FIRST DIVISION December 26, 2006
No. 1-05-3231
BAXTER INTERNATIONAL, INC., ) Appeal from ) the Circuit Court Plaintiff-Appellee and Cross-Appellant, ) of Cook County ) v. ) ) No. 03 CH 16823 AMERICAN GUARANTEE AND LIABILITY ) INSURANCE COMPANY, ) Honorable ) Peter J. Flynn, Defendant-Appellant and Cross-Appellee. ) Judge Presiding.
JUSTICE CAHILL delivered the opinion of the court:
This case arises out of an insurance coverage dispute between Baxter International, Inc.
(Baxter), and American Guarantee & Liability Insurance Company (American). The dispute
concerns whether payments American made to indemnify Baxter for damaged inventory can be
considered in calculating American's liability for loss due to business interruption. The trial court
held the payments could not be considered and granted summary judgment on that issue to
Baxter. We affirm in part and reverse in part.
Baxter is a global manufacturer of medical products. In September 1998, Baxter's Puerto
Rican facilities were damaged by Hurricane George. Baxter sought coverage for its losses under
a $1 billion commercial insurance policy issued by American. Baxter submitted claims to recover
losses resulting from property damage and business interruption. American indemnified Baxter 1-05-3231
for the property damage portion of its claim, including losses to Baxter's damaged finished goods
inventory. American paid Baxter the amount Baxter would have received had Baxter been able to
sell the inventory. Of the $30.7 million American paid in damages to Baxter's inventory, about
$15 million accounted for lost profit.
Baxter did not claim business interruption losses resulting from the damaged inventory.
But Baxter did claim it suffered business interruption losses due to damage of other property.
American maintained the profit component of the damaged inventory payment must be considered
in calculating Baxter's total actual loss during the period of interruption. Baxter maintained
American could not consider payments it made under the personal property provision of the
policy to reduce its obligation under the business interruption provision. The parties attempted to
negotiate their differences but could not reach an agreement.
Baxter filed this declaratory judgment action on October 8, 2003. Baxter sought a
declaration that American's liability for losses due to business interruption is independent of its
liability for damaged inventory. American filed a counterclaim for declaratory judgment.
American asserted the policy covered only "actual loss" due to business interruption, which must
be calculated by considering profits Baxter realized from American's "purchase" of the damaged
inventory. American also asserted as an affirmative defense that Baxter's action was barred by the
policy's 12-month suit limitation provision.
Both parties moved for summary judgment. The trial court held American's payment for
damaged inventory could not be considered in determining actual loss due to business interruption
and granted summary judgment to Baxter on this issue. The trial court also granted summary
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judgment to Baxter on the issue of timeliness, holding Baxter's complaint was not barred by the
policy's 12-month suit limitation provision. Baxter then moved for attorney fees and costs under
section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2004)) (section 155 sanctions).
The trial court denied the motion and, on September 7, 2005, issued a final order reflecting all
three holdings.
American appeals the trial court's summary judgment orders and Baxter cross-appeals the
court's denial of its motion for section 155 sanctions. The parties agree the issues raised by
American are subject to de novo review. See Alternate Fuels, Inc. v. Director of Illinois
Environmental Protection Agency, 215 Ill. 2d 219, 229, 830 N.E.2d 444 (2004) (appeals from
summary judgment rulings presenting issues of law are reviewed de novo); Avery v. State Farm
Mutual Automobile Insurance Co., 216 Ill. 2d 100, 129, 835 N.E.2d 801 (2005) (construction
and interpretation of an insurance policy present questions of law that are reviewed de novo).
Baxter argues the issue of whether section 155 sanctions should have been awarded is also
reviewable de novo because Baxter brought its motion in conjunction with its motion for summary
judgment. Baxter cites two appellate court cases reviewing de novo section 155 awards that were
presented in the trial court through a motion for summary judgment and decided as a matter of
law. See Mobil Oil Corp. v. Maryland Casualty Co., 288 Ill. App. 3d 743, 751, 681 N.E.2d 552
(1997); West American Insurance Co. v. J.R. Construction Co., 334 Ill. App. 3d 75, 88, 777
N.E.2d 610 (2002). Those cases do not apply here, where Baxter's section 155 sanctions motion
did not involve purely legal issues and was presented to the trial court after the court ruled on the
parties' summary judgment motions. Under these circumstances, we review the trial court order
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for an abuse of discretion. See Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186
Ill. 2d 127, 160, 708 N.E.2d 1122 (1999) (an abuse of discretion standard ordinarily applies to
review a ruling on a motion for section 155 sanctions).
The parties ask this court to decide whether, under the insurance policy, American's
liability for loss due to business interruption can be offset by payments made to indemnify Baxter
for damaged inventory. The general rules governing contract interpretation apply to insurance
policies. Hobbs v. Hartford Insurance Co. of the Midwest, 214 Ill. 2d 11, 17, 823 N.E.2d 561
(2005). "When construing the language of an insurance policy, a court's primary objective is to
ascertain and give effect to the intentions of the parties as expressed by the words of the policy. "
Central Illinois Light Co. v. Home Insurance Co., 213 Ill. 2d 141, 153, 821 N.E.2d 206 (2004).
"If the policy language is unambiguous, the policy will be applied as written, unless it contravenes
public policy." Hobbs, 214 Ill. 2d at 17. "Conversely, if the terms of the policy are susceptible to
more than one meaning, they are considered ambiguous and will be construed strictly against the
insurer who drafted the policy." American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 479,
687 N.E.2d 72 (1997). An ambiguity exists where the language of the policy is " 'obscure in
meaning through indefiniteness of expression.' " Central Illinois Light, 213 Ill. 2d at 153, quoting
Platt v. Gateway International Motorsports Corp., 351 Ill. App. 3d 326, 330, 813 N.E.2d 279
(2004). "A contract is not rendered ambiguous merely because the parties disagree on its
meaning. [Citation.] On the other hand, a contract is not necessarily unambiguous when, as here,
each party insists that the language unambiguously supports its position." Central Illinois Light,
213 Ill. 2d at 153-54. Whether a contract is ambiguous is a question of law. Central Illinois
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Light, 213 Ill. 2d at 154.
The parties maintain the policy language unambiguously supports their respective
positions. The policy's business interruption provision reads in its entirety:
"Business Interruption/Gross Earnings
1. This policy insures against loss resulting directly from necessary
interruption of business caused by physical loss or damage by a
peril not otherwise excluded herein to insured property of the
Insured, all subject to the terms and conditions of this policy.
2. Actual Loss Sustained
This policy insures the actual loss sustained by the Insured which
results directly from the necessary interruption of business, but not
exceeding the reduction in Gross Earnings and Entire Ordinary
Payroll less charges and expenses which do not necessarily continue
during such interruption of business caused by direct physical loss
or damage to property insured.
'Gross Earnings' shall mean the sum of:
(a) total net sales value of production (manufacturing
operations)[;]
(b) total net sales of merchandise (mercantile operations)[;] and
(c) other earnings derived from operations of the business;
less the cost of[:]
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(1) raw stock from which production is derived;
(2) supplies consisting of materials consumed directly in the
conversion of such raw stock into finished stock or in
supplying the service *** sold by the Insured;
(3) merchandise sold, including packaging materials
thereof;
(4) services purchased from outsiders (not employees of
the Insured) for resale which do not continue under
contract.
No other costs shall be deducted in determining [g]ross [e]arnings.
3. Exclusions
The Company shall not be liable under the Gross Earnings section
for any loss sustained resulting from damage to finished products
manufactured by the Insured nor for the time required for their
reproduction, to the extent the Gross Earnings value is recoverable
under the Property Damage section of this policy."
American argues that, under the language of the policy, the payments it made to Baxter
for damaged inventory must be included in calculating "gross earnings." American explains that
the gross earnings formula includes total net sales of merchandise and other earnings derived from
business operation. American argues its payment to Baxter for the damaged goods constitutes a
"sale" of merchandise or other earnings. American relies on Lyon Metal Products, L.L.C. v.
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Protection Mutual Insurance Co., 321 Ill. App. 3d 330, 747 N.E.2d 495 (2001), where the court
held there is no distinction between selling damaged inventory to a customer in the ordinary
fashion and receiving the cash selling price for the same inventory under the terms of an insurance
policy. Lyon, 321 Ill. App. 3d at 343-44. American argues the profit Baxter realized from the
"sale" of its damaged inventory to American decreased Baxter's total actual loss for the period of
business interruption. American maintains Baxter would receive a windfall if actual loss or "gross
earnings" did not take into account the money Baxter made from its damaged finished goods inventory.
Baxter does not dispute that, under its interpretation of the policy, it may be entitled to
greater profit than it might have realized had the hurricane never occurred. But Baxter argues this
is what the parties bargained for when they entered into the contract. Baxter points out that,
under the language of the policy, American agreed to indemnify Baxter for damaged inventory in
an amount equal to what Baxter would have realized had it been able to sell the inventory on the
market. Baxter was not required to prove projected sales because it was presumed under the
contract that Baxter would have sold 100% of its inventory had the damage not occurred. Baxter
maintains American's attempt to include the damaged inventory payments into its calculation for
actual loss or "gross earnings" would require Baxter to prove projected sales on the same
inventory that, under the contract, would have presumably been sold in its entirety.
The underlying question is whether "gross earnings" includes all of Baxter's earnings
during the period of interruption, including those earnings realized from American's
indemnification of Baxter's damaged finished goods. The policy language offers no clear answer
and is ambiguous for this reason. See Central Illinois Light, 213 Ill. 2d at 153. Although
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generally, under these circumstances, the court would apply the anti-drafter rule and construe the
policy strictly against the insurer, we do not do so here. The anti-drafter rule is intended to aid
the party with less bargaining power during the drafting process and is not appropriate where the
parties are equally sophisticated. Alberto-Culver Co. v. Aon Corp., 351 Ill. App. 3d 123, 132,
812 N.E.2d 369 (2004). We believe the rule is inappropriate because Baxter is a sophisticated
entity with bargaining power equal to that of American. See Alberto-Culver, 351 Ill. App. 3d at
133. So, rather than applying the rule as a default in favor of Baxter, we turn to general principles
governing contract interpretation. Alberto-Culver, 351 Ill. App. 3d at 133.
One such principle is that parties cannot contract for terms that are contrary to public
policy. In re Foreman, 365 Ill. App. 3d 608, 611, 850 N.E.2d 387 (2006). The public policy of
this state is that an insurance policy should indemnify an insured for loss but not provide a
windfall profit. Lyon, 321 Ill. App. 3d at 344. We also note the general purpose of business
interruption insurance is to protect earnings an insured would have enjoyed had there been no
business interruption. Lyon, 321 Ill. App. 3d at 342. The interplay of these two principles is set
out in Lyon.
The insured there was a manufacturer of steel products and was insured under a
commercial policy that covered, among other things, losses due to property damage and business
interruption. Lyon, 321 Ill. App. 3d at 333. The insured sustained property damage to its
principal manufacturing and distribution center as a result of flooding and was prevented from
producing goods or continuing business operations for 22 consecutive days, including 17
production days. Lyon, 321 Ill. App. 3d at 333. The insurer paid the insured the cash selling
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value of its damaged finished-goods inventory, including the profit the insured would have
realized had it been able to sell the inventory. Lyon, 321 Ill. App. 3d at 333. The insurer claimed
the profit component of the damaged inventory payment offset its liability for losses due to
business interruption. Lyon, 321 Ill. App. 3d at 334. The insured disagreed, arguing the insurer
must cover lost profit resulting from the inability to manufacture goods for the 17-day period.
Lyon, 321 Ill. App. 3d at 335. The insurer presented evidence at trial showing the insured
suffered no actual loss from the interruption of its business because the profit the insured would
have realized from projected sales for the 17-day period was less than the amount it received from
the "sale" of its damaged inventory to the insurer. Lyon, 321 Ill. App. 3d at 336-37.
The appellate court held the insurer's payment for damaged inventory must be considered
in calculating the insured's business interruption loss. Lyon, 321 Ill. App. 3d at 340. The court
explained that the general purpose of business interruption coverage is to protect profits the
insured would have realized had there been no interruption. Lyon, 321 Ill. App. 3d at 342.
"[W]hen there is a loss of production capacity without a loss of earnings there is no recoverable
business interruption except the extra expense necessary to prevent loss of earnings." Lyon, 321
Ill. App. 3d at 342. The court found the compensation received for the damaged inventory was a
"sale" for purposes of determining the insured's actual loss. Lyon, 321 Ill. App. 3d at 343-44.
The court explained:
"[T]here is no distinction between [the insured's] selling its damaged
inventory to a customer in the ordinary fashion and *** receiving the regular cash
selling price for the same inventory under the terms of an insurance policy.
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Whether a 'sale' took place is not crucial. The gravamen of the analysis is whether
the compensation for the damaged inventory allowed [the insured] to earn net
profit and fixed charges in the same way [the insured] would have earned net profit
and fixed charges had there been no flood and the inventory was sold in the
ordinary manner." Lyon, 321 Ill. App. 3d at 343-44.
The court concluded that, by selling the damaged inventory to the insurer, the insured realized a
sales profit that must be considered in determining actual loss due to business interruption. Lyon,
321 Ill. App. 3d at 343-44. The court relied heavily on Northwestern States Portland Cement Co.
v. Hartford Fire Insurance Co., 360 F.2d 531, 533 (8th Cir. 1966).
A fire in Portland Cement damaged a cement-making facility owned by the insured.
Portland Cement, 360 F.2d at 532. As a result of the damage, the insured was unable to produce
a raw material necessary to cement production. Portland Cement, 360 F.2d at 532. To reduce
the loss, continue production and fill existing orders, the insured used raw materials it had
stockpiled to produce cement. Portland Cement, 360 F.2d at 532-33. The insured argued it was
entitled to an amount equal to lost production for the period of business interruption. Portland
Cement, 360 F.2d at 533. The court disagreed. Portland Cement, 360 F.2d at 533-34. The
court found the insured was able to meet its projected sales despite its inability to produce raw
materials and the only actual loss suffered by the insured was the replacement value of the
stockpiled materials. Portland Cement, 360 F.2d at 533-34. The court concluded that, because
the loss in production did not cause a loss in profit, lost production was not covered as a business
interruption loss. Portland Cement, 360 F.2d at 533-34.
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Baxter argues Lyon and Portland Cement are not dispositive of Baxter's business
interruption claim. Baxter points out that it is not seeking lost profit based on its inability to sell
the damaged inventory but, rather, lost profit resulting from damage to other property. Baxter
argues the insured in Lyon sought recovery of the same lost earnings: indemnity for damaged
inventory and business interruption due to inability to produce more of the same inventory.
Baxter also argues Portland Cement is distinguishable because the insured there was able to avoid
the loss of sales by using stockpiled inventory. It is undisputed that Baxter was unable to avoid
loss.
The distinctions Baxter urges do not alter the impact of the holdings in Lyon and Portland
Cement. The courts in those cases held an insured cannot recover for lost profit due to business
interruption where there has been no actual loss. In other words, business interruption is not itself
a loss. See Lyon, 321 Ill. App. 3d at 344 (business interruption insurance "covers a loss of
earnings due to a loss of production, not just a loss of production"). An actual loss occurs only
where the insured is unable to reduce or eliminate lost profit caused by the interruption. Baxter
was able to reduce its lost profits by selling its damaged inventory to American during the
business interruption.
Without citation to authority, Baxter contends its business interruption loss is independent
from the profit it realized from selling its damaged inventory to American. Baxter explains the
profit it realized from the sale of the damaged inventory was not the result of business interruption
but the result of property damage. We fail to see how this distinction matters. The business
interruption provision provides coverage for actual loss resulting from business interruption but
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not exceeding "gross earnings." "Gross earnings" is defined in the policy as "total" sales and other
earnings minus costs. It is not defined, as Baxter suggests, as "only the gains or losses resulting
from such business interruption." In other words, there is no suggestion from the language in the
policy that a distinction can be made between different types of profit.
We find the holding in Lyon dispositive of this case. American's indemnification payment
for damaged inventory was a "sale" and can be considered to calculate lost profit or "reduction in
gross earnings" under the policy. The trial court's holding to the contrary is reversed.
American next argues the trial court erred in granting summary judgment to Baxter on the
timeliness issue. The policy requires that an action against American be brought within one year
"after the occurrence becomes known to the Insured unless a longer period of time is provided by
applicable statute in the jurisdiction in which the property is located." "Occurrence" is defined in
the policy as a "loss or series of losses arising out of one event irrespective of the period or area
over which the losses occur." American argues Baxter is barred from bringing its declaratory
judgment action under the one-year suit limitation because the hurricane occurred in September
1998, and Baxter did not file suit until October 2003, more than five years later. Baxter responds
that the "occurrence" was not the hurricane but, rather, the loss resulting from business
interruption.
American relies on Harvey Fruit Market, Inc. v. Hartford Insurance Co. of Illinois, 294 Ill.
App. 3d 668, 691 N.E.2d 71 (1998), in support of its position. The insured there suffered
business interruption loss due to a fire that destroyed its store. Harvey Fruit Market, 294 Ill. App.
3d at 669. The insurer did not cover the loss and the insured filed suit. Harvey Fruit Market, 294
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Ill. App. 3d at 669. The insurer argued the suit was barred under the policy, which required that
the suit be filed " 'within one year after the loss occurs.' " Harvey Fruit Market, 294 Ill. App. 3d
at 669. At issue was whether the "loss" was the date when the actual physical loss occurred or
the date when the full extent of loss of income could be determined. Harvey Fruit Market, 294 Ill.
App. 3d at 670. The court held "the date utilized for determining the date of loss is the date on
which the actual physical loss of property occurred." Harvey Fruit Market, 294 Ill. App. 3d at
669. "Loss" was not defined in the Harvey Fruit Market policy.
We are concerned here with the "occurrence." Occurrence is defined in the policy as a
"loss or series of losses arising out of one event irrespective of the period or area over which the
losses occur." The policy distinguishes between "loss" and an "event" resulting in loss. The only
reasonable interpretation here is that the "event" giving rise to the "loss" was the hurricane. The
"occurrence" was not the hurricane; it was the loss arising out of the hurricane. As Baxter points
out, and American does not dispute, the business interruption loss is ongoing in its discovery.
The trial court properly granted summary judgment to Baxter on this issue.
Baxter argues on cross-appeal that the trial court erred in denying its motion for section
155 sanctions. As noted earlier, we will not disturb the trial court's ruling absent an abuse of
discretion. Employers Insurance of Wausau, 186 Ill. 2d at 160. Section 155(1) of the Insurance
Code reads:
"In any action by or against a company wherein there is in issue the liability
of a company on a policy or policies of insurance or the amount of the loss payable
thereunder, or for an unreasonable delay in settling a claim, and it appears to the
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court that such action or delay is vexatious and unreasonable, the court may allow
as part of the taxable costs in the action reasonable attorney fees, other costs, plus
[certain penalties.]" 215 ILCS 5/155(1) (West 2004).
The totality of the circumstances must be considered when deciding whether an insurer's conduct
is vexatious and unreasonable, including the insurer's attitude, whether the insured was forced to
sue to recover and whether the insured was deprived of the use of his property. McGee v. State
Farm Fire & Casualty Co., 315 Ill. App. 3d 673, 681, 734 N.E.2d 144 (2000). An insurer's delay
in settling a claim will not be deemed vexatious or unreasonable for purposes of section 155
sanctions where a bona fide dispute over coverage exists. Gaston v. Founders Insurance Co., 365
Ill. App. 3d 303, 325, 847 N.E.2d 523 (2006).
A bona fide dispute over coverage exists in this case. As already explained, the language
of the insurance policy is ambiguous, leaving no clear answer to the issue disputed by the parties.
Also, there is no support in the record for finding that American acted vexatiously or
unreasonably in bringing its affirmative defense under the policy's suit limitation provision. The
trial court's denial of Baxter's motion for section 155 sanctions was not an abuse of discretion.
The judgment of the trial court granting summary judgment to Baxter on the timeliness
issue is affirmed. We also affirm the trial court's denial of Baxter's motion for section 155
sanctions. We reverse the trial court's summary judgment ruling for Baxter on the issue of
whether American can consider indemnification payments for damaged inventory in calculating its
liability under the policy for actual loss due to business interruption.
Affirmed in part and reversed in part.
M.S. McBRIDE, P.J., and R.E. GORDON, J., concur.