Brief Fact Summary. A dispute arose over whether an insurance company exercised good faith prior to terminating a contract with one of its insurance agents. The insurance company conceded liability, but the amount of damages was at issue.
Synopsis of Rule of Law. One of two methods is used to calculate damages "when the loss of business is alleged to be caused by the wrongful acts of another." Either "(1) the going concern value; or (2) lost future profits." For lost profits to be awarded the must be "clear proof in the record of the value of plaintiff's business as a going concern" and this value "must necessarily take into consideration its future profit-earning potential."
Points of Law - Legal Principles in this Case for Law Students.
Generally, when the loss of business is alleged to be caused by the wrongful acts of another, damages are measured by one of two alternative methods: (1) the going concern value; or (2) lost future profits.
Facts. The Plaintiff, Protectors Insurance Service, Inc. (the "Plaintiff") is an insurance agency. Earl Colglazier ("Mr. Colglazier") is the sole owner of Plaintiff's corporate stock. Mr. Colglazier had a written contract authorizing it to "solicit and submit applications" for the Defendant's, United States Fidelity & Guaranty Company (the "Defendant"), insurance contracts. If the Defendant accepts an application, the Plaintiff is paid a commission. During 1979-1992, over 80% of the insurance sold by the Plaintiff were the Defendant's policies. The Plaintiff's contract included a provision regarding termination of the agreement. It stated the parties "agree to make a good faith effort to provide for rehabilitation and thereby avoid termination of this Agreement." In March of 1992, the Defendant, due to profitability concerns, began "establishing a formal rehabilitation program for plaintiff." The program set certain "earned loss ratios" that measured the Plaintiff's profitability to the Defendant with regards to certain personal and commercial lines of insurance. In October of 1992, the Defendant informed the Plaintiff it would terminate the personal lines contract for a period of 180 days unless the Plaintiff met the goals the rehabilitation program by the end of 1992. The Plaintiff wrote to the Defendant and informed him that his personal and commercial accounts were "intertwined", and if the Defendant terminated the personal lines, the Plaintiff would effectively be put out of business. • As a result of the Defendant's demands, Mr. Colglazier decided to sell all the Plaintiff's assets for $148,000. Shortly thereafter, the Plaintiff sued the Defendant alleging that the Defendant did not make a good faith effort "at rehabilitation to avoid termination of the agreement", which lead to him having to sell at a distressed price. During these proceedings, the Defendant's liability was not at issue, only at issue was the calculation of damages. Expert testimony was presented during trial that Mr. Colglazier sold the Plaintiff agency at a distressed price because the "time pressure to make a sale and USF & G's stated intention of terminating the agency's personal lines insurance." It these circumstances were not present, the business would have been worth $175,000. Mr. Colglazier also testified that if the Defendant had not threatened to cancel the parties' contract he would have operated the agency for ten more years. Testimony about the net income of the Plaintiff agency from previous years was also elicited. The Defendant objected to the district court judge's damage instruction arguing it permitted double recovery. Specifically "because the reasonable sale value of the agency was based on the agency's ability to earn future profits and, thus, plaintiff would be compensated twice if it received lost profits on top of the sale price."
Issue. Does the trial court's loss profit award represent "an impermissible double recovery?"
Held. Yes. The court first observed that the goal of a breach of contract action is to return the injured party where he would have been if the breach did not occur. It next determined based on expert testimony, the "determination of the reasonable sale value of the agency was based largely–if not entirely–upon the agency's ability to generate future profits." Further, "value of an agency to a buyer is determined from its potential to generate a future income stream." The court then recognizes that one of two methods is used to calculate damages "when the loss of business is alleged to be caused by the wrongful acts of another." Either "(1) the going concern value; or (2) lost future profits." The going concern value is "the price a willing buyer would pay and a willing seller would accept in a free marketplace for the business in question." Based on the expert testimony, this would be $35,000. The court then vacated the juries' lost profit award because the court had no "clear proof in the record of the value of plaintiff's business as a going concern, and that value must necessarily take into consideration its future profit-earning potential."
Discussion. This case discusses two different ways to compute damages when a business is harmed by the conduct of another and when to apply each method.