When it comes to relationships, businesses are as vulnerable as people. Just like in our personal relationships, businesses depend on the performance and accountability of third parties. When relationships fail, it’s hard to get back out there. Many businesses rely on outside purchasers, suppliers and distributors on a daily basis. These relationships are often stable and reliable, but loyalties are swiftly destroyed if a partner suffers an unexpected loss or calamity and is unable to purchase, supply or distribute inventory. Unlike people, businesses can be less vulnerable by purchasing what I call “relationship insurance,” or Contingent Business Income coverage (CBI), which protects the “recipient business” from income losses caused by an interruption or slow-down in the operations of a “dependent business” (i.e., purchasers, suppliers or distributors).

But how many relationships can a CBI endorsement hold? A federal judge answered this $10 million dollar question in a 25 page opinion. Millennium Inorganic Chemicals Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, is one of three published court opinions on CBI insurance. It is therefore a must read for all first party property coverage practitioners, but I will attempt to condense its value for those who want a superficial understanding on the topic.

In 2008, a natural gas pipe line exploded off the coast of Western Australia. As a result of the explosion, Millenium could not purchase gas from its exclusive “gas trader,” Alinta, and was forced to suspend its production of titanium dioxide, a white pigment used in manufacturing a range of products such as paint, plastics, and paper. Millenium submitted a $ 10 million claim to its insurers, but coverage was denied because its contributing business (Alinta-the gas trader) did not sustain any physical loss or damage at its location.

As I understood the intricate business relationships in this case, Alinta purchases natural gas and delivers it downstream to its clients’ outlet points. Alinta owns “title” to the gas while it’s being pressured through the pipes, but Alinta does not own the pipes or any of the other gas transportation equipment. The owners of the pipe line that exploded do not sell gas to end users, nor do they purchase gas themselves (aside from a small amount of gas for their own energy needs). Rather, they obtain revenue by providing a regulated transport service for gas.

According to the insurers, Millenium’s CBI endorsement did not extend to the location where the explosion occurred because it was not a direct “contributing property” to Millennium’s business, nor did Millennium have a contractual or “direct relationship” with the owners of the pipe line.

The court interpreted Millenium’s policy and found that it was reasonable to expect coverage under the CBI endorsement because Alinta was a “direct supplier” to Millenium, albeit not in a physical sense.

Millenium’s master policy read as follows: coverage to “locations [that are] direct suppliers of materials to the Insured’s locations.” […] This suggests that the physical relationship between the properties is as or more important than the legal relationship between the properties’ owners. It is not an unreasonable interpretation of the Master Policies to conclude that, by providing only “direct” CBI coverage, the Insurers sought to limit their exposure to situations in which the insured lacked the kind of influence over a contributing property that comes with contractual privity. But, the Master Policies do not say this expressly.

Whereas ordinary “[b]usiness interruption insurance protects against the loss of prospective earnings because of the interruption of the insured’s business caused by an insured peril to the insured’s own property,” contingent business interruption insurance “protects against the loss of prospective earnings because of the interruption of the insured’s business caused by an insured peril to property that the insured does not own, operate, or control.” In other words, “[r]egular business-interruption insurance replaces profits lost as a result of physical damages to the insured’s plant or other equipment; contingent business interruption coverage goes further, protecting the insured against the consequences of suppliers’ [or customers’] problems.”

I must note that Millenium’s policy is not typical. Most CBI endorsements limit coverage to “physical loss or damage” at the contributing premises, which are typically listed. The Millenium case will certainly now make many risk managers, brokers and agents carefully review this “relationship insurance” contract.

1 No. 09-1893, 2012 WL 4480708 (D. Md. Sept. 28, 2012).