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Law360, New York (April 4, 2011) -- Given all the factors that may hamper manufacturing operations in northern Japan for months to come, commercial insureds in the U.S. may be facing some complicated measurement issues on dependent property claims involving damage to their Japanese suppliers.
Take as an example a minimally quake-damaged Japanese factory that directly supplies an insured. The insured has earthquake and flood coverage and high limits dependent property coverage that applies. The supplier's damage will be repaired in weeks, but the supplier will not be able to operate effectively because of a shortage of employees, periodic blackouts, concerns about contamination of air or water, and the destruction of one its local suppliers. How should the insured's loss be measured?
Even when insured physical loss or damage is present, business interruption coverage is not intended to reimburse an insured for a loss of business during periods when the damaged business would have been shut down anyway. The principle applies to dependent property claims.
Dependent property (or contingent business interruption) coverage generally does not reimburse for any period of time when absent physical loss or damage of the type insured the supplier's business would have been shut down for other reasons.
Three "idle period" cases illustrate the point, suggesting that in appropriate cases insurers will be within their rights in limiting the insured's dependent property claim to the actual loss sustained by the insured due to loss or damage of the type insured - not including idle periods from other causes.
In Simkins Industries v. Lexington Insurance (Md. Ct. Spec. App. 1979), the insured's property sustained both insured and uninsured damage following a tropical storm. The court held that the business interruption period did not include any part of the factory's shutdown that was attributable to the time necessary to repair the uninsured damage. This eliminated the first six months of the period of interruption.
In Air Liquide America v. Protection Mutual (9th Cir. 1997), an explosion at a nearby chemical supplier damaged the insured's plant. Before the explosion, the chemical supplier was the insured's sole raw material supplier. The court found that even if the insured's plant had been undamaged, the insured could not have operated without its sole supplier. The court held in its unpublished decision that there was no business interruption coverage for the idle period.
The Simkins and Air Liquide decisions relied on Idle Periods clauses in the insurance policy, although standard policy language limiting business interruption coverage to the actual loss sustained due to a necessary interruption caused by an insured peril would support the same result. The case of Harry's Cadillac-Pontiac GMC Truck v. Motors Insurance (N.C. Ct. App. 1997) illustrates the point.
In Harry's Cadillac, a snowstorm damaged a car dealership's roof and closed area roads leading to the car dealership for one week. Neither the roof damage nor its repair required the car dealership to close. The court rejected the insured's business interruption claim, holding that the policy only covers interruption that is the direct result of the insured physical loss or damage.
These idle period cases suggest that in appropriate cases insurers will be within their rights in limiting the insured's dependent property claim payment to the actual loss sustained by the insured due to loss or damage of the type insured - not including idle periods from other causes.
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