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What a New York Business Should Know About Recovering for Damage to its Property (II)

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1208318_sailing_ship.jpgA business has to know how to recover for damage to its property. Most times it will need to use the money to repair or replace the damaged property or, in the most severe cases, to re-start the business.

In our last entry, we spoke about how a business can establish the amount it can recover from someone who damages its property. Normally, the business can recoup either the reasonable cost to repair the damaged property, or the loss of market value caused by the damage, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). Where the property is totally destroyed, the owner can recover the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934).

Though everyone likes to think the worst will never happen, it can, and often does, in strange and unexpected ways. Recently, on Long Island, a car crashed into the front of a house and drove all the way through to the backyard. This happened in the middle of the night, while the homeowner was asleep. Similar damage also can happen to a business. A couple of months ago, a car drove through the front of a print shop in Florida, through where the supplies were kept, while the store owner was helping a customer. Only a few weeks earlier, a car drove through the back of the same store.

Property damage affects all types of businesses, from retail stores to factories, from start-ups to well established companies. This winter a fire heavily damaged three stores in Smithtown, Long Island. The fire reportedly started in a bar, which had to be closed for repairs; it had opened only a few weeks earlier. In May, a bell factory in East Hampton, Connecticut, was so badly damaged by fire that it was trying to temporarily re-locate so it could re-start production on a limited basis while rebuilding its facilities; the company had operated for 180 years and was the last bell factory in this country. Sometimes, property damage, even from a mundane cause, can be so extensive that it totally shuts down a business. Last week, a custom car tuning shop outside of Rochester, New York was damaged so severely by fire that it had to close; the fire reportedly started in an electrical circuit box.

It is clear that all types of businesses suffer when their property is damaged. One affected by a special set of rules is a retail store. For example, if a car drove through a grocery store, or a clothing shop, in New York, what could the store owner recover from the driver for the destruction of its stock or sales inventory? That would depend on the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). What, however, is the market value of the destroyed food, or clothes, and how is it determined?

The market value of goods that are being held for retail sale, like the food in a grocery or the clothes in a clothing shop, is their wholesale value, not their retail sales price. When a store’s sales inventory is destroyed, the store owner can recover the wholesale cost of the inventory and any damages actually sustained by reason of the absence of the articles while they are being replaced. See Dubiner’s Bootery, Inc. v. Gen. Outdoor Adver. Co., 10 A.D.2d 923 (1st Dept. 1960). It cannot recover the sales price. This is based on the idea that, in New York, compensatory damages are designed to make the owner of the damaged property, whole; the owner cannot be better off after the damage than before it occurred. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934), and Ward v. New York Cent. R. Co., 47 N.Y. 29, 33 (1871).

In our example, the business owner will be able to replace the merchandise, either the food or the clothes, at wholesale cost. Its customers might have paid the higher retail, or sales, price had the goods not been destroyed, but the owner can buy replacement goods at the lower wholesale price. If the business owner could recover the retail, or sales, price for the destroyed goods, it would be much better off after the loss. The business would receive the higher retail price for the destroyed goods, pay the lower wholesale price to replace the destroyed goods, and profit by keeping the difference between them. Paying the store owner the selling price, in effect, would guaranty that the store owner would have been able to sell the merchandise, without discount, had the goods not been destroyed. Since the store owner makes a profit off the sale of its merchandise, paying the store owner the retail, or selling, price for the destruction of its stock would have the effect of paying the store owner its lost profits. See J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept 2006). A business must do more to recover lost profits due to property damage than merely show that it had the merchandise for sale at a given price before it was destroyed. See Syracuse Cablesystems, Inc. v. Niagara Mohawk Power Co., 173 A.D.2d 138, 140-42 (4th 1991), and Dunlop Tire & Rubber Corp. v. FMC Corp., 53 A.D.2d 150, 154-56 (4th Dept. 1976).

Every New York business should use this information, that it can recover only the wholesale cost of its sales inventory from the person responsible for destroying it, to adequately plan to safeguard its operations in case the worst actually does happen.