November 2, 2012
Our posts on October 31 and November 1 discuss business interruption insurance coverage for businesses that suffered physical damage to their own covered property in Hurricane Sandy. Today we discuss insurance coverage for business income losses suffered by businesses that did not themselves suffer physical damage. Businesses that lose customers or critical supplies as a consequence of physical damage to the property of others will seek coverage under the Contingent Business Interruption (CBI) provisions of their commercial property insurance policies. See Archer Daniels Midland Co. v. Hartford Fire Ins. Co. (“Regular business-interruption insurance replaces profits lost as a result of physical damage to the insured’s plant or other equipment; [CBI] goes further, protecting the insured against the consequences of suppliers’ problems.”)
1. Elements of a CBI Claim Are Identical to Those of a BI Claim, Except That Physical Damage Must Be to “Contributing” or “Recipient” Property, aka. “Dependent” Property, “Leader” Property, or “Attraction” Property
In Pentair, Inc. v. American Guarantee and Liability Insurance Co., the insured depended on products supplied by two factories in Taiwan. Neither factory suffered damage when an earthquake struck Taiwan. However, the earthquake disabled a power substation that provided power to the two Taiwanese factories. Without power, the factories could not manufacture products that they supplied to the insured. The court upheld the insurer’s denial of CBI benefits. The Eighth Circuit reasoned that the physical damage was to the substation, not to the factories, and the substation did not qualify as a dependent property under the insured policies. The court rejected the insured’s argument that the power outage caused direct physical loss or damage to the two factories because the factories were unable to perform or produce products. The court held the mere loss or use of function does not constitute direct physical loss or damage.
2. A Key Issue in CBI Claims Is the Meaning of “Suppliers” and “Customers”.
If the CBI provision limits coverage to losses resulting from damage to “direct” suppliers or customers, those not in privity may not be encompassed by the CBI provision. However, if the policy is broader in its terms, distant suppliers and customers can qualify for coverage. For example, some policies permit recovery for damage to property of suppliers or customers, whether “direct or indirect.” Arguably, under these policies, a person or company need not be in privity with the insured to qualify as a “supplier or a “customer.” Compare Pentair’s narrow view of suppliers with the broader view taken in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minn., aff’d, 356 F.3d 850 (holding that Midwest farmers who sold grain to a licensed grain dealer, which in turn resold grain to the insured, were suppliers of the insured for purposes of the policy’s business interruption coverage).