Contingent business coverage is a type of business interruption coverage intended to protect the “dependent business” from an external business income exposure. There are four (4) types of dependent business ISO endorsements:
- Contributing Premises, such as the businesses that deliver materials to the insured;
- Recipient Premises, such as the businesses that receive the insured’s products;
- Manufacturing Premises (businesses that make products for delivery to the insured), and
- Leader Premises, such as businesses that bring the customers to the insured.
Typically, ownership or control between the dependent companies destroys contingent business income coverage in the event of a loss. However, an FC&S Bulletin article discusses the possibility of presenting a claim for “interdependent” businesses that share the same owners and avoid the coverage foreclosure.
Our client has complete or majority ownership of many companies, which are all insured on the same property and business interruption policy. Some of the companies make goods that are bought by the other companies within the group.
For example, one company is a paint producer and buys cans from another company in the group in which the actual paint is merchandised. Therefore, if one of these producing companies suffers a loss that is insured under the property coverage, there is a possibility that not only will this company suffer a direct business interruption loss but also that the recipient company of these goods will suffer an indirect business interruption loss because they could not produce their own products.
Would the business interruption loss suffered by the recipient company be covered under the policy given that they are insured under one policy and that they are companies of similar ownership? In order for the loss suffered by the recipient company to be covered, does there have to be an explicit clause or sublimit covering contingent business interruption?
Our interpretation is that contingent business interruption is meant for companies that are important suppliers to a client but that do not share ownership or are controlled by the same administration. In turn, we believe that contingent coverage will not respond in this example.
However, we believe that interdependent business interruption coverage for companies that have similar ownership or that are controlled by the same administration is what would apply in this example. We consider this coverage to be required in explicit terms within the policy when these companies have different policies for each business or when the insurance company wants to sublimit this coverage to an amount smaller than the total business interruption limit of the policy.
If, as is our case, these companies are within one policy, unless excluded specifically in the policy, our understanding is that there is interdependent business interruption coverage up to the limit of the policy without the policy being required to specifically list it.
FC&S feels that it may depend on how the business income limit(s) was calculated. If it is based on total sales for all companies, then the "interdependent coverage" could be automatic. That is, because the can production is interrupted at Company A, Company B cannot sell its product, the loss of paint sales would be covered. However, if Company A and Company B have separate limits, the coverage may not work that way.
In the scenario discussed above a contingent business income endorsement alone would have failed to protect the policyholder’s loss. To avoid this costly coverage foreclosure, insurance agents, risk management professionals and company underwriters should carefully consider the interrelationships of the policyholder’s business operations to adequately endorse and structure the insurance product before it is issued.