Big Pharma BI, CBI, and Service Interruption Claims Percolating in Puerto Rico

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:]

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 StutzmanJosé 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.


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