Blogs

Posted: July 12, 2018

Law Firm Not Entitled to Business Interruption Coverage for Contingency Fees Not Earned During Policy Period

On June 28, 2018, the First Department issued a decision in Bernstein Liebhard LLP v. Sentinel Ins. Co., Ltd., 2018 NY Slip Op 04842, reversing a decision by Justice Masley of the New York County Commercial Division that granted summary judgment to a law firm on a claim for business interruption coverage. (See our previous post on Justice Masley’s decision here.)

The plaintiff, a mass tort law firm, sought coverage for loss of business income after a fire destroyed its offices.  Although the policy only covered income that would have been “earned” during the 12 months after fire, Justice Masley held that the law firm could recover for new matters for which it would have been retained during the 12-month period, even though the contingency fees for those matters would not have been received until years later.  The First Department disagreed and reversed the decision, explaining:

The plain language of the lost business income provision at issue . . . provided coverage for any resulting “actual loss” of business income due to the necessary suspension of operations as a result of a covered cause of loss and that would have been “earned” during the 12 months after the fire.  The parties agree that “earned” means “become entitled to.”

The entire fee amounts that eventually result from settlements and judgments in cases foregone by plaintiff would not have been “earned” by plaintiff at the time, within the 12-month cutoff after the fire.  Lost fees from prospective clients that plaintiff law firm had to forego, but which would have resulted from work performed after the 12-month cutoff, are not covered by the policy. Rather, the lost business income provision here covers fees that, if not for the suspension of advertising due to the fire, plaintiff law firm would have earned for services actually performed for such new clients within 12 months of the fire or from such new cases that resolved within 12 months of the fire.  Although plaintiff would have theoretically been entitled to coverage for such fees for services performed within 12 months of the fire or from such cases resolved within 12 months of the fire, plaintiff has acknowledged that the claim was not presented in such a manner and it pursues no such claim in its brief.

(Citations omitted).

One take away here is the importance of obtaining the right coverage for the insured’s business.  As Justice Masley recognized, the business interruption policy at issue in this case was not well-suited to the law firm’s business model, given that it is paid on a contingency fee rather than an hourly basis.  That said, the First Department was prepared to accept a theory that would have awarded coverage for “fees for services performed within 12 months of the fire,” suggesting that their could have been a way to extract some value from the policy.

View posts