Business interruption coverage is often difficult to figure out. We receive many questions from FC&S subscribers on a variety of BI topics, like the following:
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.
While we understand that these companies are interdependent, we are not aware of anything specifically called interdependent business interruption coverage, so we are not aware of a differentiation between when to use that or contingent coverage.
However, it would be best if the underwriter agreed to endorse the policy stating that this type of loss (suffered by the recipient company as a result of the interruption at the providing company) was covered for interdependent business interruption losses. That way there would be no doubt. This may be done with a simple manuscript endorsement stating the fact if one is not available.
Sometimes underwriters may agree to document their files with this type of confirmation, but that is not as good since the policy is the contract. At the least, such an endorsement would save arguments during the adjustment process.
What is your experience with these types of business interruption losses? Have you ever seen an endorsement or policy provision called “interdependent business interruption”? Let us know in the comments below.
Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader
Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
- Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
