Catastrophically dependent

Risk & Insurance, Jan, 2005 by Richard Mackowsky

After the winds of Hurricane Frances buffeted Florida, dumping more than a foot of rain and destroying homes and businesses just three weeks after Hurricane Charley, the companies that depend on suppliers located in Florida are counting their losses along with the owners of the damaged property. That's because serious damage to property or facilities of suppliers, manufacturers or customers can have the same disastrous effect on a company's ability to continue operations and generate income, even though the company's own facility isn't damaged.

Despite what you might think, traditional business interruption insurance coverage only applies to damage to the named insured's property, and doesn't pay for lost business income caused by damage to third-party owned property, such as your supplier's factory or your customer's warehouse.

Companies might try to protect their income by requiring their suppliers or manufacturers to name them as additional insureds on their business interruption policies, but that may not do the trick. While insurers will extend additional insured status to third parties for property damage, most will provide business interruption coverage only to their named insureds.

An alternative is contingent business interruption, or CBI, sometimes referred to as coverage for dependent properties. CBI coverage pays for the actual loss of business income that you, as the insured, suffer due to the interruption of your operations, caused by covered losses to dependent properties.

CBI coverage varies from carrier to carrier--some don't offer it at all while others only offer CBI coverage subject to reduced limits of liability when compared with the traditional business interruption coverage they provide. In addition to covered causes of loss and policy limits, the key issues when considering CBI coverage are determining which "dependent properties," if damaged, would cause business interruption losses, and then ensuring that the CBI policy applies to those dependent properties.

CBI policy language varies, along with the types of properties the policy covers. Many CBI policies mandate that the dependent properties be scheduled on the policy, which requires an insured to consider its chain of business operations and determine when damage to the property of others would likely interrupt its own business and affect its income. This type of policy, which has an impact on premiums, allows a carrier to consider the risk at the identified dependent properties.

Other CBI policies cover lost business income due to damage to property of others that are not specifically identified in the policy.

For example, some policies cover your lost business income when your business is interrupted due to damage to real or personal property of "any supplier of goods and services" or "direct suppliers or direct receivers." Under this type of policy the risk undertaken by the carrier is less well-defined and broader, so policies that provide coverage for unnamed locations often have reduced limits.

CBI coverage is important for companies whose operations and income depend on outsourced business or other types of dependent properties. Risk managers should take a second look at their existing business interruption policies to see if this kind of risk is covered.

Don't assume you're covered if another company that you depend on is damaged by a hurricane or some other casualty.

RICHARD MACKOWSKY is a member of the insurance coverage practice group at the law firm of Cozen O'Connor.