Millions of businesses have been affected directly or indirectly this hurricane season. Hurricane Irene and Tropical Storm Lee caused significant structural and infrastructure damages, expansive floods and lengthy power outages. Many so-called coverages will play important roles in the adjustment and recovery process. Proper training and in depth understanding of all available coverages and remedies will ensure quick and proper resolution of the slew of claims related to these storms. The flip side will cause delays and headaches.
Many businesses were not directly affected by the storms, but if they have a dependent relationship with a business that was affected by the storms, there may be coverage for any economic losses as a result of the inability to continue the relationship with the affected entity.
Businesses develop and thrive on symbiotic relationships, in which 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.
Contingent business coverage is a type of business interruption coverage which will 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.
Extra Expense Coverage pays for necessary additional expenses a business incurs that it would not have incurred if there had been no direct physical loss or damage to property at the described premises (or contingent premises if adequately endorsed)
A good example of how distant businesses can be affected by catastrophes and yet recover under their own commercial policies is found in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004).
ADM processes and markets a variety of agricultural commodities such as corn, wheat, and soybeans. ADM uses corn to make such products as high-fructose corn syrup (“HFCS”) and ethanol. It relies heavily on corn producing operations and government transportation ways along the Mississippi and Illinois Rivers to conduct its operations. ADM insured its operations for $100 million under a difference-in-conditions program with several layers of insurance.
In 1993, severe floods devastated the Midwestern corn crops. The flood also obstructed the waterways and hampered the ability to navigate and move products by barge on the river. ADM claimed the flood caused it to incur extra expenses to procure sufficient quantities of corn for its processing and that the prolonged closures of parts of the Mississippi and Illinois Rivers caused it to incur additional expenses in alternative transportation. ADM ultimately submitted claims to its insurers for losses from the flood totaling more than $166 million in extra expenses and contingent business income losses.
ADM filed suit against all its insurers and settled with all, except for the hardiest $50 million layer with Hartford. The district court found that Hartford’s policy insured only against direct physical damage to ADM’s insured property, and that Hartford was not responsible for any contingent business or extra expense losses. ADM filed suit against its broker, Aon Risk Services, seeking $50 million in damages for Aon’s failure to secure contingent business interruption and extra expense coverages in the Hartford policy. The broker alleged that ADM could not seek to recover Hartford’s excess layer because it had not exhausted the underlying layers. The court denied Aon’s motion and allowed ADM to proceed against its broker, holding that ADM had exhausted the lower layers by agreeing to settle with the underlying insurers for a partial sum and absorbing the balance.
Aon then argued that even if it had procured contingent business and extra expense coverage under Hartford’s policy, ADM could not have recovered because its operations were not interrupted. Aon also argued that ADM’s expert was not offsetting the amounts that the manufacturing giant was hedging in the commodities futures market or the increased costs that it passed down to its buyers.
The jury returned a verdict of $16.5 million against Aon and the court awarded $3.6 million in pre-judgment interest. Aon appealed.
In affirming the verdict and interest award, the court of appeals stated:
The phrase “interruption of business,” as used in section 13Q of the DIC policy, does not require ADM to show that its corn processing plants stopped or slowed production. An interruption of business means some harm to the insured’s business, including the payment of extra expense, that would not have been incurred but for damage that an insured peril has caused to the property of any supplier.
Section 10B specifically excludes from the definition any “extra expense in excess of that necessary to continue as nearly as practicable the normal conduct of the insured’s business.” Because the definition of extra expense contained in Section 10B applies wherever the term is used in the DIC policy, it applies to the extra expense coverage provided by Section 13Q.
As defined in Section 10B, extra expense clearly includes those expenses necessary to carry on business operations. Section 10B would not make any sense if the DIC policy were interpreted as covering only the extra expense incurred as a result of a complete cessation of business. Accordingly, Aon’s argument that the policy only covers extra expense if business operations were stopped is inconsistent with the terms of the policy.
The cases cited by both parties demonstrate that parties to an insurance contract can require a slowdown or cessation of business before extra expense coverage applies. The DIC policy, however, does not include such a requirement with respect to the extra expense coverage and we are not at liberty to rewrite the policy to include one.
Notwithstanding these general principles, every policy must be read carefully to determine if this general rule applies to a particular claim. Feel free to call if you have questions.