As recovery and
rebuilding efforts drag on in Puerto Rico, Hurricane Maria’s impact on Big
Pharma is radiating across the U.S., and around the globe as the dozens of drugs manufactured in Puerto Rico become scarce. Maria brought drug
manufacturing to a screeching halt in Puerto Rico, where about 10 percent of all drugs prescribed in the U.S. are made. The FDA is
focused on about 40 drugs it expects to be in short supply, including 13 that are made only in Puerto Rico.
10% of all drugs prescribed in the U.S. are manufactured in Puerto
Rico, including 13 drugs made only there.
[photo credit:
Forbes.com]
In our October 5
post on insurance bad faith under Puerto Rico law we noted that filing a property insurance
claim is not top of mind while people are struggling to meet basic needs. The
same is true for drug makers scrambling to rebuild capacity and keep production
lines running in facilities damaged by the storm, dependent on backup
electrical supplies, or both. But the claims will eventually come. And for
insureds who have purchased business interruption (“BI”) and contingent
business interruption (“CBI”) coverage, they are likely to include BI and CBI
claims.
BI and CBI
claims often involve complex questions of causation, and each claim must be analyzed
in light of the policy language and the specific facts of the loss. But many
post-Maria claims will also involve the unique factor of utility service
interruption, and the general framework below will be helpful.
The basics of Business Interruption (BI)
coverage
BI coverage generally
covers the profits a business loses when physical damage to its property
interrupts its business operations. Requirements vary from policy to policy,
but the most basic requirement is that the interruption must be caused by a
peril covered by the property insurance policy. Many property policies cover
wind damage but not flood damage, and claims can get complicated when these two
causes overlap.
Maria hammered
Puerto Rico with sustained winds of up to 150 mph and dumped more than 30
inches of rain, leading to catastrophic wind damage and epic flooding, especially in the northern coastal areas.
The relationship between wind damage and flood damage will undoubtedly come
into play in many claims. For a primer on causation analysis under Puerto Rico
law, read this recent post by my colleagues Anaysa Gallardo Stutzman, José Umbert and Hernán Cipriotti.
But according to FDA commissioner Scott Gottlieb, who recently returned from Puerto Rico, the biggest problem for drug makers is not physical damage to factories, but instability of the electrical supply. BI coverage generally applies only to suspension of business caused by direct physical loss or damage to insured property. Losses relating to utility service are typically excluded. However, BI coverage can be extended to include utility services coverage, so many Hurricane Maria BI claims will require analysis of whether the policy includes or excludes utility services coverage.
Understanding utility services coverage in
a BI context
There are two kinds
of utility service coverage: “direct damage” and “time element.” Utility
Service – Direct Damage coverage protects against physical damage to covered property
caused by a power outage or a power surge. Examples in Maria’s aftermath could include
damage to drug components requiring temperature-controlled storage, or damage
to manufacturing equipment caused by a power surge as power is lost or restored.
In these examples, Utility Service – Direct Damage coverage could be triggered
by physical damage to property at the insured premises. If that physical damage
causes a suspension of business activities, and the policy includes BI
coverage, lost profits could also be covered.
Utility Service
– Time Element coverage protects against losses caused by interruptions of
utility service that do not damage
property covered under the policy. The classic scenario – a long-lasting power
outage caused by damage to electrical infrastructure – is exactly what Puerto
Rico is experiencing right now. If a pharmaceutical factory is shuttered
because there’s no power to operate it, but the factory itself is not damaged,
the business interruption probably will
not be covered unless the policy includes a Utility Service – Time Element endorsement.
Policies that
include the Utility Service – Time Element endorsement will provide BI coverage
only if the physical damage that caused the service interruption resulted from
a covered cause of loss. For instance, if a factory’s policy excludes flood
damage, an outage caused by flooding at a power plant would not trigger
coverage under the Utility Service – Time Element endorsement because flood is
an excluded peril under the factory’s policy.
Contingent Business Interruption
(CBI) claims multiply the complexity
When a weather
event on the scale of Hurricane Maria causes widespread interruption of
business activities, CBI claims are almost sure to follow. Last month, my
colleague Shannon O’Malley defined
CBI claims and explained how they work in a post focused on Hurricane Harvey. You can click here to read Shannon’s post, so I won’t repeat
her analysis. But to put it in a nutshell, while BI
coverage protects the insured from business interruptions caused by physical
damage to the insured’s own property,
CBI coverage protects the insured from business interruptions caused by
physical damage to a supplier’s or
customer’s property.
To
illustrate the typical CBI scenario, suppose Company A assembles a finished
product using components supplied by Company B. Storm damage temporarily shuts
down Company B’s factory, causing Company A’s production to shut down too. If
Company A’s property policy includes a CBI endorsement, Company A may be able
to recover the profits it loses while Company B’s factory is restored to
operation.
As with BI coverage, a key requirement of CBI coverage is that the
loss causing the interruption must be due to a covered peril. But now the
policy at issue is Company A’s policy, so the loss at Company B’s factory can
only support Company A’s CBI claim if it was caused by a peril covered under Company
A’s policy.
CBI endorsements also typically
require a direct connection between the insured and the supplier whose property
was damaged. In the Company A/Company B scenario, suppose Company B makes its
components from parts it buys from Company C. If storm damage to Company C’s
property interrupts Company B’s business, which in turn interrupts Company A’s
business, Company B might have CBI coverage, but Company A probably will not
because there are two degrees of separation between Company A and Company C.
What does all this mean in the
context of post-Maria power outages in Puerto Rico? Consider this variation on
the Company A/Company B scenario: Company C is not a parts supplier, but rather
a utility company. Company C provides electricity to Company B. Company B manufactures
pharmaceuticals under contract for Company A. Company A holds a property
insurance policy that includes a CBI endorsement. An Eighth Circuit case applying
Minnesota law illustrates the likely outcome of a CBI claim by Company A.
In Pentair, Inc. v. Am. Guarantee & Liab.
Ins. Co., 400 F.3d 613 (8th Cir. 2005), an earthquake in Taiwan damaged an
electrical substation, causing the closure of two factories in Taiwan that
supplied goods to the plaintiff/insured. The factory closures impacted the
insured’s business, and earthquake was a covered peril under the insured’s
property policy. But the court held that CBI was not triggered because there
were two degrees of separation between the insured and the power utility in
Taiwan. Id. at 614-15. A court
applying Pentair to Company A’s CBI
claim would likely find no CBI coverage because there are two degrees of
separation between Company A and the electric utility company, Company C.
Conclusion
In
the aftermath of Hurricane Maria, BI and CBI claims based on interruptions of
pharmaceutical manufacturing are inevitable. These claims will involve complex
questions of causation, and may require analysis of potentially overlapping BI,
CBI, and service interruption provisions. Every claim will have to be analyzed
based on its unique facts and the language of the policy.
Posted by Dennis Anderson
