A United States District Court held that a corporation was not entitled to recovery under its business interruptions insurance policy, following extensive tornado damage, because a net loss exceeded the amount of continuing normal operating expenses after the damage was incurred. The insured appealed the ruling, contending that net income (profit or loss) and continuing normal operating expenses should be considered separately and that the latter should be paid without reference to the former. The amount of such expenses was substantial.

The matter rested with the Tennessee Supreme Court when the Sixth Circuit Court of Appeals asked it to resolve the issue. The court observed that the policy provided for recovery only if the insured sustained an "actual loss of business income, which is defined as net income that would have been earned had the business not been interrupted and continuing normal operating expenses that were incurred during the interruption of business."

The court cited several cases in point underscoring "actual loss sustained" as crucial to a conclusion. It said that the amount of business income is to be determined by adding net income, which could be a net profit or a net loss, and continuing normal operating expenses incurred.

The court said that the insured's contention that "net income" should be ignored whenever there is a net loss "would put the insured....in a better economic position from having its business interrupted than it would have occupied had there been no interruption of its business operations."

In summary, if there would have been a net profit, that figure would be added to continuing normal operating expenses and the insured would be entitled to recover the sum. But if there were a net loss, the amount of continuing normal operating expenses would be reduced by that amount.Accordingly, the state high court advised the federal appeal court that the insured in this case was not entitled to recover the amount of its "continuing normal operating expenses," as defined in the policy.

(CONTINENTAL INS. CO., Plaintiff, Respondent v. DNE CORP., Defendant, Petitioner. Tennessee Supreme Court, at Nashville. No. 01S01-9203-OT-00038. July 20, 1992. CCH 1992 Fire & Casualty Cases, Paragraph 3861.)