The devastating impact of Hurricane Florence may be felt well beyond North and South Carolina. Boasting over 460,000 manufacturing workers, North Carolina has the largest manufacturing workforce in the Southeast, and the 10th largest in the U.S. Manufacturing accounts for 20 percent of the state’s GSP, fifth-highest in the nation. North Carolina is home to more than 290 automotive manufacturing establishments and a workforce of over 26,000. North Carolina’s automotive manufacturing industry grew 25 percent in the past five years.
Nationally, North Carolina has the second-largest animal processing and manufacturing cluster, and the sixth-fastest growing confectionary production cluster. Agriculturally, North Carolina is a leading peanut and sweet potato production state.
Research Triangle Park is the largest research park in the U.S. Research Triangle Park is comprised of 200+ companies and 50,000+ employees with industry specializations including biotechnology and pharmaceuticals.
North Carolina’s reach is international in scope. In 2017, India-based technology consultants Infosys chose Raleigh for a 2,000 job technology and innovation hub. Triangle Tyre Co., a Chinese company previously announced plans for a $580 million tire-manufacturing facility.
In South Carolina, greenhouse and nursery products lead the way in crop agriculture but, tobacco is the state's leading field crop followed by cotton. South Carolina reports 400 firms in the private sector component of the SC aerospace cluster, including Boeing who selected North Charleston for its final assembly and delivery facility. South Carolina leads the US in the export of completed passenger vehicles. It also ranks first in both the production and export of tires, accounting for nearly one-third of the US market share. Among the 400 life sciences industry companies with global reach residing in South Carolina are Bausch + Lomb, GlaxoSmith Kline, Lenscrafters, Inc., and Nutra Manufacturing USA, Inc.
Damage to these businesses in the Carolinas may trigger claims for contingent business interruption (“CBI”) as insureds face disruptions in their supply or distribution chains. A typical CBI provision may provide coverage for:
This policy ... is extended to cover the actual loss sustained by the Insured resulting from the necessary interruption of the business conducted by the Insured, whether partial or total, caused by loss, damage or destruction covered herein ... to:
Property that directly or indirectly prevents a supplier of goods, services or information to the Insured from rendering their goods, services or information or property that directly or indirectly prevents a receiver of goods, services or information from the Insured from accepting or receiving the Insured’s goods, services or information.
Arthur Andersen LLP v. Fed. Insurance Co., 416 N.J. Super. 334, 347, 3 A.3d 1279, 1287 (App. Div. 2010).
The key distinction with CBI coverage as opposed to traditional business interruption coverage is that under CBI coverage the damage occurs to property not insured under the policy. It is the interdependency of the insured’s operations to the damaged property for the continuation of its normal business operations that triggers the coverage. In other words, the disruption in the supply or distribution chain that affords coverage under contingent business interruption.
Perhaps the most pervasive issue arising from CBI claims in post-loss situations is how far down the supply chain do you go to find a “supplier” for coverage.
Where CBI language does not limit the term supplier or includes language providing coverage for “any supplier of good or services” courts will interpret the policy in its broadest form and perhaps stretch coverage beyond the intended bounds. See Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minn., Case No. CIV-97-2185 JRT/FLN, 2002 WL 31185884, * 8 (D. Minn. Sept. 27, 2002), aff'd, 356 F.3d 850 (8th Cir. 2004), (holding Midwest farmers who sold grain to a licensed grain dealer, which in turn resold grain to the insured, were suppliers of the insured for purposes of the policy's business interruption coverage).
On the other hand, some CBI language will limit coverage to “direct suppliers,” “dependent property” or “direct contributing property.” For instance, in Pentair, Inc. v. American Guarantee and Liability Insurance Co., 400 F.3d 613, 615-16 (8th Cir. 2005), the insured depended on products supplied by two factories in Taiwan that sustained no direct physical damage from an earthquake. The earthquake did disable power to the Taiwanese factories. The power outage prevented the factories from resuming their manufacturing operations, which included products that were supplied to the insured. The court reasoned that the physical damage in that situation was sustained by the power station, not the actual factories; therefore, there was no coverage because the power station was not a “dependent property” under the subject insurance policy. The take-away from the Pentair decision is that the mere loss or use of function may not be enough for find direct physical loss or damage.
In Millennium Inorganic Chemicals, LTD v. National Union Fire Insurance Company of Pittsburg, PA, 744 F.3d 279 (4th Cir. 2014), the insured, a titanium dioxide producer, challenged a denial of contingent business interruption coverage where a pipeline failure caused by a natural gas explosion disrupted the delivery of natural gas (an essential element in its production) to the insured’s facility in Western Australia. The facts of this case revealed that the insured purchased the gas from a retail gas supplier. The retail gas supplier purchased the gas from several gas producers. The insured argued that the gas producers were direct suppliers because the retail gas supplier only provided a service and the gas was extracted, processed, and placed in the gas pipeline for sale by the retail agent. The policy limited coverage to a “direct contributing property” and the court noted that the relationship between the insured and the actual gas producer was “interrupted by ‘an intermediary.’” Millennium, 744 F.3d at 286. As a result, the court found that the gas producer could not be considered a direct contributing property to the insured thereby denying any coverage for contingent business interruption.
To the extent that CBI claims arise from insureds located outside of the Carolinas that have suffered disruptions due to the impact of Hurricane Florence in North and South Carolina, it will become important to evaluate the specific policy language providing the CBI coverage and determine the breadth of that coverage. Just because an insured’s business was impacted by the hurricane does not mean there is necessarily coverage.
