Reaching into the weeds to analyze a business interruption claim, the Massachusetts Court of Appeals determined the cost of ordinary payroll could be included in the calculation of net profit or loss in determining business loss income when business is resumed quickly after a fire. Verrill Farms, LLC v. Farm Family Cas. Ins. Co., 2014 Mass. App. LEXIS 145 (Mass. App. Ct. Nov. 4, 2014).

   The insured suffered a fire loss at its farm store. Within two days, the business was reopened at alternate locations at reduced capacity. Within a month, the business had resumed nearly full capacity in temporary locations. No employees were laid off. This allowed the insured to maintain its business and generate income. 

   The insured submitted a claim for loss of business income, based on its loss of  net income in the year after the fire. The insurer paid a sum considerably less than the claim based upon its interpretation of what expenses could be included in a calculation of net profit or loss in order to determine loss of business income. The trial court held that the insurer did not have to pay the cost of ordinary payroll beyond the sixty-day limit, and granted summary judgment in the insurer's favor. 

   The insured never made a claim for a direct payment of the costs of its ordinary payroll, however. Instead, it only sought to include the cost in its calculation of net profit or loss for the appropriate time period. Consequently, the appellate court reversed, holding that loss of business income could only be determined by including the expense of ordinary payroll, and other unreimbursed continuing expenses required by the resumption of operations, in the calculation of net profit or loss.

   An endorsement provided direct payment to the insured for the cost of "ordinary payroll expenses." The purpose of this coverage was to make a direct payment to the insured of the cost of ordinary payroll, for a specified period of time, in the event that the business could not resume its operations during the period of restoration. Here, however, the insured resumed its business operations at alternate locations within two days of the fire. Therefore, the insured made no claim for direct payment pursuant to the limited ordinary payroll endorsement.

   The policy did not provide a methodology to calculate loss of business income if the insured was able to resume operations at an alternate location. The insurer argued that the necessary expense of ordinary payroll could not be included as a deduction from gross revenue earned during the resumption of operations by the insured in order to calculate net profit or loss. The lower court agreed.

   While making no claim for direct payment of the cost of ordinary payroll, the insured instead used the cost of ordinary payroll as an operating expense to offset its revenue in determining net profit or loss during the period of restoration. The appellate court agreed that gross income had to be reduced by the expenses required to earn it in order to determine net income. Only if the net profit or loss was less than the net profit that the insured would have earned if no fire had occurred would the policy be called upon to make the payment for loss of business income.

   Therefore, the judgment was vacated and the matter remanded for entry of a new judgment in the insured's favor. The new judgment would provide that loss of business income can only be determined by including the expense of ordinary payroll, and other unreimbursed continuing expenses required by the resumption of the insured's operation, in the calculation of net profit or loss.