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13-P-1747                                                Appeals Court

VERRILL FARMS, LLC       vs.    FARM FAMILY CASUALTY INSURANCE COMPANY.


                                No. 13-P-1747.

            Middlesex.         May 2, 2014. - November 4, 2014.

              Present:    Trainor, Fecteau, & Carhart, JJ.


Insurance, Business owner's policy, Amount of recovery for loss,
     Construction of policy. Contract, Insurance.



     Civil action commenced in the Superior Court Department on
September 17, 2010.

     The case was heard by Kimberly S. Budd, J., on motions for
summary judgment.


    Barry P. Fogel for the plaintiff.
    William A. Schneider for the defendant.


    TRAINOR, J.      The plaintiff, Verrill Farms, LLC (Verrill

Farms), owns and operates a retail farm store in Concord.         The

defendant, Farm Family Casualty Insurance Company (Farm Family),

issued a "Businessowners Advantage Insurance Policy" (policy)

effective August 4, 2008, to August 4, 2009, to Verrill Farms.

On September 20, 2008, Verrill Farms suffered a fire loss to its
                                                                    2


farm store.   Within two days of the fire, Verrill Farms reopened

its business at alternate locations at reduced capacity.     Within

another month, the business had resumed nearly full capacity in

temporary facilities at nearby locations.   After the fire and

during the process of restarting the business at the alternate

locations, no employees were laid off.   All employees who

remained on the payroll were involved in operations that allowed

Verrill Farms to maintain its business and generate income.

     Verrill Farms submitted a claim under the policy for loss

of business income, based on its loss of net income (net profit

or loss) in the year after the fire, which it believed the

policy covered under the loss of business income coverage.    Farm

Family paid a sum considerably less than the claim made by

Verrill Farms, based on its interpretation of what expenses can

be included in a calculation of net profit or loss in order to

determine loss of business income under the policy.1   Farm Family

describes the question as whether it has to "pay" Verrill Farms

for the cost of its ordinary payroll expense during the period

     1
       On January 30, 2010, Verrill Farms made a claim of
$626,219 to Farm Family for loss of business income, on which
Farm Family paid $317,825. Verrill Farms filed a complaint
seeking the balance of that claim, and a declaration that its
interpretation of the Policy was correct. Farm Family filed a
counterclaim for declaratory relief. The parties filed cross
motions for summary judgment, stipulating that "this case does
not concern any dispute between the parties over the amount of
the loss, and that issue is not before the Court. . . . After
the Court interprets the policy the parties can revisit the
issue concerning the amount of loss and conclude the claim."
                                                                   3


of restoration, beyond the sixty-day limit contained in the

policy.   See note 7, infra.   The Superior Court judge declared

that Farm Family did not have to pay the cost of ordinary

payroll beyond the sixty-day limit and granted summary judgment

in Farm Family's favor.    This, however, is not what Verrill

Farms was seeking to recover and misapprehends what the policy

provision was intended to accomplish.

     Verrill Farms never made a claim for a direct payment of

the cost of its ordinary payroll; it sought only to include the

cost in its calculation of net profit or loss for the

appropriate time period.   The sole question before us,

therefore, is whether the cost of ordinary payroll can be

included in the calculation of net profit or loss in order to

determine the loss of business income, when the business has

resumed operations at temporary locations during the restoration

period.   We conclude that it can, and that under the factual

circumstances of this case, loss of business income can only be

determined by including the expense of ordinary payroll, and

other unreimbursed continuing expenses required by the

resumption of operations, in the calculation of net profit or

loss.

     Standard of review.   The interpretation of an insurance

contract is a question of law, Boston Gas Co. v. Century Indem.
                                                                    4


Co., 454 Mass. 337, 355 (2009), which we review de novo.2     See

Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486, 495 (2012).

"The interpretation of language in an insurance contract 'is no

different from the interpretation of any other contract, and we

must construe the words of the policy in their usual and

ordinary sense.'"   Metropolitan Property & Cas. Ins. Co. v.

Morrison, 460 Mass. 352, 362 (2011), quoting from Boston Gas Co.

v. Century Indem. Co., supra.   "Every word in an insurance

contract 'must be presumed to have been employed with a purpose

and must be given meaning and effect whenever practicable.'"

Allmerica Fin. Corp. v. Certain Underwriters at Lloyd's, London,

449 Mass. 621, 628 (2007), quoting from Jacobs v. United States

Fid. & Guar. Co., 417 Mass. 75, 77 (1994).   "The objective is to

'construe the contract as a whole, in a reasonable and practical

way, consistent with its language, background, and purpose.'"

Massachusetts Property Ins. Underwriting Assn. v. Wynn, 60 Mass.

App. Ct. 824, 827 (2004), quoting from Gross v. Prudential Ins.

Co. of America, 48 Mass. App. Ct. 115, 119 (1999).   "If the

meaning of the contract language is unclear, we 'consider what


     2
       In an action with cross motions for summary judgment,
"[w]e ask whether the evidence, in the light most favorable to
the party losing the contest of cross motions, and the
controlling law entitle the prevailing party to judgment."
Audubon Hill S. Condominium Assn. v. Community Assn.
Underwriters of America, Inc., 82 Mass. App. Ct. 461, 465
(2012). The parties assert there are no issues of material
fact, and as a result, we review the pure issue of law.
                                                                    5


an objectively reasonable insured, reading the relevant policy

language, would expect to be covered.'"   Metropolitan Life Ins.

Co. v. Cotter, 464 Mass. 623, 635 (2013), quoting from Hazen

Paper Co. v. United States Fid. & Guar. Co., 407 Mass. 689, 700

(1990).

    Discussion.   We begin our analysis with a brief outline and

explanation of the relevant policy provisions.    The specific

policy at issue here is termed a business owners special

property coverage form.   In addition to coverage for physical

loss or damage to the covered party, the policy contains, as

relevant to our inquiry, additional coverage for loss of

business income and extra expense.

    In its most basic form, a commercial property casualty

policy insures against the risk of damage or loss of a

business's real and personal property.    See 1 Cozen, Insuring

Real Property §§ 1.05 & 3.01 (2014).   When a business's property

is damaged or lost, it often incurs additional consequential

losses such as increased costs or lost profits which are the

direct result of their inability, or partial inability, to

conduct their business operations.   Id. at § 3.01.   Additional

coverage can be negotiated to cover those economic losses.
                                                                   6


     Loss of business income.3    The general nature of loss of

business income, or business interruption,4 insurance is that it

acts in concert with, and as a supplement to, commercial


     3
         Section A.5.f. of the policy reads in pertinent part:

     "Business Income

     "(1) Business Income

     "We will pay for the actual loss of Business Income you
     sustain due to the necessary suspension of your
     'operations' during the 'period of restoration.' The
     suspension must be caused by direct physical loss of or
     damage to property at the described premises.

     ". . .

     "We will only pay for loss of Business Income that you
     sustain during the 'period of restoration' and that occurs
     within 12 consecutive months after the date of direct
     physical loss or damage. We will only pay for ordinary
     payroll expenses for 60 days following the date of direct
     physical loss or damage.

     "Business Income means the:

     "(i) Net Income (Net Profit or Loss before income taxes)
     that would have been earned or incurred if no physical loss
     or damage had occurred, but not including any Net Income
     that would likely have been earned as a result of an
     increase in the volume of business due to favorable
     business conditions caused by the impact of the Covered
     Cause of Loss on customers or on other businesses; and

     "(ii) Continuing normal operating expenses incurred,
     including payroll."
     4
       See, e.g., Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App.
4th 434, 437 (2002) ("The policy also provided coverage for loss
of business income, commonly called business interruption
insurance"); Wood Goods Galore, Inc. v. Reinsurance Assn. of
Minnesota, 478 N.W.2d 205, 207 (Minn. Ct. App. 1991) (using both
terms to describe coverage in a property loss policy).
                                                                    7


property casualty insurance.   Cozen, supra at §§ 1.06(4) & 3.01.

The business income or business interruption insurance is

designed to do for the business what the business would have

done for itself had no loss occurred.   See Gordon Chem. Co. v.

Aetna Cas. & Sur. Co., 358 Mass. 632, 636 (1971) (acknowledging

that "'the policy [of insurance (Business Interruption)] is

designed to do for the insured in the event of business

interruption caused by fire, just what the business itself would

have done if no interruption had occurred —- no more.'    No more

certainly, but also no less" [citation omitted]).   See also

National Union Fire Ins. Co. of Pittsburgh v. Anderson-Prichard

Oil Corp., 141 F.2d 443, 445 (10th Cir. 1944) ("The purpose,

scope and legal effect of the insurance contract is to protect

the prospective earnings of the insured business only to the

extent that they would have been earned if no interruption had

occurred . . . . In other words, the policy is designed to do

for the insured in the event of business interruption . . . just

what the business itself would have done if no interruption had

occurred -- no more").   Usually the additional coverage is tied

to the underlying property damage coverage because only business

interruptions or income losses resulting directly from physical

loss or damage to the insured property will be covered.
                                                                    8


    Extra expense.5    Extra expense coverage is intended for

businesses that cannot allow their operations to cease because

of damage to their property.    Verrill Farms is typical of the

kind of business "that [would] suffer a permanent loss of

customer goodwill as a result of even the temporary curtailment

of operations.   Continuity of service is the key to success for

[these] businesses . . . .     Extra expense insurance meets this

need for it reimburses the insured for those expenditures in

excess of normal operating costs that are required to keep the

business going while repairs to the physical property are made"

    5
        Section A.5.g. of the policy reads in pertinent part:

    "Extra Expense

    "(1) We will pay necessary Extra Expense you incur during
    the 'period of restoration' that you would not have
    incurred if there had been no direct physical loss or
    damage to property at the described premises. The loss or
    damage must be caused by or result from a Covered Cause of
    Loss.

    ". . .

    "(2) Extra Expense means expense incurred:

    "(a) To avoid or minimize the suspension of business and to
    continue 'operations':

    "(i) At the described premises; or

    "(ii) At replacement premises or at temporary locations,
    including relocation expenses, and costs to equip and
    operate the replacement or temporary locations.

    "(b) To minimize the suspension of business if you cannot
    continue 'operations.'"
                                                                       9


(emphasis in original).    Cozen, supra at § 3.04[1], at 3-82 to

3-83.    Additionally, the policy includes the appropriate adjunct

requirement that Verrill Farms "[r]esume all or part of [its]

'operations' as quickly as possible."6

     Most businesses obtain either business interruption

coverage or extra expense coverage.     There are situations,

however, where a business would want to have both types of

insurance protection.     Cozen, supra at § 3.04[3].   Verrill Farms

purchased coverage, by virtue of these additional endorsements,

that would allow it to resume operations as quickly as possible

as well as cover any loss of income suffered for a maximum of

twelve months when operations were resumed at a temporary

location.

     Ordinary payroll endorsement.7    The policy provision

providing for loss of business income contains an additional

endorsement providing direct payment to Verrill Farms for the

cost of "ordinary payroll expenses."     It is the interpretation




     6
       This duty is reinforced throughout the policy by means of
economic incentives and disincentives. Here, Verrill Farms
immediately moved to a temporary location, following the
policy's directive, and resumed operations elsewhere on a
temporary basis.
     7
       The provision for "ordinary payroll expenses" contained in
section A.5.f. of the policy reads: "We will only pay for
ordinary payroll expenses for 60 days following the date of
direct physical loss or damage."
                                                                   10


and application of this provision that is the focus of the

dispute between the parties.

     In these types of insurance contracts there are basically

two types of payroll expenses.     First, there are a business's

key employees -- directors, executives, managers, employees

under contract, and other employees who are so important that

they must be retained even if the business does not immediately

resume operations.    Second, there are ordinary payroll

employees, which are generally all other employees.8    For many


     8
         The policy here contains the following definition:

     "Ordinary payroll expenses mean payroll expenses for all
     your employees except:

     "(a) Officers;

     "(b) Executives;

     "(c) Department Managers;

     "(d) Employees under contract; and

     "(e) Additional Exemptions shown in the Declarations as:
          "(i) Job Classifications; or
          "(ii) Employees.

     "Ordinary payroll expenses include:

     "(a) Payroll;

     "(b) Employee benefits, if directly related to payroll;

     "(c) FICA payments you pay;

     "(d) Union dues you pay; and

     "(e) Workers' compensation premiums."
                                                                     11


businesses there is no need to purchase additional insurance to

cover the cost of "ordinary payroll" during a prolonged shut

down.

    "In many firms, there are some employees for whom the
    employer will not feel a need to continue wages or salary
    during an extended interruption. . . . Two endorsements are
    generally available that give the insured flexibility with
    regard to 'Ordinary Payroll.' These are: (1) ordinary
    payroll exclusion endorsement, and (2) ordinary payroll
    limited coverage endorsement" (emphasis added).

Huebner, Black, & Cline, Property & Liability Insurance 244 (3d

ed. 1982).   Here, Verrill Farms, apparently in an abundance of

caution and business planning, purchased an ordinary payroll

limited coverage endorsement.    "With the Ordinary Limited

Payroll Coverage Endorsement, it is possible to add back

ordinary payroll coverage for a limited period of time [here for

60 days].    The reasoning here is that the insured may not desire

to continue to pay employees in the ordinary payroll

classification should the interruption be of long duration; but

if it were relatively short, it would be advantageous to keep

the work force together."    Ibid.   The purpose of this coverage

is to make a direct payment to the insured of the cost of

ordinary payroll, for a specified period of time, in the event

that the business cannot resume its operations immediately or

not at all during the period of restoration.     When the business

is able to restart its operations, a direct payment of the

expense of ordinary payroll is no longer necessary because the
                                                                  12


business is generating income which pays its payroll expenses.

Cf. Cozen, supra at § 3.02[3][d].

    Here, Verrill Farms was able to resume its business

operations at alternate locations, within two days of the fire

at its store.   If the business had been unable to resume

operations immediately and therefore unable to generate revenue

to cover the cost of these employees, the limited ordinary

payroll endorsement would have allowed Verrill Farms to receive

direct payment for the cost of ordinary payroll employees, not

to exceed sixty days.   If there had been no resumption of

operations and the ordinary payroll employees had been laid off,

there would have been no continuing ordinary payroll expense.

However, because business operations resumed almost immediately,

it was not necessary to lay off any employees.   Since the

salaries of ordinary payroll employees were being paid, at all

times, from revenues generated by the resumption of operations,

Verrill Farms made no claim for direct payment pursuant to the

limited ordinary payroll endorsement.

    Calculating loss of business income.    Both parties agree

that operations covered by the policy were suspended for the

entire period of restoration and that the suspension was the

direct result of physical loss or damage to property at the
                                                                    13


described premises.9    Both parties also agree that the policy not

only requires the resumption of operations as soon as possible,

see notes 5 & 6, supra, but also that such a resumption of

operations does not prevent a recovery for loss of business

income.   The only issue before us, as we have stated earlier, is

therefore the method of calculating loss of business income.

     The policy sets out two seemingly contradictory provisions.

First, the policy provision that provides the methodology to

calculate loss of business income presumes that Verrill Farms

will not resume operations during the period of restoration.

See note 3, supra.     The policy defines business income as net

profit or loss that would have been earned if there had been no

fire and "continuing normal operating expenses incurred,

including payroll."     By defining business income as net profit

or loss and "continuing normal operating expenses incurred,

including payroll" (but not including ordinary payroll), the

policy is providing two separate payments, one for each

category.   In this scenario, loss of net income is not

calculated but is determined by projecting what net profit or

loss would have been if there had been no damage to the business


     9
       The policy defines "operations" as "your business
activities occurring at the described premises." Verrill Farms
was therefore able, and required, to restart operations at an
alternate location and still be covered for loss of business
income until it was able to restart operations at the covered
premises.
                                                                     14


property.   Since net profit or loss is not calculated by

subtracting expenses from gross income, an additional direct

payment is provided for the costs of continuing normal operating

expenses, which is allowed by the policy when business

operations do not resume during the period of restoration.      In

an operating business, however, net profit or loss is always

determined by subtracting the costs of materials, wages

(including ordinary payroll), and other charges from gross

income.10   The policy's payment plan must presume that there has

been no resumption of business operations.   The policy here

would pay the amount of the projected net profit or loss and an

additional payment of unavoidable continuing expenses during the

period of restoration.   See Amerigraphics, Inc. v. Mercury Cas.

Co., 182 Cal. App. 4th 1538, 1554 (2010).    Ordinary payroll

expenses are not included in this calculation because they have

presumably been paid separately for a period not to exceed sixty

days and, since the business has not resumed operations, the




     10
       Gross income has been "distinguished from 'net income,'
which is that portion of the receipts which remain after paying
wages and paying for materials." Black's Law Dictionary 832
(4th ed. 1968). Net profit is "that which remains as clear gain
of [the] corporation, after deducting from its income all
expenses incurred and losses sustained in the conduct and
prosecution of its business." Id. at 1192. Net profit is now
defined as "[t]otal sales revenue less the costs of the goods
sold and all additional expenses." Black's Law Dictionary 1404
(10th ed. 2014).
                                                                    15


employees have been laid off.11   The policy does not provide a

methodology to calculate loss of business income in the event

that Verrill Farms is able to resume operations at an alternate

location.

     Second, and at the same time, the policy requires Verrill

Farms to resume operations as soon as possible, at the same or

alternate location.   This requires Verrill Farms to incur the

actual expense of ordinary payroll because these employees are

necessary to continue operations once they have resumed.

     The United States Court of Appeals for the Fifth Circuit,

when considering the same apparent contradiction in a policy,

repeated the trial judge's observation that "[t]he policy does

not address 'charges and expenses' in the event of a resumption

of operations and does not clearly state the effect that a

resumption of operations has on the calculation of charges and

expenses."    Consolidated Cos. v. Lexington Ins. Co., 616 F.3d

422, 429 (5th Cir. 2010).    The court had already noted that the

policy required the resumption of operations as soon as

possible.12   Id. at 427.   The court concluded that "[t]he proper


     11
        If the business did not resume operations within sixty
days but chose to continue paying its ordinary payroll
employees, that expense would similarly not be covered as an
additional expense and could not be used to reduce any projected
net profit. The business would bear the cost entirely of any
retained ordinary employees.
     12
        The facts in Consolidated Cos. differ from ours only in
that the insured was attempting to use the expenses in "charges
                                                                   16


reading of a policy term is the one that gives it the meaning

that 'best conforms to the object of the contract.'"   Id. at

430, quoting from In re Katrina Canal Breaches Litigation, 495

F.3d 191, 207 (5th Cir. 2007).   "The fundamental principle of a

property insurance contract is to indemnify the owner against

loss, that is to place him or her in the same position in which

he would have been if no [fire] had occurred."   Ibid., quoting

from Bradley v. Allstate Ins. Co., 606 F.3d 215, 227 (5th Cir.

2010).   "This represents 'the reasonable expectations of the

parties in light of the customs and usages of the industry,' In

re Katrina Canal Breaches Litig., 495 F.3d at 207, and the

policy should be construed in accordance with them."   Ibid.    The

court in Consolidated Cos. determined that

    "[i]f the charges and expenses had already been paid by the
    revenue of the business, requiring the policy also to pay
    them is not placing [the insured] in the same position it
    would have been had no damage been suffered. In other
    words, the only 'reasonable' reading of the policy in the
    light of the goal of making [the insured] whole is that the
    policy requires reduction of 'actual loss' by income earned
    during the partial resumption of operations. Just as [the
    insured] would have paid the charges and expenses out of
    its revenue if Katrina had never struck, the policy
    provides for [the insured] to pay them, to the extent it
    could do so, out of the revenue from partially resumed
    operations. Only if revenue did not offset the charges and
    expenses would the insurance policy be called upon for
    payment."


and expenses" in the calculation of lost profits while also
being paid separately for the same expenses by the insurer. The
insured was, in effect, attempting to be paid twice for the same
expenses; once in the calculation of net profit by reducing
gross income and again by a direct payment for those expenses.
                                                                     17



Ibid.

     Here, Farm Family argues that the necessary expense of

ordinary payroll cannot be included as a deduction from gross

revenue earned during the resumption of operations by Verrill

Farms in order to calculate net profit or loss.     The judge

agreed and concluded that the cost of ordinary payroll could

only be reimbursed directly by Farm Family for a sixty-day

period and could not be included as an expense to offset revenue

earned during the period of restoration when Verrill Farms had

resumed operations.     The judge's conclusion would have been

correct if Verrill Farms had been unable to resume operations

during the period of restoration.    See Amerigraphics, Inc. v.

Mercury Cas. Co., 182 Cal. App. 4th at 1552.     The judge's

interpretation, however, does not "construe the contract as a

whole, in a reasonable and practical way, consistent with its

language, background, and purpose."     Massachusetts Property Ins.

Underwriting Assn. v. Wynn, 60 Mass. App. Ct. at 827, quoting

from Gross v. Prudential Ins. Co. of America, 48 Mass. App. Ct.

at 119.     The judge's interpretation would not put Verrill Farms

in the position it would have been in if no fire had occurred.

This interpretation also does not account for the policy

requirement that Verrill Farms resume operations as soon as

possible.    The policy requires Verrill Farms to resume
                                                                  18


operations as soon as possible but only provides a methodology

to calculate loss of business income which assumes that business

operations would not be resumed.   The policy provides no

methodology to calculate loss of business income in the event,

as required by the policy, that Verrill Farms resumed

operations.

    By refusing to include the cost of ordinary payroll as a

deduction from gross revenue in the calculation of net profit or

loss, which is the basis to determine loss of business income,

Farm Family is artificially inflating Verrill Farms's net

revenue for the year after the fire.   The artificial increase to

net revenue also incorrectly decreases Verrill Farms's actual

loss of business income.   Unlike the claim made in Consolidated

Cos. by the insured, Verrill Farms made no claim for direct

payment of the cost of ordinary payroll.   Instead it used the

cost of ordinary payroll as an operating expense to offset its

revenue in determining net profit or loss during the period of

restoration.

    The only rational reading of the policy, considering the

contract as a whole as well as its purpose of making Verrill

Farms whole, is that it requires the loss of business income to

be determined by the difference between the amount of net profit

or loss earned during the partial resumption of operations and

the amount of net profit or loss that Verrill Farms would have
                                                                    19


earned had no fire occurred.     The gross income earned during the

period of partial resumption of operations (the restoration

period) has to be reduced by the amount of legitimate and

necessary expenses for that period, including ordinary payroll,

in order to determine net profit or loss.    Simply put, gross

income must be reduced by the expenses required to earn it in

order to determine net income.    Just as Verrill Farms would have

paid the cost of its ordinary payroll (and other continuing

expenses) out of income earned if the fire had never occurred,

the policy requires Verrill Farms to pay these expenses, to the

extent possible, out of income earned during the partial

resumption of operations.   Only if the net profit or loss for

this period was less than the net profit that Verrill Farms

would have earned if no fire had occurred would the policy be

called upon to make the payment for loss of business income.13

     The judgment is vacated, and the matter is remanded to the

Superior Court for entry of a new judgment allowing Verrill

Farms's motion for summary judgment and denying Farm Family's

motion for summary judgment.     The new judgment shall include a

declaration that in the circumstances of this case, loss of


     13
       Here Verrill Farms claims a net loss in its business
income when compared to the previous year. Even if Verrill
Farms had realized a net profit during the period of
restoration, the policy may still have been required to make up
any short fall of net profit when compared to the net profit of
the previous year.
                                                                  20


business income can only be determined by including the expense

of ordinary payroll, and other unreimbursed continuing expenses

required by the resumption of Verrill Farms's operation, in the

calculation of net profit or loss.

                                     So ordered.
