Obscured by the recent hurricanes ravaging the Caribbean, Florida and Texas, Mexico suffered its own natural disaster earlier this week with a 7.1 magnitude earthquake. Our hearts and prayers go out to those affected by the quake.
Although most US-based businesses, save those with offices in the quake zone, were physically unaffected by the events in Mexico City, those businesses still may suffer quake-related financial loss. This could be caused by, among other things, interdependencies with suppliers in Mexico, use of transportation that flows through Mexico, or communication and logistics that occur in or through Mexico. Although the full impact of the earthquake to the region will not be known for months and years to come, it is worth a reminder that businesses should take prompt action to identify potential insurance coverage to mitigate any resulting economic losses.
International and global transportation systems and businesses are interdependent. Damage to one has a ripple effect that impacts others. Consequently, disruptions that began locally in Mexico may lead to disruptions and delays worldwide, as airlines, shipping companies, rail operators and trucking companies become increasingly affected. These effects will have the short-term impact of increasing manufacturing, supply and distribution costs for products that utilize international and global distribution routes. They may also impact longer-term profits. In either case, insurance coverage is available for economic loss caused by damage to other people’s property where the insured business relies on that property for its own normal operations. Such coverages typically are found under the following portions of your commercial property insurance policy:
A. Contingent Business Interruption
Contingent business interruption claims generally arise in four circumstances where there is economic loss resulting from a business interruption: (1) where the insured company depends on one or several suppliers of materials; (2) where the insured company depends on one or several manufacturers of its products; (3) where the insured company depends on one or several purchasers of its products; and (4) where the insured company depends on one or several “leader properties” to attract customers to its business. In the general context of claims arising out of the events in Mexico, claims will likely involve damage to the property of suppliers and/or customers.
In each instance, physical damage to property has occurred elsewhere, away from the policyholder’s own covered locations. For coverage to exist, many policies require that the damage be of a type that would itself be covered under the policyholder’s own property insurance, although this limitation is not always present. Thus, if the insured business has coverage for earthquake damage, then contingent business interruption coverage is available where loss is caused by quake-related damage to a customer or supplier. Likewise, if the policyholder sustains a loss of income due to remote damage caused by the quake, the policyholder’s contingent business interruption coverage will apply if the policyholder has coverage for the ensuing cause of loss.
B. Contingent Extra Expense
Coverage also is available for any “extra expense” that is incurred to mitigate or avoid an otherwise covered contingent business interruption loss. For instance, where (a) a policyholder in Virginia relies on a manufacturer of component parts for its product and (b) that supplier sustains damage to its manufacturing plant in Mexico resulting in a suspension of its supply of components, which (c) in turn causes the Virginia company to obtain replacement parts from an alternate supplier in Hong Kong at a higher cost, then coverage may be available for the “extra expense” incurred in obtaining the more costly alternate components.
C. Ordinary Business Interruption
To the extent that a business suffered physical damage to its own covered property, a claim for ordinary business interruption insurance may also be available. This coverage, which also operates to make the policyholder whole as if no damage or interruption has occurred, generally requires (a) loss or damage to covered property, (b) a necessary suspension of business, (c) caused by a covered loss, (d) that results in a loss of income or profits during the period of restoration.
Significantly, as the requisite elements clearly illustrate, business interruption coverage will be available only where the damage sustained is to the policyholder’s own covered property. Thus, for the typical business impacted by the recent and evolving events in Mexico, ordinary business interruption coverage may not be a viable source of recovery.
D. Service Interruptions
Many international and global companies or their affiliates conducting operations in Mexico also may have been directly affected by the widespread power, water and telecom outages. When such disruptions result in pecuniary loss or require that the insured company incur additional expense to maintain ordinary business operations, that loss or expense is often covered under available service interruption coverage.
E. Restrictions By Orders of Civil Authority
Coverage likewise is available where access to a business’s property is restricted by an order from a civil or military authority. In contrast to the triggering event for business interruption coverage, some courts have held that physical damage to the insured premises is not required to invoke the civil authority coverage, so long as access to the insured’s premises, or to property used by the policyholder for a fee, is prohibited. There are many types of civil authority orders, including orders closing or preventing access to office buildings, manufacturing facilities, ports and airports, financial exchanges and navigable waters. Any of these types of orders could potentially trigger an insurance claim. Examples might include loss caused by evacuation and loss caused by an inability to access ports.
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Companies with potential or actual losses should promptly assess their coverages and any potentially qualifying loss. Failure to do so may result in covered loss or expense being overlooked or forgotten. This includes (1) promptly reviewing all insurance policies, including third-party policies that might extend coverage for their benefit; (2) documenting suspected business loss and additionally incurred expenses, as well as the expenses associated with preparing any potential claim, since such expenses may also be covered; and (3) following all policy conditions, such as notice and proof of loss requirements and, where necessary, negotiating with insurers to obtain waivers and tolling agreements.
Companies also should take necessary steps to mitigate their losses, including attempting to obtain any necessary substitute materials. Insurance policies typically contain provisions that obligate the policyholder to make reasonable effort to mitigate any actual or potential loss and a failure to do so may jeopardize coverage.
Finally, a company should assemble a team of qualified professionals to assist in preparing and presenting their claim. Insurance companies employ accountants, underwriters and attorneys to represent their interests against their policyholders. Thus, it is incumbent that policyholders be prepared to present their claim in the best possible light. Hunton & Williams’ insurance recovery attorneys are well versed in the intricacies of business income and extra expense coverages and are available to assist policyholders with any claims or questions they might have.