverage in the policy. The Fifth Circuit noted that the insured had produced evidence that the rent abatements were necessary to keep their tenants from moving out after the roof damage, and found that “The Policy covers not just extra expense associated with a suspension of operations but extra expense necessary to avoid a suspension of operations.” The Fifth Circuit, however, also found that “GBP must still establish that the extra expense was due to a covered loss. The court noted that although there was conflicting evidence in the record as to whether the need for the rent abatements was caused by the (covered) roof damage or the (excluded)  loss of utility service, the conflicting evidence was sufficient to create a genuine issue of material fact which should have precluded the entry of summary judgment on this part of the claim. The Fifth Circuit therefore reversed the entry of summary judgment on the rent abatement issue, and remanded to the district court for a trial on the issue of whether need for the rent abatements were caused by the roof damage. 

3) summary judgment in favor of the insurer on the claim for the recovery of increased management fees was proper. The insured’s contract with the management company was up for renewal shortly after the loss. When the contract was renewed, the management fees were increased over the fees paid under the earlier term of the contract. The Fifth Circuit found that the insured had failed to produce sufficient evidence showing that the increase in fees was caused by the greater management demands caused by the Hurricane Ike roof damage. 

4) summary judgment in favor of the insurer on the window damage claim was proper.  Almost three years after Hurricane Ike, the insured retained a consultant to inspect the windows at the shopping center, and subsequently submitted a proof of loss claiming that the hurricane had caused damage to the windows. The district court entered summary judgment for the insurer on this claim, finding that the insured had failed to provide timely notice of loss and had failed to create a genuine issue that the damage to the windows was caused by Hurricane Ike rather than a non-covered peril. The Fifth Circuit affirmed, finding that “Regardless of the timeliness of its notice, GBP’s claim for window damage must fail because GBP did not offer evidence to establish what part of the damage to the windows was caused by Hurricane Ike as opposed to some other non-covered event.” The court also found that GBP waived its argument on this issue by inadequately briefing the issue on appeal.” 

The GBP decision is significant in three respects

– First, it adds to a growing body of authority that under Texas law, an insured must establish a complete cessation of operations in order to recover under the business interruption coverage in its policy. While there is support for this proposition in Kansas and California (see Home Indem. Co. v. Hyplains Beef, 893 F.Supp. 987 (D. Kan. 1995) and Buxbaum v. Aetna Life & Cas. Co.,126 Cal.Rptr.2d 682 (2002)), this continues to be the minority rule, as the majority of jurisdictions have found that a complete cessation of one part of the insured’s total operations is required. Nonetheless, virtually all jurisdictions hold that a simple slowdown of operations, or a simple loss of business income is not sufficient to trigger coverage.

– Second, the Fifth Circuit reaffirmed the basic, but too often overlooked, proposition that recovery for extra expense requires proof that the expenses be caused by covered physical damage.  See Imperial Trading Co., Inc. v. Travelers Prop. Cas. Co. of Amer., 2009 U.S.Dist. LEXIS 64010 (E.D.La. 2009). 

– Third, in its ruling regarding the window claim, the Fifth Circuit found that the insured was required to show which part of the loss was caused by a covered peril as opposed to a non-covered peril. While seeming to acknowledge that the insured had produced evidence that some part of the window damage may have been caused by Hurricane Ike, the court found that this was insufficient because the insured was obligated to show how much of the damage was caused by the hurricane. This seems to parallel the Hurricane Katrina cases regarding who has the burden of separating covered from excluded loss, although some of those cases were decided based on the anti-concurrent causation clause in the policy. See Bayle v. Allstate Ins. Co., 615 F.3d 350 (5th Cir. 2010); Leonard v. Nationwide Ins.Co., 499 F.3d 419 (5th Cir. 2007); Tuepker v State Farm Fire & Cas. Co, 507 F.3d 346 (5th Cir. 2007).