Contingent insurance covers the loss that the insured will suffer if the operation of a key supplier, customer, or leader property on which the insured’s operations are dependent is shut down by an insured peril. It is important to note that ISO form CP 15 08 06 07 is used to provide coverage subject to the same limit of insurance, coinsurance percentage, and coverage options as is found on the business income (and extra expense) coverage form, whereas CP 15 09 06 07 is used when direct business income coverage at the insured’s own premises is not provided or when the limits of insurance selected by the insured for the dependent properties differ from the direct business income limit of insurance or differ among the various dependent properties themselves.
Under both dependent property forms listed above, a “leader property” (a.k.a. attraction property) is property not owned, controlled, or operated by an insured. Rather, a “leader property” attracts customers to the insured’s business. An example is an anchor store in a mall that attracts patrons who pass by the insured’s specialty shop nearby. For instance, smaller stores at a mall may have Leader Property coverage to cover them for the drop off in customer traffic and business that might befall them if the flagship store at the mall – e.g., a Wal-Mart or Nordstrom’s – is damaged or destroyed.
While it is clear that ownership or an insurable interest over the leader property (ie. leaseholds) do not trigger contingent business income coverage, it must also be understood that control, use and intent of the “leader property” destroys contingent business income coverage.
In Zurich American Ins. Co., v. ABM Industries Inc., 265 F.Supp.2d 302 (S.D.N.Y. 2003), a janitorial company that held a contract to clean the World Trade Center (“WTC”) submitted a claim to its carrier as a result of the September 11th attacks. ABM was a facility services contractor that provided janitorial, lighting, and engineering services in the common areas of the WTC; provided janitorial services for virtually all of the tenants in the WTC; and operated a call desk through which it provided engineering and lighting services to the WTC tenants.
The trial court rejected ABM’s contention that the WTC itself was a “leader property” under the incorrect assumption that the leader property cannot be located in the same site.
But the Court need not reach this latter issue because it is plain that neither the World Trade Center nor its constituent parts is “leader property” in the “vicinity” of ABM which “attracts business” to ABM, but rather is itself the site and source of the ABM business here at issue. This is not a case, for example, where a related business located near a ballpark might suffer a loss if the ballpark were destroyed. Here, rather, the destruction of the World Trade Center caused loss to ABM’s business by destroying the tenanted premises and common areas where ABM supplied its services.
ABM appealed the ruling. While the appellate court affirmed the outcome, it rejected the trial court’s reasoning finding that:
We reject the notion that a property cannot “attract” business to another entity at the same site, or adjacent to it. The district court’s refutation of this possibility rests on an overly literal interpretation of the word “attracts.” Economic forces need not act in the same physical fashion as does a magnet attracting metal. Indeed, it was the interconnectedness of the WTC complex that “attracted” its tenants to ABM’s services by providing an opportunity for ABM to exploit economies of scale. Zurich American Ins. Co., v. ABM Industries Inc., 397 F.3d 158 (2nd Cir. 2005)
Nonetheless, the court concluded that “leader property” coverage was inappropriate because the insured “operated” the infrastructure of the WTC complex, including the common areas and tenanted premises. Agents and risk managers should carefully analyze the particular nature of the businesses that the insured wishes to schedule as a dependent properties to avoid coverage foreclosure, especially in those cases where the limited form is used as an endorsement.