Coverages generally relevant to business income losses

Typically, the policies designed to respond to a policyholder’s own losses of income from accidents and catastrophes are property insurance policies. These first-party insurance policies typically provide coverage for loss or damage to property as well as time element losses arising from or related to loss or damage to property. Time element coverages are those where an adverse event occurs and injury – lost business income or extra expense – is suffered over time. This period is often referred to as the period of restoration or period of indemnity.

In general, direct (as opposed to contingent) business income is the most important of time element coverages. However, in most property policies, direct physical loss or damage to the policyholder’s own property must occur to trigger such business income coverage. The principal physical loss or damage to property in connection with the collapse was to the FSK Bridge, which is owned by the state of Maryland, and to the MV Dali and its cargo, which are subject to various types of marine insurance coverage – topics beyond the scope of this report. Accordingly, instead of direct business income, the time element coverages most likely to respond to income losses from the collapse are so-called additional time element coverages (setting aside the direct business income losses to the state of Maryland from the collapse). The most pertinent of these coverages to the collapse appears to be contingent business income, contingent extra expense and ingress/egress insurance.²

Contingent business income and contingent extra expense

Overview: Contingent business income

Contingent business income coverage is designed to cover certain types of supply chain disruptions – more specifically, to protect a policyholder for its loss of income resulting from damage to or destruction of property owned by third parties (often called dependent property). Qualifying third parties typically are limited to direct or indirect suppliers of goods and services as well as the policyholder’s direct or indirect customers and clients, often identified in the policies as contributing, recipient or manufacturing locations.

The potential for recovery under contingent business income coverage depends substantially on the precise policy wording. For example, some policies limit coverage to specifically named and scheduled dependent properties. Other policies cover dependent properties generically. Some policies provide such coverage only if the dependent property is that of a direct supplier or customer but others extend the concept of dependent property to include properties of indirect suppliers and customers, or suppliers of any tier, such as suppliers of suppliers, suppliers of suppliers of suppliers, etc. Property damage to the third-party property typically must be of a type that would have been covered under the policy had it happened to the policyholder’s own property. An example involving a direct supplier would be a producer of computer systems for cars, where, if the computer system producer suffers damage causing it to suspend operations, the car manufacturer likewise will have to suspend or diminish operations. An example of an indirect supplier for the car manufacturer would be a microchip manufacturer, whose microchips are used by the computer system manufacturer.

Overview: Contingent extra expense

In addition, such affected businesses may have contingent extra expense coverage, which is intended to pay for increased costs incurred after the adverse event to minimize or avoid a contingent business income loss. Accordingly, if a business incurs additional expenses to avoid or minimize a contingent business income loss – for instance, a car manufacturer’s extra costs to adapt its manufacturing process to utilize a replacement source of computer systems – it may have coverage for those costs under contingent extra expense coverage.

How contingent time element coverage might apply to losses from the collapse

There are a number of issues to consider when evaluating whether your business might have contingent time element coverage for losses from the collapse.

First, does the loss arise from physical loss or damage to the property of a supplier or a customer? This may be the most significant issue. Policyholders likely will have to establish that the state of Maryland (either as operator of the FSK Bridge or the Port) or another entity³ was a supplier of services – for example, provision of facilities for the safe and efficient transport of goods – and that damage to the supplier’s property caused the policyholder to suspend or reduce operations, or incur extra expense to sustain operations. Policyholders may argue, for example, that the state was a direct supplier (e.g., if the policyholder shipped goods through the Port or over the FSK Bridge) or an indirect supplier (e.g., if the policyholder relied on a supplier’s shipment of goods through the Port for incorporation in its products or operations).

As noted above, the case law on contingent time element losses is thin, but among the potentially helpful cases is Archer-Daniels-Midland Co. v. Phoenix Assurance Co., 936 F. Supp. 534 (S.D. Ill. 1996). In that case, the policyholder sought coverage for its increased costs in transporting and purchasing grain in the wake of flooding along the Mississippi River in 1993 under a contingent extra expense provision covering extra expenses incurred as a result of damage to or destruction of property “of any supplier of goods or services which results in the inability of such supplier to supply an insured location[].” 936 F. Supp. at 540. The core issue was whether “Midwest farmers and the United States government, through the Army Corps of Engineers (Corps), which operates and maintains the Mississippi River system, and the United States Coast Guard are ‘suppliers of goods and services’ under the policies.” Id. As to the United States Coast Guard and the Corps, the court rejected the insurance companies’ argument that these entities were not suppliers because they did not provide services to any individual user but rather, serviced the overall improvement of the waterways on the grounds that the latter was indisputably a service. Id. at 541. Next, the court rejected the argument, on the grounds that it had no authority – let alone support in the policies – that these entities could not be service providers because they were governmental entities. Id. at 543. Third, the court rejected the argument that these entities could not be suppliers because the policyholder did not have a written contract with them, because “the policies do not state that coverage is limited to principal suppliers or suppliers with whom [the policyholder] has a written contract, rather, they apply to ‘any’ supplier.” Id. Under Archer-Daniels-Midland, a policyholder may argue that the state or another entity is a supplier of services to those policyholders that are dependent upon the services provided at the Port, Baltimore Harbor and the FSK Bridge.

Second, depending upon the facts, the specific wording of the contingent business income and contingent extra expense provisions in the property policy at hand also may be important. Again, this language varies widely from policy to policy, with some provisions limiting coverage to direct customers or suppliers, and other provisions covering customers or suppliers of any tier. As to the “direct” language, one court has construed “direct” supplier to mean only a supplier in direct privity with the policyholder. In Millennium Inorganic Chems., Ltd. v. National Union Fire Ins. Co., 744 F.3d 279, 280, 282, 286 (4th Cir. 2014) contingent business interruption coverage was denied upon finding that the policyholder’s direct supplier was a gas reseller rather than the gas producer that suffered property damage due to an explosion. Another court, construing only the word “supplier,” concluded that a utility serving the policyholder’s supplier was not a “supplier” of the policyholder because the policyholder did not consume the power produced by the utility. See Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400 F.3d 613, 615 (8th Cir. 2005). Thus, in most instances, a broader definition of “supplier” will prove more useful in arguing for recovery.

Third, recovery may depend upon the type of contingent time element clause the policyholder purchased. For example, it may be argued that a supplier’s inability to supply is due to the supplier’s loss of ingress to or egress from the Port, rather than property damage. In addition, some properties policies include extended contingent time element coverage for Loss of ingress or egress and for service interruption.

Ingress/egress coverage

Overview

Ingress/egress coverage is designed to pay for loss of business income caused by physical loss or damage to third-party property that prevents or hinders ingress to or egress from the policyholder’s business. As with contingent business interruption coverage, Ingress/egress provisions typically require the property damage at issue to be of a type that would be covered if it had happened to the policyholder’s own property. Many policyholders will be affected by the closure of the Port and the FSK Bridge, which prevents ingress to or egress from their premises.

How ingress/egress coverage might apply to losses from the collapse

Ingress/egress clauses in commercial use vary from policy to policy. Many of them require that the prevention of ingress or egress must result from damage to property within a specific geographical limit, such as a distance of one mile or five miles. These clauses also differ in the language triggering coverage, with some clauses requiring ingress or egress to be prevented or prohibited, and others covering loss when ingress or egress is merely impaired.

With regard to language requiring prevention of access, insurers are likely to argue in defense, as they asserted in the wake of the attacks of September 11, 2001, that ingress to or egress from the policyholder’s business was still possible, just more difficult. Again, the case law is thin, but certain cases may be helpful. In Fountain Powerboat Industrial, Inc. v. Reliance Insurance Co., 119 F. Supp. 2d 552 (E.D.N.C. 2000), the policyholder was a manufacturer of boating equipment, whose facility was served by one road, Whichard’s Beach Road, which in turn was served by one highway, U.S. Route 17. After Hurricane Floyd, both Whichard’s Beach Road and U.S. Route 17 were flooded for days, but access to the policyholder’s premises was still possible using “large trucks.” Despite this, the court found that the policyholder was entitled to ingress/egress coverage: “The court finds that the ingress/egress provision relates only to reasonable access and does not, therefore, apply to extraordinary efforts by [the policyholder] or its employees to get to work over closed and flooded roads.” 119 F. Supp. 2d at 554, 557 n.4. Under Fountain Powerboat, a policyholder suffering, for example, substantially lengthened driving times to access their premises due to the collapse, should be able to effectively maintain that the collapse amounts to prevention of access to their premises.

Policyholders can stack coverage for contingent time element and ingress/egress losses

Last, we note that the coverages discussed in this report are commonly subject to sublimits, some of which may be low relative to the overall policy limit. Importantly, a policyholder is often entitled to stack sublimits for contingent time element, ingress/egress and other additional time element coverages. This is a useful feature for policyholders because a large accident or an area-wide catastrophe may trigger a number of time element coverages. For instance, if a fire destroys the policyholder’s factory and the neighboring factory of its main customer, the policyholder may have both a business income loss and a contingent time element loss. If the policyholder’s loss exceeds the sublimits of one of the coverages, courts may permit the policyholder to stack the coverages. In the factory fire example, if the policyholder had an eighteen-month business income loss running at $1 million per month, business income coverage limited to twelve months only, and contingent time element coverage with a $5 million sublimit, then a court might permit the policyholder to recover its first year of business income losses (i.e., $12 million), plus (under the contingent time element coverage) additional loss up to the $5 million sublimit of the contingent time element coverage, for a total recovery of $17 million.

Conclusion

Insurance coverage issues that will arise in relation to lost income from the collapse are distinctive and unusual ones, and the case law on the coverages discussed above is thin. Policyholders should have an advocate that is highly experienced in ensuring they receive the full benefit of their policies. This is what the attorneys in Reed Smith’s Insurance Recovery Group do all day, every day. In addition, Reed Smith is one of the global leading maritime law firms, uniquely positioning the firm to understand the nuances and complexities of coverage claims arising from the collapse. We would be pleased to speak with you about ways we can help navigate your insurance claims in connection with this challenging loss. If you have questions about your coverage claims, please contact our group leads, Amber Finch and Stephen T. Raptis.

1. This report does not address the significant liability insurance issues, nor the marine cargo insurance issues, arising from the collapse, although Reed Smith has significant experience handling insurance coverage claims involving both of these types of losses.
2. Although many property insurance policies also provide coverage for business income lost due to orders of civil and military authorities, as of the time of writing there do not appear to be any such orders resulting from the collapse that are causing significant business income losses.
3. For example, the U.S. Army Corps of Engineers (Corps) is responsible for maintaining the federal Fort McHenry channel in the Patapsco River, which supports ingress and egress to shipping, and thus the Corps might be such an entity in connection with the collapse. See, e.g., this article

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