...are pondering, perhaps too late in some cases, whether their business insurance will pay for their loss of income in being unable to continue normal operations.
One particularly important form of insurance that comes into play and which also took center stage following the September 11, 2001 World Trade Center disaster, is contingent business interruption. This insurance covers a business for its loss of income and other expenses resulting from total or partial suspension of operations because of physical loss or damage to dependent property that is not owned, controlled or operated by the business, provided the loss is caused by a covered cause or peril.
Property policies differ and so, too, does contingent business interruption insurance. The keys to triggering this coverage, in general, are: (1) direct physical loss or damage to the dependent property; (2) loss or damage from a covered cause of loss; and (3) the territorial scope of coverage.
For purposes of illustration, and assuming the territorial scope is not an issue, a U.S. business would need to maintain earthquake insurance to trigger contingent business interruption coverage because a Japanese supplier’s business is damaged or destroyed by earthquake. If the Japanese business were damaged or destroyed solely by the tsunami, contingent business interruption coverage would not be activated for a U.S. business unless it had flood coverage in force. If, however, a U.S. business did not maintain earthquake or flood insurance, coverage still could be activated for any damage or destruction by fire following an earthquake and/or tsunami.
As stated, the foregoing illustration assumes that physical damage or destruction by a tsunami would be covered by flood insurance. However, it is likely that one of the big disputes (other than with ISO forms, as mentioned later) that will come out of this is whether, in fact, a tsunami falls within the definition of flood or an earthquake, particularly when earthquake insurance was purchased but flood and other water damage coverage was not. In such a case, businesses would likely argue that earthquake insurance applies to damage or destruction by the tsunami, because earthquake was the proximate cause of loss and, but...