...operation may be able to recover its time element losses, again subject to policy terms and conditions. Historically, successful contingent business income recoveries from major hurricanes in Florida and Louisiana have been asserted where hotels identified percentage declines in business based on customers not traveling from hurricane-devastated areas to the affected hotels.
Reference was made earlier to losses arising solely due to the loss or partial interruption of power, and the concern that the suppliers of such power are excluded as a dependent property. There may be a solution to such seeming lack of coverage in the boiler and machinery/equipment breakdown policies that many manufacturers have in force as part of their overall insurance program.
Many boiler and machinery policies provide a form of contingent time element coverage that is also known as interruption of supply coverage. This coverage indemnifies the insured for time element losses that are sustained because of an accident to the type of property covered by the insured’s policy, however the damage occurs to the property of a supplier or recipient (dependent property) of the insured’s goods and services. It should be noted that the type of accident which so damaged the dependent property must also be the type of damage covered by the insured’s policy.
Finding coverage for a loss under the contingent or interruption of supply provisions is not without its challenges. The trigger for this type of coverage is much more restrictive than under a property form. This is primarily because a flood or earthquake, which was the primary cause of damage in Japan, is not a covered accident under a boiler and machinery policy. However, if flood or earthquake sets into motion a chain of events that resulted in an accident to insured equipment, coverage may be triggered.
For instance, coverage has been found where floodwaters from a river flowed into the electrical equipment room of a manufacturing concern. The equipment was energized at the time and when the flood waters made contact with the equipment, severe arcing ensued which caused the destruction of the equipment. The arcing constituted a covered accident and the policy did not contain any anti-concurrent causation language in connection with flood. Accordingly, the claim was paid.
A recovery under these circumstances is by no means a proverbial layup and is a very difficult type of claim to perfect. However, the prudent professional should leave no stone unturned when searching for coverage. Initial review of a policy or discussion with a policyholder may lead to a preliminary determination that coverage is excluded. However, a careful review of the underlying factual scenario, the detailed policy language, the DIC policy (Difference in Conditions) and/or other endorsements will result in an ultimate determination of coverage for the loss.
Throughout this discussion, we have referred to contingent time element losses. As many readers understand, these losses encompass both business income and extra expense. If the policy is such that it will trigger coverage for contingent business income losses, it will also trigger coverage for extra expense.
It is not the intent of this discussion to engage in the means and methods for evaluating a business income loss. We will stress, however, that very careful attention should be paid to the extra expense provisions of the policy. This type of coverage is very broad and it can be utilized in many ways to resume operations and mitigate income losses. Often the extra expense coverage is underutilized, thus resulting in greater losses not only to the insured, but also to the insurer. Again, pay careful attention to the extra expense coverage and utilize it to the fullest extent to not only mitigate your income loss, but perhaps to save the business. The extra expense coverage leads to a variety of issues, some of which can be internally inconsistent. Many endorsements contain a provision that requires the insured to exercise whatever means are at their disposal to influence or induce the dependent property to restore its operations so as to resume...