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


Denial and Litigation

Two days after the explosion, Millennium sent notice of claims to both of its insurers. After an investigation and a report, both concluded that Apache was not a direct supplier to Millennium. As a consequence, the insurers denied coverage, but left the door open for Millennium to provide evidence of a direct relationship between it and Apache sufficient to establish coverage.

The United States District Court for the District of Maryland entered an order granting Millennium’s motion for summary judgment. In doing so, the court reviewed and interpreted the policies, concluding that coverage under the policies extended only to “direct contributing parties.” In determining the meaning of the term“direct contributing property,” the district court reviewed existing case law on contingent business interruption insurance.

The court also held that Millennium’s contract with Alinta “had no effect on the physical realities of natural gas supply between Apache and Millennium” because although Alinta took title to the gas when it traveled through the DB Pipeline, Alinta “never took physical possession of the gas and had no ‘property’ with which to do so.”

On appeal, the U.S. District Court of Appeals stated that for Apache to have been considered a direct contributing party to Millennium it would have been required to supply Millennium with materials necessary to the operation of its business “without deviation or interruption from an intermediary.” On the undisputed facts of the case, the court went on to say that neither Apache nor Apache’s facilities could be considered a “direct contributing party” of Millennium. From the appeals court’s perspective, whatever the relationship between Apache and Millennium, it was clearly interrupted by “an intermediary, ”Alinta — which took full physical control of Apache’s gas before delivering indistinguishable, commingled gas to Millennium.

That relationship was also interrupted by an intervening step, the court added — the physical insertion of the gas into the DB Pipeline, at which point Apache relinquished all physical control over that gas. Under any view of the relevant facts, the court concluded, Apache could therefore be only an indirect contributing property to Millennium, coverage of which was not included in the policies.

Approaches of Independently Filed Policies

Insofar as manuscript and independently filed property policies are concerned, where larger risks are likely to be handled, insurers either exclude indirect suppliers altogether or provide a sublimit.

In one such manuscript policy reviewed, the limit for contingent business interruption and contingent extra expense (a coverage not discussed here) for direct suppliers and receivers as described in the policy was $10 million. For indirect suppliers and receivers, on the other hand, the limit was $2.5 million. Perhaps this kind of limit can be viewed by insureds as being welcome, considering that some insurers do not provide any coverage — sublimit or otherwise — for indirect suppliers and receivers.


If a company is dependent on other organizations for its raw materials or supplies, or dependent on customers who buy its products and services, it needs contingent business income coverage.