Contingent Business Interruption (CBI) insurance protects a company from business interruption losses when a logistics system fails due to a covered cause of loss.
Potential Pitfalls When Making A Claim
A policyholder must act in a timely fashion when seeking coverage under any insurance policy. Notice should be given immediately if the company suspects that it might suffer an interruption-related loss. Doing so prevents an insurer from denying the claim as untimely. Property insurance policies also often require that the policyholder submit a proof of loss within a specific and relatively short period of time after a loss. This often proves quite difficult if not impossible for a complicated and potentially ongoing interruption caused by damage to a third-party supplier, receiver or distributor. Accordingly, a company should keep its insurer fully informed of the status of its claim. Further, the policyholder should make written requests for extensions of time to submit a proof of loss as needed. Such requests are normal and are routinely granted by insurance companies.
Interruption losses also are difficult to quantify. Property insurance policies typically provide two different methods for calculating business interruption and CBI loss: (1) gross earnings -- the net reduction in earnings less the expenses that do not necessarily continue during the interruption; or (2) business income -- the profit that would have been earned plus continuing normal operations expenses during the period of interruption.
Proving an interruption-related loss in either case involves a complicated process of demonstrating how the policyholder would have performed had the event not occurred, the nature of the market in general, and the impact of the catastrophic event on that market. This difficulty of proof reemphasizes the need for thorough documentation of losses and expenses during the interruption so that any claim can be properly supported.
Policyholders should be wary that their own internal analytical material may become a hurdle to recovery. Insurance companies and the adjustors they retain have an incentive to reduce the amount of a claim, and they will use the policyholder’s own analytics against it, if possible. A policyholder can effectively and thoroughly track the extent of its loss by immediately hiring experts to assist in adjusting the claim. A policyholder may also retain coverage counsel early to place its own analytics in perspective and provide advice on the scope of the losses covered by the policy. Proper calculation of a CBI or extra expense claim takes time. Coordination with the adjustment team and counsel often are the most important steps. These steps should be taken at the beginning of the process to maximize potential recovery.
Conclusion
Companies that have suffered an interruption in their business often overlook potential CBI and extra expense claims. Sandy and the other recent storms in the Northeast have significantly disrupted shipping through the port facilities located in New York and New Jersey. Moreover, these storms have physically damaged a significant amount of inventory located at those facilities. Any company that suspects it might have suffered an interruption-related loss should give notice and implement good record keeping; should carefully track expenses; and control its internal communications.
The company should remember to maintain open communication with the third party that suffered damage, given that proving that a third party sustained damage is vital to the company’s recovery efforts. By early retention of experts and experienced counsel, a company can minimize the impact to its bottom line caused by a disruption to supply or distribution systems resulting from a catastrophic event.
John Heintz and Jeremy King are attorneys with Dickstein Shapiro LLP, in the law firm’s insurance coverage practice. Heintz is a partner at Dickstein Shapiro. He is a veteran in the fields of corporate insurance coverage and complex litigation with more than 30 years of experience. He has won numerous landmark appellate cases in state and federal courts. King’s practice focuses on insurance coverage actions and other civil litigation matters. His experience with insurance coverage matters encompasses cases involving comprehensive liability coverage, including disputes arising out of bodily injury caused by products and property damage caused by environmental contamination, as well as disputes concerning directors and officers and errors and omissions coverage.
Footnotes:
1 We are referencing the storm that recently devastated the Northeast by its popular description. However, the popular description ought not confuse technical questions of insurance coverage including causation, application of deductibles or sub-limits, and even whether more than one storm was involved. Specific losses occurring as a result of sever weather conditions may have been caused by a number of different perils.
2 Duane Reade, Inc. v. St. Paul Fire and Marine Ins. Co., 600 F.3d 190, 192 n.2 (2d Cir. 2010) (citation omitted).
3 Park Electronchemical Corp. v. Continental Casualty Co., No. 04-cv-4916, 2011 WL 703945 (E.D.N.Y. Feb. 18, 2011).
4 Archer Daniels Midland Co. v. Aon Risk Services, Inc., 356 F.3d 850 (8th Cir. 2004).
5 54th Street Ltd. Partners, L.P. v. Fidelity and Guar. Ins. Co., 306 A.D.2d 67, 763 N.Y.S.2d 243 (1st Dep’t 2003).
