Every day, businesses develop and thrive on symbiotic relationships, where the entities rely on the continued operational viability of each other (or even exclusively beneficial relationships). Few businesses, however, consider the risk and exposure of losing that relationship due to an unexpected calamity. Businesses that are dependent on a non-related entity’s operations should talk to their agents about attaching “dependent business interruption” endorsements to avoid costly surprises.

Contingent business coverage is a type of business interruption coverage will protect the “dependent business” from the external business income exposure. There are four (4) types of dependent business ISO endorsements: 1) contributing premises, such as the businesses that deliver materials to the insured, 2) recipient premises, such as the businesses that receive the insured’s products, 3) manufacturing premises (businesses that make products for delivery to the insured and 4) leader premises, such as businesses that bring the customers to the insured. In lay terms, 1) suppliers, 2) buyers, 3) providers, and 4) drivers.

It is important to note and understand that contingent business interruption is triggered by the proverbial “actual physical loss” requirement (to the dependent structure) or at a minimum have an “insurable interest” over the dependent structure.

For instance, in Arthur Andersen LLP v. Federal Ins. Co., 3 A.3d 1279 (N.J. Super 2010), an accounting firm filed a $204 million claim under its contingent business interruption provision for business losses sustained after the 9/11 terrorist attacks. Andersen, however, did not own or lease any property at the World Trade Center nor could it identify any supplier or client whose property was damaged to support its contingent business interruption (CBI) claim. Andersen argued that, although there was no actual interruption of goods or services from suppliers, it was entitled to coverage under the contingent business interruption provision because the World Trade Center, the Pentagon, and United Airlines Boeing 757 Aircraft (Flight 93) sustained physical damage and there was a direct nexus to its loss of revenue in the aftermath of the terrorist attacks.

Andersen relied on definition of Real and Personal Property contained in Clause 9.A(1) and argued that the ambiguity should be resolved in favor of coverage.

The interest of the Insured in all real and personal property … which is not otherwise excluded and which is owned, used, leased or intended for use by the Insured, or in which the Insured may have an insurable interest, or for which the Insured may be responsible for the insurance [..]

The court disagreed with Andersen and found that the accounting firm failed to establish a cognizable relationship between itself and the damaged properties (WTC, Pentagon and the Boeing 757 Aircraft). Andersen did not prove it derived a direct pecuniary benefit from the properties or that it suffered a direct pecuniary loss caused by the damage.

Andersen did not derive any direct pecuniary benefit, such as rental income, from the existence of the WTC and Pentagon and suffered no direct loss from the damage inflicted to those buildings on September 11. Andersen argues that such proof is unnecessary; that an insurable interest means “ any economic interest in the continued existence of the property” and exists “if the loss of the property may cause the insured an economic loss.” (Emphasis added). When the trial court explored the breadth of this contention with counsel at oral argument, Andersen’s counsel agreed that, based upon its interpretation, Andersen could assert a claim for lost revenue if a terrorist attack targeted and destroyed property that was completely unrelated to Andersen’s ability to conduct its business, i.e., low income housing in New York. This expansive interpretation fails because it conflicts with established caselaw and subverts the policy underlying the insurable interest requirement.

Andersen’s theory would permit an insured to allege an insurable interest in a class of property so broad as to be impossible to define and certainly not susceptible to a predictable level of risk. Just as an insurable interest cannot be viewed so narrowly as to create “a windfall for the insurer, allowing it to retain the premiums it reaped on [a] policy without providing anything in return,” Balentine, supra, 406 N.J.Super. at 144, 966 A.2d 1098, the interest cannot be read as broadly as Andersen argues, allowing the insured to reap a windfall recovery for a loss so clearly unanticipated in the calculation of the premium. Such an application would undermine the very purpose of an “insurable interest” requirement, reducing an insurance contract to a “pure gamble,” Lincoln Nat’l Life, supra, 596 F.Supp.2d at 889, and we reject it as a matter of law.