LYON METAL PRODUCTS v. Protection Mut. Ins. Co.

• Decision Date: 16 April 2001
• Docket Number: No. 2-00-0587.,2-00-0587.
• Citation: 321 Ill. App.3d 330,747 N.E.2d 495,254 Ill.Dec. 455
• Parties: LYON METAL PRODUCTS, L.L.C., Plaintiff-Appellant, v. PROTECTION MUTUAL INSURANCE COMPANY, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

747 N.E.2d 495

321 Ill. App.3d 330

254 Ill.Dec. 455

LYON METAL PRODUCTS, L.L.C., Plaintiff-Appellant, v. PROTECTION MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 2-00-0587.

Appellate Court of Illinois, Second District.

April 16, 2001.

Patrick M. Kinnally and Matthew J. Herman, both of Murphy, Hupp & Kinnally, P.C., of Aurora, Edward L. Foote, of Winston & Strawn, and Fred L. Foreman and David V. Goodsir, both of Freeborn & Peters, both of Chicago, for appellant.

Robert J. Bates, Jr., and Robert Heist, both of Bates & Carey, of Chicago, and Phillip J. Frazee, Suzanne V. Suher Katchmar, and Russell E. Yates, all of Yates & Leal, L.L.P., of Denver, Colorado, for appellee.

Justice RAPP delivered the opinion of the court:

In this case involving business interruption insurance, a jury found that plaintiff, Lyon Metal Products, L.L.C. (Lyon), proved a business interruption loss of $400,000. Lyon appeals, contending (1) that the trial court erred in entering summary judgment in favor of defendant Protection Mutual Insurance Company (Protection Mutual) on Lyon's claim pursuant to the Illinois Insurance Code (Insurance Code) (215 ILCS 5/155 (West 1996)); (2) that the trial court erred in denying its motion in limine; (3) that the trial court erred in excluding evidence; (4) that the trial court erred in instructing the jury; (5) that the jury's verdict was against the manifest weight of the evidence; and (6) that the trial court erred in denying prejudgment interest. We affirm.

I. FACTS

Lyon manufactures various steel workplace products including shelving, storage racks, ergonomic furniture, cabinets, lockers, and other miscellaneous items. Lyon has its principal manufacturing and distribution facility in Aurora, Illinois. Lyon also sells and distributes certain products it does not manufacture, referred to as pass-through items.

Lyon was insured by Protection Mutual under an "all risk" insurance policy providing various coverages, including property damage, for a premium of $112,000 per year. Protection Mutual also provided Lyon with additional coverage against business interruption for a premium of $39,499 per year.

On July 17 to 18, 1996, flooding caused extensive damage to Lyon's Aurora facility. As a result of the flood, Lyon was prevented from producing goods and continuing business operations for 22 consecutive days, including 17 production days.

Protection Mutual compensated Lyon in the amount of $7,878,836 for property damage, which included the regular cash selling price of $3,773,250 for the damaged finished goods in inventory. Protection Mutual also paid Lyon $281,724 pursuant to the business interruption endorsement for the expenses Lyon incurred to reduce its loss and make up lost production. Lyon made further claim for business interruption loss in the amount of $5,009,105. Protection Mutual disagreed with Lyon's calculation of its business interruption loss.

Lyon filed a complaint against Protection Mutual alleging breach of contract and a cause of action pursuant to section 155 of the Insurance Code (215 ILCS 5/155 (West 1996)) for alleged vexatious and unreasonable delay in payment. Lyon alleged that it tendered to Protection Mutual a $5,009,105 claim for the actual loss sustained and expenses covered under the business interruption endorsement of the policy. Lyon further alleged that Protection Mutual refused to pay the claim. Subsequently, Lyon amended the complaint, adding a count pursuant to the Illinois Interest Act (815 ILCS 205/0.01 et seq. (West 1996)) for prejudgment interest on the amount Protection Mutual failed to pay. Protection Mutual denied Lyon's allegations, contending that the amount Protection Mutual paid Lyon for its damaged inventory must be considered when calculating Lyon's actual loss sustained under the business interruption endorsement.

Protection Mutual filed a motion for partial summary judgment (735 ILCS 5/2-1005 (West 1996)) on the breach of contract claim, requesting interpretation and application of the business interruption endorsement of the policy. Protection Mutual also filed a motion for summary judgment on Lyon's Insurance Code claim. Protection Mutual argued that it was entitled to partial summary judgment on the breach of contract count because, although the amount of the business interruption loss is a factual issue in dispute, the legal issue of Protection Mutual's entitlement to a credit against the business interruption loss should be decided by the court as a matter of law. Protection Mutual contended that the court should rule that the fact that it paid Lyon the regular cash selling price for Lyon's damaged inventory decreased or eliminated Lyon's business interruption loss because Protection Mutual became Lyon's customer and prevented Lyon from suffering lost earnings from lost sales during the period of interruption. In response, Lyon argued that it suffered independent losses due to property damage and business interruption and should be compensated for both losses. The trial court denied Protection Mutual's motion for partial summary judgment. In ruling on this motion, the court stated:

"Let me just rule on this part of it. I have read this, reread it, and intend to reread it again. It's neither clear nor free from doubt in my mind that the insurance company, Protection Mutual, the defendant in this case, is entitled to a credit.

However, this is not to be construed as a ruling with respect to whether or not the existence of the six weeks inventory affects the calculation of the appropriate recovery under the business interruption endorsement, and I am not prepared to say that at this point.

I think there are genuine issues on the trier of fact that need to be resolved on this issue as I perceive it to be at this juncture; and so the motion for summary determination of this issue is going to be denied."

The trial court granted Protection Mutual's motion for summary judgment on Lyon's claim under the Insurance Code.

Prior to trial, Lyon filed a motion in limine seeking the exclusion of evidence related to a setoff or credit based upon payments made by Protection Mutual to Lyon for property damage, claiming that the policy contains no language providing for such a setoff or credit. In denying this motion, the court stated:

"[T]he issue in this case is actual loss sustained during the period of interruption in terms of net profit which is prevented from being earned due to the interruption and fixed charges to the extent only that such charges would have been earned had no interruption of production or suspension of business operations occurred.

These motions will be denied, insofar as granting them would preclude any testimony with respect to the effect, if any, of payment for inventory under the property endorsement on the calculation * * * of actual loss sustained under the business endorsement provisions of this policy."

At trial, Lyon called its chief executive officer, Robert Washington. Washington said that Lyon was prevented from producing goods and from continuing business operations during the period of interruption. Lyon received $3,700,000 from Protection Mutual for the inventory that was damaged in the flood. Lyon never sold its damaged inventory to Protection Mutual, and the $3,700,000 was not booked as a sale.

Washington estimated that Lyon would have produced 300,000 pounds of goods per day and would have done 100,000 pounds of pass-through business per day for the 17-day period of business interruption. The goods have a sales value of approximately $1.30 per pound. The sales volume of the produced goods and the pass-through goods for the 17 day period is approximately $8,800,000. Washington reduced that number by the variable charges, which are about 50% of the sales volume, and calculated a figure of $4,400,000 in lost net profit and fixed charges.

According to Washington, Lyon also received a total of $281,000 from Protection Mutual for expenses to reduce the loss. Lyon was able to put its inventory back to preflood levels by sometime in November or December 1996.

Lyon's next witness was Douglas Harrison, vice-president of finance for Lyon. Harrison prepared a claim for Lyon's loss due to business interruption and submitted it to Protection Mutual. According to Harrison, Lyon's projected sales for the period of business interruption were $4,074,450 based on the actual sales reached by Lyon in June 1996. According to Harrison's claim, the total lost net profit and fixed charges earned for the period of business interruption were $4,413,506. Harrison's claim also included various expenses Lyon incurred in reducing its loss and replenishing its inventory for a total business interruption claim of $5,009,105. Harrison acknowledged that Protection Mutual paid $281,724 of Lyon's expense in reducing loss.

Harrison indicated that Lyon was paid roughly $3,700,000 for damaged inventory, and that amount was listed as an extraordinary item on Lyon's financial statement rather than as a receivable. The $3,700,000 was not included in the $95 million in sales for 1996. Lyon employees worked overtime in August, September, and October 1996 to replenish the inventory. The overtime pay was among the expenses Lyon incurred to reduce loss and replenish inventory and was included in the claim Harrison prepared.

Protection Mutual called Judith Spry, certified public accountant, who performed an analysis of Lyon's actual loss sustained from business interruption. According to Spry, the first step in calculating a business interruption loss is to project sales. Every sales dollar is made up of variable charges, fixed charges, and net profit. The actual loss sustained is the amount of net profit and fixed charges that can be allocated to the lost sales. Variable costs are not part of the equation because those costs do not continue during a period of interruption.

To determine the projected sales, Spry used the first six months of 1...