Arnold Palmer once described golf as “deceptively simple and endlessly complicated.” That’s a good description for insurance also. (Fortunate for me, since I get paid to figure it out.) Given the rules of construction, ambiguities (even latent ambiguities) in insurance policies are supposed to be construed against the carrier. I’ve therefore always wondered why the insurance industry doesn’t do much more to minimize the “endless complications.” On the other hand, trying to get a judge to find that policy language is ambiguous, especially in the commercial context, can be like trying to get a camel through the eye of a needle (to go all Biblical on you), so maybe the insurance industry knows what it’s doing.
The basic concept of business interruption insurance is pretty easy to understand. A covered cause of loss of happens (like, say, a fire) and your company loses money because of a resulting slowdown or suspension of operations. Business interruption coverage (also known as “business income coverage”) applies to loss suffered during the time required to repair or replace the damaged property and get back up and running. The coverage may also be extended to apply to loss suffered after completion of repairs, for a specified number of days. There are two ISO business income coverage forms: the business income and extra expense coverage form (CP 00 30) and the business income coverage form without extra expense (CP 00 32).
Sounds “deceptively simple,” eh? But let’s take a look at two recent decisions.
DirecTV v. Factory Mutual involved the question of what happens when a supplier suffers a catastrophe, causing the policyholder to lose income. Factory Mutual sold DirecTV business interruption coverage containing a “contingent time element” provision. This type of coverage extends insurance beyond the policyholder’s own property to the location “of a direct supplier, contract manufacturer or contract service provider.”
DirecTV, of course, is a satellite television company. Its satellite dishes pick up signals from satellites and submit those signals to a DirecTV receiver, known as a setup box or “STB”, which transmits the signals to the subscriber’s television.
DirecTV contracted with four companies to manufacture and supply its STBs. The manufacturers bought the component parts and incorporated them into the finished STBs, and then sold the STBs to DirecTV. The STBs included, as a component part, hard drives manufactured by two companies, one of which was Western Digital. In October 2011, a monsoon in Thailand damaged Western Digital’s hard drive manufacturing facilities. DirecTV argued that the damage to the Western Digital facilities reduced the supply of hard drives available for incorporation into DirecTV’s STBs. The resulting price increase in Western Digital hard drives, as well as the expense of obtaining substitute hard drives, caused DirecTV approximately $22 million in losses and extra expenses. DirecTV submitted a business interruption claim to Factory Mutual, requesting reimbursement of the $22 million.
Factory Mutual denied the claim, arguing that Western Digital was not a “direct supplier, contract manufacturer or contract service provider” to DirecTV. And, unfortunately for DirecTV, the Court wholeheartedly agreed, writing: “Absent any evidence that the parties intended ‘direct supplier’ to have any technical, or industry-specific meaning, there is no reason to look beyond the ordinary meaning of the term. And without recourse to electronics supply industry jargon, any definition of ‘direct supplier’ to mean ‘customer-controlled component supplier’ would not be reasonable…The ordinary meaning of ‘direct supplier’ does not apply to a situation where DirecTV never received anything from Western Digital.”
This case points out the need for risk managers and insurance brokers to understand the policyholder’s business fully. Had the supply chain been analyzed, perhaps the policy could have been amended by endorsement to include indirect suppliers, or at least certain indirect suppliers.
Another recent decision concerning business interruption coverage stemmed from Superstorm Sandy, known to lawyers in the New York metro area as “the gift that keeps on giving.” Almah LLC v. Lexington involved an office building in Lower Manhattan that got torn apart pretty badly by the storm. Lexington paid over $26 million on the claim, including $1,342,392 for wind damage. The policyholder argued that it was entitled to a further payment of $15.8 million for non-physical damage and losses, including the cost of removing debris and contaminated property; the cost of hiring professionals to inspect the property; rental loss for the time when the building was not habitable; rental loss and rent abatements caused by the lack of voice, data, or video services; and the demolition and rebuilding of portions of the building to comply with municipal ordinances. Lexington, on the other hand, argued that it already had paid in its entire flood limit of $25 million, and that no further payment was required.
So, the question was whether the claims for consequential loss (including business interruption) fell within the flood sublimit and were therefore properly rejected. The Court wrote: “The flood sublimit applies to many of Plaintiff’s claims arising from the Superstorm Sandy flood. The plain language of the Policy provides that the $25 million coverage for flood in an ‘area of 100-Year Flooding, as defined by the Federal Emergency Management’ (i.e., the Property) is for total loss or damage including any insured Time Element loss. Therefore, any claim by Plaintiffs that arises out of [time element] falls within the $25 million limit of liability for flood. Making this distinction may not be as easy as Lexington contends. Plaintiffs’ other claims must be addressed on an item-by-item basis.”
In other words, the Court rendered a decision that essentially said nothing, after (I’m sure) an enormous amount of money was spent on lawyers by both sides. The Court basically said, if a particular time element loss is attributable to the flood, then the flood sublimit applies. It’s not clear from the decision whether a good argument could be made that the building was uninhabitable due to wind damage alone. In a number of instances following Sandy, too many lawyers and insurance adjusters jumped to the conclusion that the storm was a “flood event,” without carefully analyzing the facts applicable to each specific insured property.
Deceptively simple, but endlessly complicated.