By Lawrence T. Bowman and Kendall K. Hayden
Contingent business interruption ("CBI") insurance provides coverage to an insured when a supplier or a key customer suffers a direct physical loss that interrupts the insured's own business (e.g., revenue stream). Just as property insurance generally restores damaged real or personal property, placing the insured in the same physical situation as if no loss had occurred, business interruption ("BI") insurance is intended to restore profits lost as a result of an insured casualty event, placing the insured in the same financial situation as if the loss had not happened. BI insurance protects against the loss of prospective earnings because of the interruption of the insured's business caused by an insured peril to the insured's own property. In contrast, CBI insurance protects against the loss of prospective earnings because of the interruption of the insured's business caused by an insured peril to property that the insured does not own, operate, or control.
CBI insurance is becoming a more prevalent component of property coverage as a result of converging economic and world events. Specifically, as companies move from vertical integration to outsourcing various operations (e.g., ranging from the manufacture of component parts to services that include software development, accounting, etc.), their contingent business interruption risk is increased as a result of losing direct control of critical segments of their operations.
Thus, companies routinely have supply chain interdependencies and/or technology dependencies that directly affect finished goods, services and/or revenue dependence from key customers. Risk managers are increasingly becoming sensitive to the fact that world events such as terrorism or riots, regional incidents such as power blackouts or hurricanes, or local occurrences such as strikes, fires, floods or explosions can have far reaching effects on their company even if supply chain risk solutions, crisis management or business contingency plans are in place.
Synopsis to Chapter 29: A Practical Guide to Evaluating Contingent Business Interruption Losses
II. FOCUS OF THIS ARTICLE
III. PURPOSE OF CONTINGENT BUSINESS INTERRUPTION
IV. COVERAGE LANGUAGE
V. PRACTICAL APPLICATIONS OF CONTINGENT BUSINESS INTERRUPTION CONCEPTS
A. Where Property Damage Occurs
1. Damage to a Contributing Location
2. Damage to a Recipient Location
3. Damage to a Manufacturing Location
4. Damage to the Magnet Location
B. How the Property Loss Is Measured
1. The Period of Indemnity
2. Experts Used in Determining Indemnity
3. Additional Considerations on the Presentation of Lay and Expert Opinion Testimony Regarding CBI Damages
C. Limitations on Contingent Business Interruption Coverage
1. The Direct Physical Loss or Damage to Dependent Property Must Result From a Covered Peril at the Requisite Location
2. No Contingent Business Interruption Coverage If the Business Interruption Loss Is to a Subsidiary of the Insured Rather Than the Insured
3. No Contingent Business Interruption Coverage If the Contingent Property Did Not Supply or Receive Merchandise from the Insured
Lawrence Bowman is a member of the law firm of Cozen O'Connor in Dallas, Texas and is the former national chair of the General Litigation Department. He concentrates his practice in the area of complex commercial litigation. Kendall Hayden is an associate at Cozen O'Connor in Dallas and focuses her practice in complex commercial litigation and insurance coverage.
Sign in with your Lexis.com ID to access the complete article A Practical Guide to Evaluating Contingent Business Interruption Losses.
For more information about LexisNexis products and solutions connect with us through our corporate site.