Courts commonly observe that the purpose of Business Interruption or Business Income insurance is to put the policyholder in the same position it would have been in had there been no interruption. The Business Interruption inquiry is, thus, counterfactual. As such, for Business Interruption claims that go to trial, insurance companies and policyholders alike usually rely on experts – certified public accountants acting as “forensic accountants” – to calculate the policyholder’s performance absent the interruption.
Increasingly, however, insurance companies are challenging policyholder experts under the “junk science” rule in Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), governing the admissibility of expert testimony pursuant to F.R.E. 702. See, e.g., Manpower Inc. v. Ins. Co. of the State of Pa., No. 08C0085, 2011 WL 1356945 (E.D. Wis. Apr. 11, 2011); Lightfoot v. Hartford Fire Ins. Co., No. 07-4833, 2011 WL 381613 (E.D. La. Jan. 26, 2011). Having prepared a case that depends upon the admissibility of an expert accountant’s opinions, a policyholder can easily lose its case if the court grants this motion and bars the expert from testifying. See, e.g., Lava Trading, Inc. v. Hartford Fire Ins. Co., No. 03 Civ. 7037 (S.D.N.Y. Apr. 8, 2005); Wyndham Int’l, Inc. v. ACE Am. Ins. Co., 186 S.W.3d 682 (Tex. App. Mar. 10, 2006).
Such decisions are misguided and may result in standards that are unrealistically high for many policyholders.. A policyholder should be able to prove its Business Interruption claim through virtually any type of evidence. Business Interruption coverage is designed to cover not only international conglomerates capable of hiring forensic accountants and economists, but also mom and pop grocery stores, for which requiring rigorous proof through costly experts makes the coverage practically illusory. The proper avenue for challenging the policyholder’s evidence, including evidence presented through a forensic accountant, is cross-examination at trial. See, United States Fire Ins. Co. v. Kelman Bottles LLC, No. 11 cv 0891, 2014 WL 3890355 (W.D. Pa. Aug. 8, 2014); Safeguard Storage Props., LLC. v. Donahue Favret Contractors, Inc., 60 So. 3d 110 (La. App. 2011).
Nonetheless, policyholders need to be aware of the threat of a Daubert challenge at trial. We suggest that policyholders do not rely solely upon forensic accountants, but instead backstop those witnesses. Since the insurance industry’s Daubert maneuver became commonplace, courts have accepted testimony as to the amount of a Business Income loss from:
- Public adjusters as expert witnesses: Shathaia v. Travelers Cas. Ins. Co., No. 12-cv-13657, 2014 WL 197731 (E.D. Mich. Jan. 16, 2014);
- Tax attorneys as expert witnesses: Boardwalk Apartments, L.C. v. State Auto Prop. & Cas. Ins. Co., No. 11-2714-JAR-KMH, 2014 WL 1308876 (D. Kan. Mar. 28, 2014);
- Forensic accountants as lay witnesses: Ryan Dev. Co. v. Indiana Lumbermens Mut. Ins. Co., 711 F.3d 1165 (10th Cir. 2013); Penford Corp. v. National Union Fire Ins. Co., No. 09-CV-13, 2010 WL 2509985 (N.D. Iowa June 17, 2010); and
- Regular, business accountants as lay witnesses: Louisiana Med. Mgtt Corp. v. Bankers Ins. Co., No. 06-7248, 2007 WL 2377137 (E.D. La. Aug. 16, 2007); Brown Family Orthodontics, LLC v. Travelers Ins. Co., No. 06-2359, 2007 WL 1063640 (E.D. La. Apr. 3, 2007).
Obviously, a policyholder need not put on large numbers of witnesses to prove its loss, but policyholders are best advised to be prepared to prove their case with different types of witnesses to avoid losing all of their rights to a misplaced Daubert ruling.