Fourth Circuit Rules “Direct” Not Ambiguous; No Coverage for Contingent Business Interruption Loss

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In a rare case interpreting insurance coverage for contingent business interruption (CBI), the Fourth Circuit recently held that the term “direct” is not ambiguous as it relates to determining who is a “direct” supplier of the insured. This ruling, which is favorable to insurers, overturns the District Court of Maryland’s determination that the CBI claim was covered.

In Millennium Inorganic Chemicals, Ltd., et. al. v. National Union Fire Ins. Co. of Pittsburgh, et. al., issued Feb. 20, 2014, the Circuit Court ruled 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 alleged CBI loss, stating that the gas producer was not a “direct” supplier because the insured purchased the gas through an intermediary. The plaintiff filed suit seeking a declaration that the loss was covered. 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 insurance provides coverage for loss of sales or revenue sustained when business is interrupted due to property damage that occurs away from the insured’s premises and 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 insureds and insurers.

CBI policies frequently provide a scheduled listing of dependent properties and coverage is typically limited to damage to properties of direct suppliers. However, the Insurance Services Office recently updated their policy forms for CBI coverage to allow for the scheduling of secondary contributing/recipient locations. (Read more about the updated forms here).