Flood vs. Wind Claims Following Hurricane Ian Webinar
January 25, 2023
The Fourth Circuit of Appeals recently construed policy language regarding coverage for contingent business interruption (“CBI”) in a case that will surely be a landmark in an area of coverage law that is rarely addressed by the courts.
CBI insurance provides coverage for loss of sales or revenue sustained when business is interrupted due to property damage that occurs away from the insured premises and, consequently, disrupts the flow of goods and services from/to a supplier or customer (referred to as the “dependent” or “contributing” properties). There are a limited number of cases discussing issues relating to CBI insurance; and the Fourth Circuit’s ruling provides greater clarity as to what constitutes a “direct” supplier, which is a common point of contention between policyholders and insurers.
The Fourth Circuit overturned the District Court of Maryland and held that the term “direct” is not ambiguous as it relates to determining who is a “direct” supplier of the insured. In Millennium Inorganic Chemicals, Ltd., et. al. v. National Union Fire Ins. Co. of Pittsburgh, et. al., the Court held that a natural gas producer was not a “direct contributing property” to the plaintiff’s titanium dioxide processing facility in Western Australia. The plaintiff’s facility was forced to shut down for several months following an explosion at the gas producer’s plant. As a result of the incident, gas was not able to be injected into a pipeline and transported to end-users, including the plaintiff.
The plaintiff’s insurer declined to cover the loss, stating that the gas producer was not a “direct” supplier, because the insured purchased the gas through an intermediary. The plaintiff filed a declaratory judgment suit for coverage. The District Court determined that the term “direct contributing property” was ambiguous, in part based upon the determination that the intermediary never was in possession of the gas at any time. Even though there was no contractual relationship between the producer and the plaintiff to supply the gas, the District Court ruled that the plaintiff was entitled to coverage.
The Circuit Court disagreed, referencing the contractual relationship between the plaintiff and the intermediary, as well as the lack of ownership of the gas by the producer once it intermingled with gas from other producers in the pipeline. The Circuit Court, referencing Webster’s Dictionary, defined a “direct” contributing property as one that supplies materials “necessary to the operation of its business ‘without deviation or interruption’ from ‘an intermediary.’
CBI policies frequently provide a scheduled listing of dependent properties, and coverage is typically limited to damage to properties of direct suppliers. The Insurance Services Office (ISO) has updated its policy forms for CBI coverage to allow for the scheduling of secondary contributing/recipient locations, similar to the at-issue property in Millennium Inorganic.
The case will likely be a frequently cited decision in determining whether a property will be deemed “dependent” and covered in CBI coverage as there are very few cases interpreting these policies in general. However, the analysis may not be necessary when accompanied by a schedule of dependent properties.