Contingent Business Interruption Issues Continue Following Disasters in Japan

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...result, the computer manufacturer stops placing orders for printed circuit boards from its supplier in the United States. The printed circuit board manufacturer in the United States in turn sustains a significant income loss. The printed circuit board manufacturer carries a contingent time element policy. Is that income loss covered?

Of course, the policy must be referenced to determine if it would provide coverage for a loss sustained under the described scenario. It may be that the insured carries a manuscript type form intended to cover such a contingency.

Generally speaking, coverage for a contingent time element loss is triggered by physical damage to a contributing or recipient property. In the case of the printed circuit board manufacturer, the Japanese chip manufacturer is neither a supplier nor recipient property. Instead, the computer manufacturer is the recipient property; however, the computer manufacturer did not itself sustain any physical damage. The absence of physical damage to the computer manufacturer may render the printed circuit board manufacturer’s contingent time element policy inapplicable to the loss. Or perhaps not. Again, the policy and the surrounding facts and circumstances of the loss must be carefully analyzed to assess the availability of coverage.

Hospitality Industry

The discussion thus far has focused primarily on contingent time element issues associated with the manufacturers and sellers of goods and services. However, many other types of businesses have been adversely affected by the damage in Japan. The hospitality industry is one such business sector. Many United States-based hotel chains and REITs own and maintain hotel operations in Japan that have been detrimentally affected by the disaster.

Even though the specific hotel property did not sustain any physical damage, occupancy may be significantly down due to the surrounding damage and loss of customer base. Whether or not this represents a potential subject for a contingent time element claim is a function of the type of coverage that is in place. Referencing the description of the different types of dependent properties above, the leader location is applicable to the hotel model.

Due to the destruction of many business, recreational and leisure facilities, travel to and within Japan has diminished significantly. Accordingly, where a leader location is considered to be a dependent property and/or there is a provision for losses arising from damage or destruction of the customer locations, the hotel...

“Generally speaking, coverage for a contingent time element loss is triggered by physical damage to a contributing or recipient property.”


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