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BP Business Economic Loss Claim Appeal 2016-878: Business interruption insurance proceeds treated as revenue


The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

This Claimant is in the business of renting residential property in Tuscaloosa, Alabama (Zone D). Its Business Economic Loss claim was denied by the Claims Administrator upon a finding that its financial data did not meet the causation requirements contained in Settlement Agreement Exhibit 4B.

According to Claimant, it was renting multiple properties at the time of the Spill. In April, 2011, a severe tornado struck the Tuscaloosa area and damaged its rental properties. That damage interrupted its monthly rental income from May through October of that year. In September and October of 2011, Claimant received lost rental insurance payments from its property damage insurer to compensate for those losses. In analyzing Claimant’s Profit and Loss statements, the claims analyst treated those payments as “insurance proceeds” and removed them from rental income as “not typically earned as revenue under the normal course of operations in an arms length transaction,” in keeping with CAO Approved Policy 328 v. 2. That adjustment caused Claimant to fail the V-Shaped Revenue Pattern test and relegated it to the Decline Only test which it likewise could not pass.

According to the claims analyst’s Calculation Notes:

It has been determined that the documentation provided is not sufficient to establish causation based on Exhibit 4B of the Settlement Agreement. Please note that, although the claimant passes the mathematical portion of the Decline-Only Causation Test, the claimant did not establish causation for the Decline-Only Causation Test as the claimant did not provide specific documentation that identifies factors outside the control of the claimant that prevented the recovery of revenues in 2011 as required by Exhibit 4B of the Settlement Agreement. Accordingly, under Policy 474, a Denial Notice has been issued for failure to establish Causation.

Claimant’s Request for Reconsideration was denied. The Post-Reconsideration Denial Notice contained the following analysis:

We have reviewed the Reconsideration Request regarding the inclusion of Insurance Proceeds as Revenue. These amounts remain excluded from the compensation calculation as it was not generated in the normal course of business. No changes were made to the previous calculation and we have determined that your claim remains denied for the reasons(s) stated in section II: Denial Explanation.

On appeal, Claimant argues that the analyst’s treatment of the sums it received from its insurer to replace its lost rental income was error and should be reversed.

BP responds that the Settlement Program’s exclusion of Claimant’s insurance proceeds was appropriate in light of prior policy statements by the Claims Administrator and decisions of the Appeal Panel in conjunction with Policy 328 v. 2. Says BP:

This conclusion is based in part on “the fact that these items are not typically earned as revenue under the normal course of operations in an arm’s length transaction.” Id. Accordingly, the Settlement Program’s exclusion of the insurance proceeds from its calculations was consistent with Policy 328 as interpreted by the Appeal Panel, and Claimant has not shown why the Settlement Program’s adherence to Policy 328 was inappropriate.

Of greater significance, however, is the candid statement BP includes in footnote 1:

Claimant argues that its insurance proceeds should be included in its revenue because the proceeds replace revenues that Claimant did not receive because a tornado damaged its property. While in the appropriate factual circumstance BP might not disagree that insurance that directly replaces revenue should be treated as revenue, both the Claims Administrator and the Appeal Panel have disagreed with this position.

Pertinent to consideration of this issue are the following Calculation Notes:

The claimant’s attorney explains that as a result of a tornado in April 2011, the claimant experienced a decrease in rent from May – October 2011 due to damage to some properties. Attorney further explains that, in September of 2011, the claimant began receiving “lost rental insurance disbursements from its insurance company, resulting in significant revenues in September and October 2011. Please see Adjustments 1 & 2 below for DWH accountant’s treatment of lost rental insurance revenues. The claimant also explained that rental income decreased from May through August 2011 because most of the properties were not being rented during that time due to tornado damage in April 2011.

Note 9, Profit and Loss Statements – Revenue Activity.

DWH accountant noted significant rental income reported in 2011. The Claimant explained that the business received $10,175 in insurance proceeds in September 2011. The claimant also explained they received $7,072 in insurance proceeds in October 2011, DWH accountant used Adjustment 1 & 2 to remove these amounts from rental revenue, and reclassify the as “Other-NA” as they are not part of claimant’s operational revenue.

Note 10, Adjustment 1 & 2, Effect on Causation.

It is undisputed that Claimant’s insurer provided coverage and protection against loss of Fair Rental Value of its residential properties due to the damage they sustained in the tornado. It is likewise undisputed that the payments the insurer made to Claimant compensated those losses and those losses only. In the view of this panelist, insurance payments which directly replace lost revenue are not covered by the exclusionary provision contained in Policy 328 v. 2 and should be treated as revenue for BEL calculation purposes. That policy undertakes to exclude from revenue income received by a claimant that is not generated by its ordinary business activity, such as interest income, gains or losses from sales of assets, reimbursed expenses, capital assessments, intercompany sales, non-arms length related party transactions and grants received by “for profit” entities. The Claims Administrator notes that those items “shall not typically” be treated as revenue for purposes of the various BEL calculations. When considered in that context, this panelist has concluded that inclusion of the phrase “insurance proceeds” in the policy was intended to apply to payments made by insurers to compensate for loss of or damage to property or other assets. As above noted, the payments at issue in this case do not fall within that category. Here, had Claimant sought to include as revenue any payments it received from its insurer for the cost of repairing or replacing its residential buildings, that policy provision would apply and exclude them.

For the foregoing reasons, this panelist finds that the Claims Administrator erred in mechanically applying the policy provision in question. The rental income replacement payments must be included in Claimant’s revenues for the purpose of calculating its claim. Claimant’s appeal is sustained, the denial is overturned and the claim is remanded to the Claims Administrator for further processing in keeping with this opinion.

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