After Hurricane Harvey slammed into southeast Texas on
August 25, 2017, our colleague Shannon O’Malley posted about the contingent business interruption (CBI) claims
that would inevitably follow due to damage suffered by refining, chemical, and
petrochemical facilities that supply critical products to manufacturers and
other businesses across the country and around the world. (See “Contingent BI: Why Do I have a Hurricane Harvey Claim from Hoboken?”)
Within days, Hurricane Irma was ravaging the Caribbean
before ripping through the Florida Keys and grinding its way up Florida’s
western shore, causing billions of dollars in wind and flood damage, and
leaving millions without electricity. Florida sea ports, airports and
businesses closed in anticipation of the storm, and many businesses were
temporarily shuttered due to storm damage. Florida’s agricultural sector –
especially citrus growers – suffered staggering crop losses.
As Floridians put their lives back together, the insurance
industry is handling the wave of post-Irma property claims, along with business
interruption (BI), and contingent business interruption (CBI) claims. The
damage caused by Harvey and Irma was similar in many ways, but certain
differences make it worthwhile to review the general rules that apply to CBI
claims. Of course, every claim will be governed by the language of the relevant
policy and the facts of the loss.
Business
Interruption coverage vs. Contingent Business Interruption coverage
Most commercial property owners carry some form of BI
coverage, and many also carry CBI coverage. The distinction between the two is
detailed in Shannon O’Malley’s earlier post. But in a nutshell, BI protects the insured from
disruption caused by a covered loss for physical damage to the insured’s own property, while CBI
protects the insured from disruptions to the insured’s business caused by physical
damage to a supplier’s or customer’s
property. Specific policy language may vary, but most CBI clauses require that
the interruption be caused by physical damage to a direct customer’s or
supplier’s property caused by a peril covered by the insured’s property
insurance. In other words, the CBI provision is
triggered only if all of the following elements are present: (1) a loss of
earnings by the insured (2) spanning the restoration period (3) during which business
is interrupted (4) by a direct physical loss (5) caused by a covered peril (6)
at a dependent property.
1.
Physical
damage to the customer’s or supplier’s property is required.
In the run-up to Hurricane Irma, most of Florida’s sea
ports closed as a precautionary measure. Many businesses closed before the
storm as well, as employees evacuated or sheltered in place. Such closures disrupted supply chains of all
kinds, affecting businesses inside and outside of Florida, including Hyundai’s largest North American assembly plant in central Alabama, which stopped
production as the remnants of Hurricane Irma blew through.
Whether such closures could trigger CBI coverage depends
in part on whether the closure was precautionary, or if it was made necessary
by physical damage to property. A supplier’s or customer’s precautionary
closure would not trigger a typical CBI clause. But if that supplier or
customer had to remain closed due to physical damage to its facilities, the
insured’s CBI coverage could be triggered if the other requirements are met.
2. Damage must result
from a peril covered by the insured’s property
insurance.
Physical damage to a supplier’s or customer’s property
will generally only trigger CBI coverage if the damage was caused by a peril
covered by the insured’s property
insurance. In other words, CBI is only triggered if the damage to the
supplier’s or customer’s property would be covered if it occurred at the insured’s covered property.
The coverage analysis for such claims is fact specific,
and policy exclusions and endorsements may have unanticipated consequences.
Suppose, for example, that the insured’s policy excludes flood damage, and the
insured declined to purchase a flood coverage endorsement because its own
property is not in a flood-prone area. If the insured’s supplier’s or customer’s
property is damaged by flood, CBI coverage will not apply because of the flood
damage exclusion in the insured’s policy.
In Florida, a variation of this scenario is likely for
businesses affected by crop damage. A food manufacturer who is dependent on Florida
citrus growers to supply it with oranges may not have recourse to its CBI
policy because the property policy that covers the manufacturer’s facility will
not likely cover damage to crops. The citrus growers’ losses will not,
therefore, constitute a loss covered by the insured’s policy, and CBI will not
be triggered.
3. The interruption
must be caused by property damage.
As a general rule, CBI coverage will only be triggered
when the insured can point to facts that link specific property damage with the
insured’s claimed loss. A downturn in the insured’s business due to generalized
impacts on the insured’s customer base is not enough. For example, a New Jersey
court rejected an argument by consulting giant Arthur Andersen that a revenue
shortfall of $204 million constituted a CBI loss on the theory that the
shortfall was caused by property damage to the World Trade Center. The court
decided that Arthur Andersen had failed to present sufficient evidence that the
losses were caused by damage to property that prevented the flow of goods or
services. Arthur Andersen LLP v. Fed.
Ins. Co., 416 N.J. Super. 334, 349, 3 A.3d 1279, 1288 (App. Div. 2010).
Hurricane Irma’s impacts on Florida’s tourist businesses,
including the cruise industry, may fall in the same category. Many tourists who
would have traveled to Florida but for Hurricane Irma may choose to travel
elsewhere while Florida recovers. But the resulting impact on a particular
tourist business will not trigger CBI coverage unless the insured can show that
a quantifiable loss was caused by property damage that falls within the scope
of its CBI coverage.
Insurers and courts have recognized the effect of damage
to so-called “leader properties” – i.e.,
tourist attractions that draw business to an area – and prime examples in
Florida would include Disney World, Universal Studios, and others. But leading tourist attractions dodged major damage, and the burden would be on the
insured to show that property damage to a “leader property” caused the
insured’s business interruption.
4. The customer
or Supplier must have a direct link
to the insured.
Most CBI policies provide that physical damage will only
trigger coverage if the damage is to the insured’s direct supplier or customer. For example, if the insured
manufactures components for the aerospace industry using parts supplied by
Business A, and Business A is supplied with raw materials by Business B,
physical damage to Business B will not trigger CBI coverage for the insured
because Business B is not a direct supplier
to the insured.
Courts look to policy language to determine the scope of
coverage, and there are policies that offer broad coverage. But an Eighth
Circuit case illustrates the prevailing view in the context of a power outage.
In Pentair, Inc. v. Am. Guarantee &
Liab. Ins. Co., 400 F.3d 613 (8th Cir. 2005), an earthquake damaged an
electrical substation, causing the closure of a factory that supplied goods to
the plaintiff/insured. The factory closure 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 of the degree of separation
between the insured and the power company. Id.
at 615.
Irma left millions of Floridians and thousands of
businesses without power for days. But these wide scale power outages are
unlikely to trigger CBI coverage in most cases, because the power utility will
be considered an indirect, rather than a direct, supplier for the insured
making the claim.
5. The claimed CBI loss must be properly measured.
The quantification and linking of the CBI loss to the
covered peril is a critical component of a contingent business claim. In the aftermath of September 11th
Attacks, several contingent business claims were presented for
consideration. While some claims, such
as the insured’s claim in Zurich American
Insurance Co. v. ABM Industry, 397 F.3d 158 (2d Cir. 2005), were
ultimately not covered under the CBI provision of the subject Zurich policy, a
valuable lesson can be extrapolated from the insured’s claims
presentation. In ABM Industry, which is discussed below, the insured, a janitorial
company for the World Trade Center, submitted a claim after the collapse of the Twin
Towers under the subject policy’s contingent business interruption provision. In
support of its claim, the insured submitted a claim for all of its lost income
resulting from the destruction of the World Trade Center, including equipment
it owned and used to perform its janitorial and maintenance services; its
offices and warehouses in which the insured operated and stored its supplies;
the insured’s on-site call center; the freight elevators, janitorial closets
and slop sinks to which the insured had exclusive access; the common areas; and
the spaces occupied by the tenants the insured serviced. Id. at
161-63. Although the court ultimately found that
the insured and its suppliers were all occupants of the building rendering the
CBI provision inapplicable, the detailed presentation of the claim provides a
good example of the potential damages that can be sustained as the result of a CBI
loss.
Sublimits, deductibles, and other considerations
As noted above, policy language and the specific facts of
a claim are crucial to the assessment of a CBI claim. It’s also important to
note that the application of sublimits and deductibles may be complicated, and
separating BI and CBI losses may not be straightforward. This is especially
true for insureds that provide services at properties owned by their customers.
In 2005, the Second Circuit decided a case arising from
the destruction of the World Trade Center in which the insured provided
janitorial service in the Twin Towers. When the buildings were destroyed, the
insured was unable to continue to provide those services, and sought coverage up
to the BI limits of its policy. The insurer argued that the loss was actually a
CBI loss, to which a lower sublimit applied, because it was caused by the
destruction of the insured’s customer’s property (i.e., the Twin Towers). Under the unique facts of the case, and the
specific language of the policy, the court held that the loss fell within the
BI provision, and was subject to the higher limit for BI coverage. Zurich Am. Ins. Co. v. ABM Indus., Inc.,
397 F.3d 158, 168 (2d Cir. 2005).
Policies that include CBI coverage may also have a
schedule of supplier and/or customer locations to which the coverage applies, along
with location-specific deductibles and sublimits. A storm like Irma, which
causes a very wide swath of destruction, may affect many scheduled locations,
raising questions about the application of multiple deductibles.
Conclusion
CBI claims can be very complicated. Close reading and full
understanding of the policy, the specific facts of the claim, and a properly supported measurement
are critical for both insurers and insureds.
