In late April 2013, parts of the Mississippi River flooded from an unexpected spate of rainfall that sent the water’s peak, just North of St. Louis, to eleven feet above flood stage. The extreme conditions reportedly caused 200-foot barges to break from their moorings and sink, and the Army Corps of Engineers temporarily closed three river locks to all traffic until the waters subsided. In Illinois, thousands of residents were forced to flee their homes.
The 2013 Mississippi River floods, particularly following so closely behind the immense Mississippi River floods of spring 2011, should be a siren call to companies that weather-related and flood-related incidents have the capacity to disrupt shipping even on one of the nation’s major trade routes. Companies in virtually every manufacturing industry rely on shipping on the Mississippi River to obtain supplies or to transport their products. And many of those companies may have suffered costly supply-chain disruptions because of the recent floods.
Affected companies may have insurance coverage that can protect against the costs of these types of supply chain disruptions. First-party insurance policies often include “contingent business interruption” coverage, which generally pays for losses that occur when a company loses profits not because of damage to its own property, but rather because of business interruptions it incurs as a result of covered damage to property of its suppliers or customers. This coverage often kicks in when property damage to the insured company’s suppliers prevents the policyholder from obtaining needed materials, ingredients, or services. It also can apply when property damage to the insured company’s customers prevents the policyholder from selling its products.
Because contingent business interruption insurance may pay for a company’s lost profits due to a supply chain disruption, it may be particularly relevant to companies incurring losses due to the recent Mississippi River floods. If a company has to pay more for raw materials because its usual suppliers were temporarily knocked out of business by the floods, it should consider whether its contingent business interruption coverage applies. If a company incurs losses because it must pay its suppliers more to use alternative and more expensive methods of transportation due to river closings, it should look closely at its contingent business interruption coverage. And, if a company cannot sell its products because its customers have incurred property damage or business interruptions, contingent business interruption coverage may be available to cover some of the loss.
If a company has a potential contingent business interruption claim, the company and its counsel should take three immediate steps to ensure the company can access all of the coverage to which it is entitled.
First, the company and its counsel should review all of its potentially applicable policies to determine where coverage may exist. In this review, the company and its counsel also should identify any conditions to coverage that might apply in the early days of a loss. For example, the company should identify and comply with any requirements that it give notice to its insurers, or that it submit proof of its loss to its insurers within a set amount of time. If the company cannot meet those deadlines, the company immediately should contact the insurer to seek extensions or tolling arrangements.
Second, the company and its counsel should be prepared to respond effectively to possible defenses that its insurers might make to avoid coverage obligations. Policyholders should look carefully at the language of the policies and the case law on the issues to respond quickly and effectively to these types of arguments. For example, insurers may look to flood exclusions or other exclusionary provisions to argue that coverage for resulting contingent business interruption losses are not covered. But, many policies provide specific coverages for flood-related damage. In addition, policyholders may have arguments that other, covered causes (such as interruptions due to acts of civil authority) were the true cause of the supplier’s or customer’s loss.
Third, the company and its counsel should take care to document all losses, potentially including by keeping close track of what losses resulted from what causes. In addition to disputing that a policy covers a company’s losses, insurers also often dispute the amount of the company’s covered loss and, in particular, the length of time during which the company may recover lost profits. Companies sometimes face difficult issues of proof in establishing the amount of their loss. By being vigilant in maintaining records of the costs and losses they incur, companies can position themselves to overcome insurer arguments. Companies also should consider engaging a consulting expert early in the process to ensure that they are able to recognize and document all potentially covered costs and losses.
By quickly taking these three steps, companies can position themselves to recover all that they are entitled to recover under their contingent business interruption coverage.