Contingent Business Interruption (CBI) insurance protects a company from business interruption losses when a logistics system fails due to a covered cause of loss.
Types of Interruption Coverage
Most companies purchase first-party property insurance policies that protect against loss from fire or other destruction of company property. These policies often include business interruption coverage, which insures against loss when the insured’s “business is partially or totally interrupted as a result of a covered property damage.”2 Such coverage generally requires that the loss caused by the interruption be the result of damage to the policyholder’s own property that is covered under the policy. Therefore, any business located in the Northeast may have suffered damage during recent storms should review its business interruption coverage. If damage to the business prevents the business from operating, the resulting loss may well be covered.
CBI insurance clauses extend this business interruption coverage under certain circumstances. One such circumstance is when a peril of the type covered by a policy causes damage to a supplier of the policyholder. CBI insurance also often provides coverage when a covered peril damages a receiver or distributor of a policyholder’s goods. Alternatively, policies may provide coverage for interruption loss caused by damage at the premises of a “dependent property,” which can include operations relied upon to deliver or distribute goods or services, manufacture products or components, or even attract customers to the policyholder’s business.
In addition to CBI coverage, many property insurance policies provide coverage for extra expenses that a policyholder incurs as the result of a covered event. Policies often extend extra expense coverage to include situations where extra expense is incurred because of damage to the property of a policyholder’s suppliers, receivers, and distributors. Together, these so-called “time element” coverages can provide a policyholder with broad protection against unforeseen disruptions to its supply or distribution chain. But, insurance policy language can vary in important ways, and policyholders must be careful to scrutinize the particular language in their policies to understand the full extent of their coverage.
CBI Insurance
While CBI insurance protects against losses resulting from the damage sustained by the policyholder’s suppliers, distributors or receivers, some limitations may impact a policyholder’s ability to recover. For instance, many CBI provisions require that the damage be suffered by a “direct supplier of goods.” A policyholder should consider its supply chain and what sources may be considered a “direct supplier.” Further, the question of what constitutes a “supplier” is not always clear. Recently, in Park Electromchem,3 the court found the term “direct suppliers” to be ambiguous and ordered a trial on the issue of whether a foreign facility owned by the insured could be considered a “direct supplier” of goods for purposes of CBI coverage.
CBI insurance also typically only applies when a third party suffers loss because of a peril against which the policyholder itself would be covered. An insurer may argue that exclusions limiting a policyholder’s coverage for a loss because of windstorm or flood may preclude recovering lost income due to the closures of ports and other facilities by such causes. Policyholders that have suffered a business interruption loss should consult with experienced professionals to explore the issue of causation and the proper application of potentially applicable exclusions. A policyholder must make an extra effort when preparing a claim predicated upon damage to third parties because often critical facts are outside of the policyholder’s possession or control.
For instance, an automobile dealer with a policy that excludes “flood” losses but includes coverage for “windstorm” likely will seek compensation for vehicle damage caused by wind. But that dealer may have additional losses caused by the subsequent inability to receive inventory because of port closures or damage to inventory at port locations. Likewise, a manufacturer may have losses arising out of the inability to distribute products via such facilities. Relying on a “flood” exclusion, an insurer may deny coverage for all of these losses. It behooves a policyholder to be active early in the claim process so it can gather any available facts that would help establish that its loss was the result of a covered cause of loss.
Insurance companies also may deny CBI claims by arguing that the policyholder must suffer a total and complete cessation of business. Many courts reject this overly strict interpretation of policies providing coverage in the event of a “necessary interruption” or “suspension” of business. The rejection of this insurer argument is particularly important for a CBI claim, as a disruption in supply or distribution may only impact one aspect of a policyholder’s business. One federal court noted that use of the term “necessary interruption” in a CBI provision did not require a complete shutdown of the policyholder’s entire business.4 By contrast, at least one New York court has held that a total and complete shutdown of business operations is necessary under conventional business interruption coverage.5 It remains unclear whether this ruling will translate to CBI coverage, and policyholders should consult with counsel soon after a loss to carefully determine the impact of an interruption on the policyholder’s business and the requirements of the policy.
Extra Expense Insurance
“Extra Expense” insurance covers “reasonable and necessary extra costs” a company incurs in excess of the normal operating costs in order to keep its business running after damage to the company’s property. Often, policies with CBI provisions provide for extra expense insurance covering those additional incremental costs incurred because of damage to the facilities of a supplier, receiver, and/or distributor. Such costs include the increased costs to receive goods for sale, the increased cost to transport and distribute goods, and increased labor costs to re-establish logistics systems. It is critical that a company keep detailed records regarding such efforts at reorganization, even though its employees likely are working diligently to identify alternatives to the disrupted supply or distribution system.
