Contingent Dependent Properties Insurance: Understanding the Basics - Including Direct Versus Indirect Losses

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...group claimed it sustained a loss of business income because customers cancelled their stays.

One of the provisions that came under dispute dealt with the civil authority clause. Another dealt with the dependent property clause. Under that clause the insurer agreed to pay for the actual loss of business income that the named insured sustained due to the necessary suspension of operations during the period of restoration.

This policy actually had two such clauses dealing with dependent property. Under the first one the suspension must have been caused by direct physical loss of or damage to “dependent property” at a premises described in the Schedule, caused by or resulting from any covered cause of loss. The second clause applied to “dependent property” not described in the Schedule. The policy defined “dependent property” in pertinent part as “property operated by others whom you depend on to … deliver materials or services to you … accept your products or services …manufacture products for delivery to your customers … attract customers to your business.”

Since, according to the court, Southern Hospitality had failed to identify any scheduled contributing property or any unscheduled dependent property that had been damaged by a covered cause of loss, coverage was denied. Thus, the court agreed with the insurer’s argument that physical loss or damage to dependent property was a necessary component of coverage.

In a sense, aircraft conveying passengers (customers) could be viewed as dependent property, but the way the coverage forms are prepared it is unlikely that the drafters had vehicles in mind when they defined “dependent properties.”

Direct Versus Indirect Suppliers

According to Webster’s New Collegiate Dictionary, the term“direct” is defined to mean “proceeding from one point to another in time or space without deviation or interruption.”This same source defines “indirect” as “not directed straight to the point.”What these terms mean in relation to an actual business situation might be difficult — but necessary — to determine if someone needs to purchase insurance for one or the other.

If a business knows unequivocally that it will suffer a loss if a supplier or customer sustains serious damage, then it should purchase contingent business income coverage. In some cases, depending on the insurer, unless a company purchases contingent business income insurance for both direct and indirect suppliers, there is likely to be a dispute. (An indirect supplier is one that does not have a direct connection with the insured; that is, is not an immediate supplier but is remotely involved.) What could happen when..

If a business knows unequivocally that it will suffer a loss if a supplier or customer sustains serious damage, then it should purchase contingent business income coverage.


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