Business Interruption Lessons From Katrina for the Gulf Oil Spill
By RANDY PAAR, partner at Kasowitz, Benson, Torres and Friedman in New York, and SARAH COX, associate, who both participated in the representation of Tyson Foods Inc. in Certain Underwriters at Lloyd's et al v. Tyson Foods Inc.
Policyholders, and particularly risk managers, want to believe that, when they buy an insurance policy, they buy protection and peace of mind. Unfortunately, even for diligent risk managers who purchase business interruption (BI) insurance or contingent business interruption (CBI) insurance, it may turn out that what they really bought was the right to assert a claim in coverage litigation. Therefore, if the amount of the claim is large enough, the policyholder must become familiar with the law surrounding the interpretation of the key policy language, and recognize that the claim may be resolved in litigation, rather than through the adjustment process.
Generally, BI insurance should apply so long as a policyholder's losses result from damage to real or personal property in which the policyholder has an interest. If the policy also provides for CBI insurance, the policy may apply to a business interruption loss arising out of damage to certain real or personal property of a third party (such as receivers, distributors, suppliers or utilities). To the extent the policy provides for civil-authority coverage, recovery may be available for losses resulting from damage to certain types of property to which access is prohibited by order of a civil authority. With respect to any of these coverages, property damage may also include loss of use.
The BP Gulf oil spill is the most recent catastrophe likely to result in numerous such claims. A recent insurance recovery case arising from property damage caused by Hurricane Katrina may provide guidance to policyholders trying to navigate potential hurdles in recovering their BI or CBI losses.
When Hurricane Katrina struck the Gulf Coast on August 29, 2005, it damaged facilities at various ports that were used by Tyson Foods. These facilities included independent cold storage warehouses that held Tyson's frozen chicken-leg quarters until they could be shipped to Tyson's international customers. The disruption of the logistics network caused by Hurricane Katrina led to a massive build-up in Tyson's inventory. As a result, Tyson's customers knew that Tyson had to sell off excess inventory of a perishable product and would accept fire-sale prices. They used this knowledge to drive down the price of leg quarters, resulting in losses for which Tyson submitted a claim for coverage.
After almost two years of claims adjustment, Tyson's insurers sued Tyson in three actions seeking a declaration that the lost income resulting from the sell-off of excess inventory was not recoverable under their insurance policies.
Tyson counterclaimed for breach of contract seeking, among other things, indemnification for the difference between the price it would have obtained for leg quarters had Hurricane Katrina not occurred and the actual price it received as a result of Katrina's interruption to its logistics network. After certain rulings favorable to Tyson, the parties settled.
LESSONS TO LEARN
The Tyson rulings in favor of coverage can be helpful to policyholders making large BI or CBI claims, including claims arising out of the collapse of the BP drilling rig and the resulting interruption of businesses along the Gulf Coast. (It should be noted: These issues arise in the context of an injured party's first-party property insurance, not with insurance to cover of BP's or Transocean Ltd.'s third-party liabilities.)
The extent of the property damage caused by the collapse of the BP drilling rig currently isunknown but will be enormous. At a minimum, it will include: property damage to coastal areas; loss of access to sections of the Gulf to which policyholders hold licenses, such as fishing areas and breeding grounds; loss of access to beach areas because of contamination, and damage to the Deepwater Horizon oil rig. Whether the property damaged corresponds to property designated under the policy will depend upon the particular policy language.
Application of first-party property insurance to the Gulf Coast catastrophe also may be limited depending on the scope of the pollution exclusion in a property policy and whether there is an exception to the exclusion when the loss or damage is caused by a hostile fire or explosion. There also can be sublimits in a property policy limiting business interruption insurance arising out of environmental contamination.
Assuming that there is property damage of the type described in the policy that is not otherwise excluded, the rulings in the Tyson case can be helpful to policyholders facing a business interruption loss from the release of oil into the Gulf in at least the following ways:
1. Depending on the policy language, the policyholder's business does not have to be totally suspended. The Tyson court held that the phrase "necessary interruption" in the policy did not mean total suspension of a line of business, but instead only meant interference. Thus, an interruption that results in a loss of business income should be sufficient, even though the business continues at a reduced level.
2. If there are various aspects to the policyholder's business, all aspects of that business do not all have to be
"affected." The Tyson court held that the "business of the insured" did not mean Tyson's entire chicken business, but only the business of a particular product or product line. Thus, interruption of an identifiable business operation, not the entire business, should be sufficient.
3. The fact that the business interruption is measured through the impact in the market does not mean that the
"loss of market" exclusion applies. The Tyson court rejected the insurers' argument that the "loss of market" exclusion precluded coverage in that case. Thus, if the oil rig collapse is a covered peril, which would be the case in an "all risk" property policy, and the covered peril caused the loss, the "loss of market" exclusion should not apply.
4. If there is a percentage deductible applicable to the loss but no values declared at the time of underwriting correspond to the loss, a court should allow calculation of the deductible based on the value of the operations actually affected.
The Tyson court ruled that a percentage deductible should be calculated against the value of the affected business only, not the entirety of Tyson's operations.
Many large BI claims involve disputed areas of policy interpretation that may be resolved in the context of litigation. This will be true of many BI claims that arise out of the Gulf Coast oil catastrophe. Accordingly, a policyholder should conduct itself during the adjustment period with that potential litigation in mind. This includes promptly providing the insurance company with information responsive to legitimate inquiries and making sure that the written record accurately reflects the conduct of both the policyholder and insurance company during the adjustment process. A policyholder must be aware of its rights and ensure that its insurance company is fairly handling its claim.
July 1, 2010
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