Hundreds of thousands of businesses were affected in one way or another by Hurricane Sandy. The insurance industry estimated over $20 billion dollars in business income losses. Many have presented insurance claims for their lost profits that have been denied because the business was not completely “shut down” or it did not sustain “direct physical damage” from the storm. But the insurance company’s inquiry should not stop there, and businesses should ask for a complete evaluation of coverage under their policies.

Businesses that were not forced to close may be able to recover lost profits under their contingent business interruption coverage, which is triggered when policyholders do not themselves suffer physical damage but still lose revenue after a major supplier or customer sustains “physical loss or damage” and is not able to maintain the contracts or business relationships with the insured.
Many businesses have a basic form of contingent business income coverage in their property insurance policies. Although every policy must be individually analyzed, a standard Contingent Business Income provision will typically define dependent locations:

Dependent Time Element Location –

(i)Any Location:

(a) of a direct customer, supplier, contract manufacturer or contract service provider to the Insured.

(b) of any company under a royalty, licensing fee or commission agreement with the Insured.

(ii) Any Location of a company that is a direct or indirect customer, supplier, contract manufacturer or contract service provider to a Location described in a)(i) above.

I have no doubt Hurricane Sandy claims will be heavily litigated. I anticipate one of the main subjects of litigation will be the interpretation of “physical loss or damage” requirements in Contingent Business Income provisions.

As shown above, many of these standard endorsements do not specifically list or describe the dependent location(s). When presented with similar policy language, courts have held insureds could reasonably expect coverage for losses caused at properties not legally or contractually dependent.

For example, in Millennium Inorganic Chemicals Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. 09-1893, 2012 WL 4480708 (D. Md. Sept. 28, 2012), the insured purchased and delivered natural gas to its customers. The pipeline used to deliver the natural gas was not owned by the insured, nor did the insured have to pay for its use. The pipeline sustained a major explosion causing a disruption of natural gas delivery to the insured’s main consumer. The insurance company denied payment for income losses as a result of the explosion because the pipeline was not a dependent or insured business, and the recipient (customer) location did not sustain physical damages.

In a 25 page opinion, the court found the insured had a reasonable expectation of coverage under the circumstances.

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.

You should consult with a Business Interruption Coverage professional if your business sustained losses from Hurricane Sandy and you believe you have a claim under your policy’s CBI or Dependent Property endorsement.