Contingent Business Interruption Issues Continue Following Disasters in Japan

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...due to lack of power (as opposed to physical damage), ensuing time element losses may not be covered. This type of situation is common- place in Japan due to the total loss of power in certain areas, as well as rolling blackouts ordered by the Japanese government.

These rolling blackouts lead to another coverage consideration. The proximate cause of the power interruption may be due to damage to the nuclear plants and power distribution infrastructure caused by the earthquake and tsunami, thus potentially triggering coverage. An argument in opposition to such coverage may be that the policy excludes losses caused by or resulting from nuclear radiation and other causes occurring in any sequence to the nuclear radiation (taking the anti-concurrent language into account). In the Japanese situation, however, there may be a strong argument that the fallout of nuclear radiation was a consequence of the physical damage to the plants and reactors. Regardless of the answer, the issue of a power generating facility not being a dependent property remains.

Suppliers

An additional and very complex issue in identifying dependent locations is where a secondary or even tertiary supplier is damaged, and such damage is the cause of the ultimate interruption of the flow of goods or services to the primary policyholder. For example, ABC Electric, located in the United States, supplies the policyholder with component parts obtained from a manufacturer in Japan. The Japanese plant was totally destroyed by the earthquake and thus is no longer shipping parts to ABC Electric. Is the policyholder’s resulting loss of income covered under these circumstances? When not defined or identified in the policy, insurers will often argue that lower-tiered suppliers or recipients are not considered to be dependent properties under the contingent time element coverage. This is a very significant issue and one that will often be resolved by first resorting to specific language (or the lack of such language) in the policy.

Coverage issues can become even more complicated where contingent business income losses are sustained by parallel suppliers. By way of illustration: a computer manufacturer curtails its production due to its inability to obtain a certain type of chip manufactured by a firm in Japan that was destroyed by the earthquake. As a...

“If a dependent location in Japan is specifically named, this may supersede any territorial limitation in the policy.”


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