Business Interruption – Cows, Not Covid

For the past 16 months, the insurance coverage world has been dominated by a singular issue: the availability of business interruption coverage for losses tied to Covid-19. It started with coverage lawyers, on both sides, addressing how they believed property policies should apply. Then hundreds of trial courts, with no end in sight, answered who was right. And now we are at the start of a forthcoming avalanche of appellate decision that the tell the trial courts if they got it.

With so many people having been focused on business interruption coverage, I thought that last week's decision, from a federal appeals court, addressing an important aspect of business interruption coverage – NOT involving Covid, but cows – would be of interest to many. Even if you are not involved with business interruption coverage, it's an interesting case. And the case has some Covid coverage relevance too.  

[A brief comment about the above picture. If you ever want to see the Chick-fil-A cow, with a curious expression, ask him or her to pose for a picture reading an insurance newsletter.]

At issue in Hastings Mutual Ins. Co. v. Mengel Dairy Farms, No. 20-4090 (6th Cir. July 16, 2021) was coverage for dairy farms with over 1,000 cows. In 2018, cows began to die en masse. In addition, the cows that survived began to produce less milk.

The dairy farmers, Will and Jennifer Mengel, looked for the reason for this tragedy. After several possibilities didn't pan out, the Mengels finally found the cause: stray electric current on their property electrocuted the cows.  

The Mengels' cows were insured against various perils, such as accidental shooting, attack by wild animals and electrocution. The insurer, Hastings Mutual, paid for the cows that died. However, it declined to pay for the lost milk production. The Mengels filed suit.

Under the policy, the insurer agreed to pay for "loss of business income . . . due to the necessary suspension of [the Mengels'] operations." 

As the Mengels saw it, the reduced milk production (and the resulting loss in sales) qualified as a "suspension" of their dairy farms' operations. But the insurer saw it differently, arguing that only a complete shutdown of the farms counts as a "suspension." The district court sided with the insurer.

The issue went to the Sixth Circuit (Ohio law), which was not moo-ved by the Mengels' arguments that the reduced milk production qualified as a "suspension" of their dairy farms' operations.

Noting that no Ohio court had ever addressed what is a "suspension of operations," the federal appeals court sought guidance from other courts nationally and noted that they have interpreted the term to mean a complete shutdown of business operations.

The court rejected the Mengels arguments to the contrary. First, the case law cited did not help them, as it involved a policy that provided coverage for "necessary or potential suspension" of operations. The Mengels' policy did not include "potential suspension" of operations.

The most substantive argument made by the Mengels was rejected by the court:

"[T]he Mengels argue that other provisions of the insurance policy contradict our reading of 'suspension.' For example, the policy provides that Hastings Mutual can reduce any benefits paid out for lost business income if the Mengels 'can resume [] operations, in whole or in part.' The Mengels claim this provision is proof that the term 'suspension' can include a reduction in business: Since the policy continues to provide benefits if they partially reopen, it must also provide benefits if they only partially close. Not so. The provision establishes that benefits can be reduced only when a business can 'resume' its operations. Yet in order for a business to resume operations, it must first stop operations. In other words, a business cannot restart something that never ended. So the provision does not support the Mengels' interpretation of 'suspension.'"

The court concluded with this sage observation: "Litigation has a way of transforming common-sense questions into impenetrable legal mazes. But in this case, for once, the issues are just as they seem. A business suspends its operations when it temporarily stops all business activity. Though the Mengels' cows produced less milk, the Mengels never completely shut down their dairy farms."