As businesses are forced to close, travel is restricted, and supply chains are disrupted, it is a certainty that the COVID-19 virus will engender a plethora of insurance claims affecting all lines of coverage, particularly property and general liability coverages. In this note, we focus on contingent business interruption claims.
Emergency Regulatory Action
We note that The New York Department of Financial Services has now instructed insurers to provide a COVID-19 “Explanation of Benefits” for all business information coverage, citing the “potential impact of COVID-19 on business losses.” The NYDFS letter (entitled “CALL FOR SPECIAL REPORT PURSUANT TO SECTION 308, NEW YORK INSURANCE LAW”) instructs all property and casualty insurers that provide business interruption and related coverage in New York to send a clear and concise “explanation of benefits” to all commercial policyholders. The explanation must include:
- A description of the policyholder’s commercial property insurance or related coverage;
- Whether the policy covers business interruption and a list of the covered perils under the policy;
- Whether the policy includes “civil authority” coverage, the type of damage or loss required for coverage, and, specifically, whether impairment of the policyholder’s access to property in connection with COVID-19 is sufficient for coverage;
- Whether the policy includes “contingent business interruption” coverage and a list of the covered perils under the policy;”
- Whether the policy includes “supply chain” coverage and whether such coverage is limited to named products or services from a named supplier;
- Whether business interruption, contingent business interruption or supply chain coverage requires “physical damage or loss” and whether contamination related to a pandemic may constitute “physical damage or loss”; and
- The required waiting periods under the policy.
Additionally, the New Jersey legislature is considering a bill (A-3844) which will force business interruption insurers, despite a regulator-approved “virus” exclusion in their policies, to provide coverage for COVID-19 and then spread that financial burden via a new special-purpose apportionment on other, non-business interruption carriers insuring New Jersey risks.
Contingent Business Interruption Insurance
Contingent business interruption insurance and contingent extra expense coverage are two of a number of coverage extensions that may be included in an all-risk insurance policy. These coverage extensions are intended to reimburse an insured for lost profits and extra expenses resulting from an interruption of business caused at the premises of a customer or supplier, as opposed to a loss arising from the insured’s premises. A loss resulting from direct physical damage or loss at the insured’s premises arising from a covered peril may be covered under the separate business interruption provisions of an all-risk policy. We focus here, however, on contingent business interruption and extra expenses insurance claims caused by disruptions in the insured’s distribution network.
A typical insuring agreement for contingent business interruption coverage provides generally as follows:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’ The suspension must be caused by direct physical loss of or damage to ‘dependent property’ at a premises described in the Schedule caused by or resulting from any Covered Cause of Loss.
Dependent properties generally include:
- Contributing Locations
- Recipient Locations
- Manufacturing Locations
- Leader Locations
There are generally four scenarios in which the contingent business interruption insurance and/or extra expense extension(s) may be relevant:
- When the insured depends upon one or more suppliers for materials necessary for its products.
- Where the insured relies on one or more manufacturers for the majority of its merchandise.
- Where the insured depends on recipient businesses to purchase its products.
- When the insured’s business volume is dependent on a neighboring business to attract customers (often known as the leader property, or flagship store).
Contingent business interruption insurance and contingent extra expense insurance is designed to cover an interruption in the insured’s business or extra expenses incurred as a result of overcoming a disruption in a similar type of situation, caused by a peril specified in the policy that causes physical damage or loss at a property not owned by the insured, but owned by a company within the insured’s distribution network. Thus, if there has been:
- Physical loss or damage to property of a type covered under the insured’s policy;
- To a supplier or customer’s property;
- By a peril covered under the insured’s policy;
- Which causes an interruption and loss of profits or extra expense to the insured’s business,
Then the contingent business interruption and/or extra expense insurance coverage extensions of an all-risk policy may cover:
- The business interruption loss and additional expenses incurred by the insured;
- For the period of restoration set forth in the policy.
Additional coverage extensions may exist under the all-risk policy to cover losses arising from the following caused by direct physical loss or damage to property away from the insured’s premises and caused by a defined peril: (a) loss of utility service; (b) civil authority interruption; (c) blockage of ingress or egress; (d) interdependency business interruption (i.e., where damage to one of the insured’s location causes loss to another of its owned premises); and (e) failure of heating or cooling equipment causing damage to the insured’s product.
Making and Documenting a Claim
If an insured experiences such a loss, it should promptly contact its broker and insurance professionals and report the claim to its insurer. It should also properly document its claim, which will assist the insurer in quickly evaluating whether coverage is available and complete its coverage investigation and, if covered, pay the claim sooner rather than later.
The following is a list of some basic financial documents that an insurer will likely ask for in connection with the claim:
- Documents showing how the loss occurred and when (which may be difficult for an insured to obtain quickly if the documentation is in the possession of the insured’s supplier or customer).
- Monthly profit and loss statements.
- Monthly and daily production reports.
- Monthly inventory.
- Monthly cost accounting reports.
- Invoices and purchase orders.
The foregoing list is not exhaustive. Additional documents, such as budgets or sales forecasts, may assist the insured in satisfying the insurer with respect to establishing the monetary amount of its loss with respect to the claim.
An insured making such a claim should consider doing the following to expedite the insurer’s coverage investigation and resolve the claim as quickly as possible:
- Retain knowledgeable insurance professionals and an independent accountant to help prepare the claim to (a) add credibility, and (b) ensure that the submission comports with the provisions of the insurance policy.
- Identify for the insurer’s claim adjuster who is a key contact on behalf of the insured through which requests for documents and information should be made.
- Conduct a meeting with the claims adjuster to explain the insured’s business and loss in detail and figure out what the insurer will need to process the claim.
- Ask for a written document request from the insurer to avoid confusion over what is needed to process the claim.
- Set a schedule for the production of documents and information, and any onsite inspections that have to be conducted. Set a schedule for the submission of the proof of claim, and when the coverage investigation should be completed.
- Classify the loss consistent with the descriptions and sub-limits in the policy, and provide clear descriptions of the various amounts and how they fall within the coverages of the policy.
- Maintain a log of information provided to the insurer during the claim investigation process to avoid unnecessarily re-sending information.
- Review the proof of loss with your risk manager, broker, coverage counsel, and independent accountant to make sure that it is clear and comports with the coverages of the policy. A multiple-eye review will help avoid questions and delays. A well-documented proof of claim should include all of the following: (a) contain a cover sheet/memorandum that clearly explains what is included with the submission; and (b) sufficient information, documentation, and support to substantiate the amounts claimed under the provisions of the policy and consistent with the rules of evidence applicable in a court of law.
Proper management and documentation of a contingent business interruption or extra expense insurance claim is key.