Japan Earthquake a Wake-Up Call for Contingent Business Interruption Coverage



...earthquake and/or flood, including other water damage at locations around the world, without having to schedule them.

Multinational companies with global operations will likely maintain dependent properties interruption and extra expense insurance. Such insurance programs often incorporate a “master” global policy with underlying local policies for overseas locations/operations. To the extent the local policies do not afford coverage, the “master” policy will provide the needed coverage.

The big issues confronting these businesses other than limits of coverage are likely to be: which coverage, earthquake or flood, applies to their losses, and whether second-tier suppliers are covered, since most such policies only cover first tiers. Other issues will be loss of utility services, ingress/egress and delays brought about by civil authority.

The Difference In Conditions (DIC) Policy also may be beneficial here in light of the fact that one of its primary purposes today is to obtain coverages not otherwise available under primary property policies, such as collapse, earthquake, other earth movement and flood — including excess of the National Flood Insurance Program.

Property policies were originally written on a named perils basis. In order to obtain broader coverage, the DIC policy was introduced.

What this policy was then meant to provide was coverage on an all risks perils basis, exclusive of the named perils of the underlying property policy. In other words, the DIC policy covered the difference between all risks causes of loss and named perils. Since many, if not most, property policies are written subject to the special causes of loss form (all risks), the DIC policy is not as significant as it once was.

In fact, the DIC policy is to property insurance what an umbrella liability policy is to liability insurance, with both having at least one characteristic in common: they both can “leak.” What this means is that coverage under the DIC and umbrella policies is not as broad as it used to be. In fact, both policies appear to operate more as excess follow forms, and whether coverage is broad hinges on what the primary property or liability policy provides.

This means that when the DIC policy includes flood or water damage coverage — defined to mean waves or tidal waves — it should be broad enough to encompass tsunamis. Whether coverage will apply for contingent loss of business income and/or...

“Depending on the covered causes of loss, it may be possible to obtain coverage stemming from earthquake and/or flood, including other water damage at locations around the world, without having to schedule them.”