Have Insureds’ Chances of Recovery Under Contingent Business Interruption Insurance Policies Been Wiped Out Post-Tohoku
Contingent business interruption (CBI) insurance, which provides coverage for a company’s financial loss caused by damage to its suppliers’ property, will therefore play a central role among UK and US companies seeking to recoup losses arising from the Japan disaster. However, in light of recent legal developments in the UK and US, the ability of such companies to recover under CBI insurance will largely depend on the language of each policy and the law governing its interpretation.
Supply Chain Meltdown
Business interruption insurance provides coverage for an insured’s loss of income caused by physical damage to the insured’s property, although sometimes coverage is provided for loss caused by an insured event or circumstance. Damage to the property must be caused by an insured peril. This means that there are two causes involved in BI insurance: firstly, physical damage caused by an insured peril; and secondly, loss of income caused by the physical damage.
CBI insurance is an extension of BI insurance, in that the loss must be caused by physical damage to the insured’s supplier’s property, rather than the insured’s property. An important aspect of CBI coverage is the scope of the policy’s definition of “supplier” and what constitutes the territorial limits of the policy. The central issues for all claims under CBI insurance – and especially relevant to the Japan disaster – are the causes of the physical damage to the supplier’s property and the causes of the insured’s loss of income. For example, Japan’s earthquake and tsunami damaged not only suppliers’ property but also the country’s surrounding infrastructure (for example, with damage to road and rail networks and seaports, power shortages and no-fly zones).
Therefore, questions may arise as to whether the cause of an insured’s loss was the damage to a particular supplier’s property, or damage to the infrastructure transporting the products to the insured (or perhaps a combination of both). These types of causation questions are likely to be relevant to all CBI claims arising out of the Japan disaster.
Get to the Root
Under English law, courts attempt to ascertain the “proximate cause” of a loss, which has been described as the “real”, “dominate” or “efficient” cause and is determined by applying “common-sense standards”.
If there are two or more concurrent proximate causes, cover for the loss caused will depend on whether one of the causes is excluded, as opposed to merely uninsured.
If one of the causes is excluded, the exclusion prevails, thereby preventing coverage for the resulting loss. If one of the causes is only uninsured, coverage is still available for any loss resulting from the insured cause (Wayne Tank & Pump Co. v Employers’ Liability Assurance Corporation CA  Lloyd’s Rep.Vol.2). This general principle may have changed in the context of independent causes (rather than dependent causes) following the decision in Orient-Express Hotels v Assicurazioni Generali SA  EWHC 1186 (Comm) (discussed below).
Under most US state laws, the prevailing approach applies the “efficient proximate cause” doctrine which, like English law, permits recovery for a loss caused by the “efficient”, “predominant”, or “moving” cause of the loss. Unlike English law, the doctrine also applies if there are two or more causes of the loss and one of them is excluded by the policy.
To counter this situation, commercial parties have developed anti-concurrent causation (ACC) clauses, which prevent the insured from recovering if the loss was caused by two or more causes and at least one of those causes was excluded. Although ACC clauses are not enforced in all states, those that do, generally apply causation principles similar to those under English law.
CBI insurance normally requires that losses be caused by physical damage to the supplier’s property, rather than by some other cause. As discussed above, companies with suppliers in Japan are likely to face circumstances where losses are caused by damage to both the supplier’s property and to the surrounding area, including damaged infrastructure. Damage to the surrounding area is more likely to be an uninsured cause of the loss, rather than being specifically excluded from the policy.
This situation was recently considered in the English Orient-Express Hotels case. While the case concerned BI, rather than CBI insurance, the issues in the case are equally relevant to both types of coverage. The case, which concerned an appeal from an arbitration award of an English Tribunal, addressed whether a luxury hotel in New Orleans was covered for “loss due to interruption... with the business directly arising from damage”.
Losses were to be adjusted so that they represented “the results which, but for the damage, would have been obtained during the relative period after the damage”. The hotel had been damaged by hurricanes Katrina and Rita, which devastated New Orleans in 2005 and was forced to close for two months. During that time, New Orleans was subjected to a state of emergency, a curfew and two mandatory evacuations.
The court noted that the damage to the hotel (insured cause) and the damage to New Orleans (uninsured cause) were independent proximate causes of the BI losses to the hotel. The court found that the policy wording was clear that a “but for” test applied.
The question therefore was what would have been the BI losses of the hotel had the damage to the hotel not occurred – a question the Court approached by considering an “undamaged hotel in a damaged city” scenario. As the losses would have been the same (due to the devastation in New Orleans), there was no recovery under the policy.
Whether English and US courts will interpret CBI policies in the same manner as the court in Orient-Express Hotels will likely depend on the specific wording of the policies and, in particular, whether a “but for” test is applied in assessing CBI losses caused by damage to the supplier’s property.
Under English law, insurers are likely to rely on Orient-Express Hotels in arguing that any losses suffered by the insured are not covered, regardless of whether the supplier’s property has been damaged, as the insured would have incurred such losses from damage to the sur¬rounding area in any event.
Insureds will face further difficulties under English law if damage to the surrounding area is a cause of loss specifically excluded by CBI policies, because in such circumstances coverage would be unavailable for losses caused by such damage.
Whether a similar situation arises in the US will largely depend on whether ACC clauses likewise exclude losses caused by damage to the surrounding area and whether such clauses are enforceable under the applicable US state law. If ACC clauses exclude coverage for such losses, insureds may be unlikely to make any recovery.
Plainly then, it will be important for insureds and insurers to carefully check the extent of any CBI coverage, the governing law, any applicable exclusions and how losses are assessed under their policies. Much will depend on the governing law and the specific wording used. As this is a relatively young and developing area of law, it is likely that there will be causation arguments available for both insureds and insurers alike.