By DAVE LENCKUS, who has covered the insurance industry for more than two decades
Some business interruption losses not triggered by physical damage have been insurable for some time under property insurance policies, and relatively new policies are specifically designed to respond when an insured's suppliers are shuttered for various reasons other than damage to their facilities.
While helpful in some scenarios, however, experts say that those coverages would not address many phantom business interruptions--shutdowns that are not linked to any physical loss.
Some disruptions are not covered under an insurance policy because a policyholder or its major supplier does not sustain damage to insured property, said John White, Chicago-based vice president of market management with Allianz Global Corporate & Specialty Americas.
For example, take a business interruption triggered by unrest in the Middle East. A company would not be insured for its losses if it halted shipments to that area over concerns that its goods would be stolen from a port or left to sit there because transporting them to their final destination would be dangerous, experts said.
A classic example of an uninsured business interruption that recently occurred was the 2010 grounding of European commercial airlines following the eruption of a volcano in Iceland. The eruption sent such a heavy cloud of ash into the atmosphere that European aviation authorities grounded commercial air travel for nearly a week in April 2010 and several days the next month. The grounding cost the airline industry between $200 million and $400 million, the International Air Transport Assn. estimated.
But policyholder attorneys John M. Sylvester, Thomas M. Reiter and Jane-Harte-Lovelace, partners at K&L Gates LLP, contend that the volcanic ash incident is not such a classic example of an uninsurable loss.
In an online newsletter posted in late April 2010, the attorneys noted that some all-risk insurance policies purchased by policyholders affected by the grounding might cover their business interruption losses. The coverage would depend on the policies' wording and applicable law, they noted.
For example, they pointed out, an all-risk policy might provide civil authority coverage, which is designed to cover business interruption losses resulting from action taken by a governmental authority.
"For example, there may be governmental or regulatory actions that restrict the use of public facilities that are necessary for business operations to proceed, such as airports or flight paths in the sky," the attorneys stated in the newsletter.
Another provision in an all-risk policy that could provide coverage is a sue-and-labor clause, the attorneys noted. That type of provision is designed to extend coverage for the cost of measures the policyholder takes to mitigate or prevent damage to its insured property.
Even after providing such coverage extensions, however, an insurer might not cover a phantom business interruption loss, the attorneys noted. For example, an insurer might not respond unless a policyholder's entire operation has been halted. Other insurers will examine whether their policyholders recover their lost income after resuming operations.
There typically also is a distance limitation on the civil authority provision, noted Pete Fahrenthold, the Houston-based managing director of risk management at United Continental Holdings Inc. The distance parameter requires that a denial of access must be within a certain distance of an insured location, he said.
In the case of the Icelandic volcano, aviation authorities closed the airspace over the Atlantic Ocean, "but the airports--where the airlines had property--were not closed," Fahrenthold pointed out.
Indeed, the civil authority provision has triggered some significant insurance coverage litigation that has not benefited policyholders, said Richard S. Betterley, president of Betterley Risk Consultants Inc. of Sterling, Mass.
Betterley pointed to a 2005 New York federal court decision that denied business interruption coverage to the Philadelphia Parking Authority for its loss of business after U.S. airlines were grounded for several days due to the Sept. 11, 2001, terrorist attacks. The court ruled that, while the grounding might have significantly reduced the demand for the authority's parking services, access to the garages was not prohibited and, therefore, the authority did not have a covered loss.
SUPPLY CHAIN HITS
For the last few years, some insurers also have written policies designed to cover business interruption losses caused by supply chain interruptions, regardless whether the supplier sustained physical damage to its facility.
A policy written by Zurich North America, a unit of Zurich Financial Services Group, is an all-risk policy that, with only some exceptions, would respond if a named supplier were shuttered by an incident similar to the volcanic ash risk that grounded airlines in Europe last year.
Among the various other policies that are available, some can be written to cover a policyholder's main supplier, and others--for an additional premium--will respond to interruptions much farther up the supply chain to as far back as the raw material supplier, said Ben Tucker, New York-based senior vice president and the property specialized risk group leader in the U.S. property practice at Marsh.
While the coverage has been available a few years, only a handful of insurance buyers have purchased it, according to Duncan Ellis, the New York-based U.S. property practice leader for Marsh. Ellis said that the coverage's slow uptake is largely a result of unfortunate market timing: It was introduced when the economy began souring and insurance buyers were looking for ways to cut, not increase, spending.
But, more recently, buyers are examining the potential benefits of the coverage, Ellis said.
May 1, 2011
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