borton & sons and travelers insurance and loss of market and loss of market share exclusion

One of the exclusions mentioned in the Duane Reade case is the "loss of market" exclusion. The way the issue was presented in the case was as an exclusion to the "Business Interruption Coverage," ("BIC") which is a normal part of a Commercial General Liability insurance policy. Though the case in our book comes in the Homeowner section of cases, Abraham mentions that BIC is "closely allied" with property insurance. In any case, Duane Reade presents the situation where the insurer argues that because the Duane Reade Pharmacy was in the World Trade Center Mall, and that the entire Mall was destroyed, there was a resultant "loss of market," which would mean that the insurer would not be responsible for lost profits or even lost sales of the pharmacy. The purpose of this essay is to present the facts of another recent case (2000) where the "loss of market" argument was front and center--so as to clarify the nature of this exclusion. In this case, from the State of Washington, the insurer was able successfully to introduce this exclusion to avoid liability.

Borton & Sons Inc. v. Travelers Ins. Co., 99 Wash App 1010

At issue in the case was whether Travelers would be responsible for covering the value of 1,089 bins of unsold Fuji apples after the roof of plaintiff's apple-storing facility collapsed, destroying thousands of boxes of apples. On January 20, 1993 the roof of one of Borton's storage facilities in Yakima collapsed due to the weight of ice and snow, where there were 70,320 boxes of various varieties of apples, including 13,764 of Fuji applies. All apples were exposed to the elements. At the insurer's suggestion, Borton repackaged apples that were salvageable, being able to sell around 47,000 boxes, including 9,680 boxes of Fujis. However, even though they were able to sell these boxes of Fujis, Borton was unable to sell 1,089 bins of Fuji apples stored elsewhere (i.e., not threatened in the collapse). Borton argued that because Fujis were new in the market and the sale of "inferior" Fujis after the collapse eroded confidence in Borton's Fuji apples generally, the public wouldn't buy the Fujis.

Legal Analysis

Here is how the court stated the issue.

"We first consider the effect of a policy clause that excluded coverage "for loss or damage caused by or resulting from ... {d}elay, loss of use or loss of market." Borton has alleged that one of the causes of its inability to sell the 1,089 bins of Fuji apples was the undeveloped domestic market for Fuji apples. Travelers contends the "loss of market" exclusion precludes coverage for this type of loss. Borton contends its losses were caused, not by "loss of market," but rather by "loss of market value."

The court then spent some time differentiating between a loss of market and a loss of market value. A market, it says, is "the geographical or economic extent of commercial demand for any particular product and generally refers to a more or less identifiable group of prospective purchasers seeking a particular type of product offered by a more or less identifiable group of sellers." On the other hand, market value means "the price that a product can command in a given (general or particularized) market." In other words, the former has to do with a collapse of ability to sell one's product because of a number of factors, such as price of a good, demand "out there," health scare associated with the product you are trying to sell, thus leading to consumer avoidance of the product, etc. Loss of market has everything to do with diminished demand, while loss of market value has to do with the diminution of value of certain items/products through a variety of reasons (such as damage to crops, vehicles, etc.).

The court concludes: "To the extent Borton alleges its loss was the result of conditions in the domestic apple market (which was the nature of their allegation), the loss is excluded by the 'loss of market' exclusion."

Conclusion

In the Duane Reade case assigned for today, the insurer also argued that the "loss of market" exclusion should apply to Duane Reade Pharmacy. After all, when it was destroyed along with the WTC properties, its immediate "market" seemed to disintegrate with it. But the court said that the insurer had not put on enough evidence to support that claim. Indeed, as the court goes on to say, the loss of market exclusion relates "to losses resulting from economic changes occasioned by, e.g., competition, shifts in demand, or the like; it does not bar recovery for loss of ordinary business caused by a physical destruction or other covered peril."

Keeping these two phrases distinct will aid our more precise understanding of insurance policies.

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