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Insurance Coverage for the 2011 Thailand Floods
In late 2011, floodwaters from the monsoon season overwhelmed the low-lying areas of Thailand, including within Bangkok. In addition to the tragic loss of life and sickness to individuals, the floods caused major property damage and business interruption. Damage estimates are in the range of US $45 billion. Time Magazine, Dec. 2, 2011 (“Thailand Cleans Up; Areas Remain Flooded”). Many factories remain closed, and major crops like rice have been negatively impacted. Reuters, Oct. 28, 2011 (“Floods may damage quarter of Thai rice crop, exports hit”). Thailand is a critical link in international supply chains, notably automotive and computer components. For example, many of the factories that make hard disk drives have been flooded, leading some industry analysts to predict future worldwide shortages of hard disk drives. The New York Times, Nov. 6, 2011) (“Thailand Flooding Cripples Hard-Drive Suppliers”). One hard-drive manufacturer, Western Digital, reported estimated flood damage costs at between $225 and $275 million, with an insurance claim expected to lower the net impact. The Orange County Register, Dec. 2, 2011 (“Western Digital restarts flooded Thai plant”).
Such impacts to manufacturing or agricultural operations can have downstream effects on export markets and supply chains across the world. Businesses in the United States and elsewhere may have what are known as “contingent business interruption” losses, which in turn might be insured under their first-party property policies. A company with losses from the Thailand flooding should consider several areas of possible insurance coverage.
Property Damage and Flood Exclusions
The standard commercial property insurance policy covers “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” “Covered Property” typically includes the policyholder's building, equipment, personal property, and stock, as well as the personal property of others. “Covered Cause of Loss” usually refers to a form attached to the policy that either will: 1) include “all risks of direct physical loss” except those excluded by the form (an “all risk” form), or 2) include only certain “named perils.”
Unlike residential policies, commercial property policies can and frequently do include coverage for losses from flood, either up to the policy limit or, in some cases, a flood-specific sub-limit. Some commercial property policies exclude coverage for losses from flood, but the extent of the exclusion's applicability can depend on the precise language employed. For example, if the exclusion is not introduced by an “anti-concurrent causation clause” (which purports to exclude coverage if one of several causes of a loss is an excluded cause), this makes the exclusion operate more narrowly.
Insurers and policyholders can disagree over causation in the context of floodwater damage. Engineers and industrial hygienists may disagree over whether property can be “dried out” and re-used or whether it needs to be replaced in full. Electronic components, for example, that have been wetted usually require full replacement.
Assuming causation is established, adjustment of the loss is relatively straightforward. Damage typically is paid on the basis of cost of repair, if repairs are possible, or otherwise based on full replacement cost (regardless of the depreciated actual cash value of the destroyed property). Most commercial policies also cover any extra costs of upgrades necessitated by building codes.
Policyholders are advised to document their full losses from the disaster and consider inclusion of all such losses in their insurance claims.
Business Interruption Losses
Business interruption insurance covers a policyholder for lost profits and continuing expenses incurred during the “Period of Restoration” needed to complete the repair or replacement of the damaged property and return the policyholder to full operations. This coverage applies to a policyholder with a damaged factory or operations within Thailand and a related business interruption. As with the property damage portion of the loss, documentation of this aspect of an insurance claim is often crucial to the policyholder's ability to secure proper compensation. Policyholders should consider engaging a forensic accountant to measure such business interruption losses.
CBI and Other Triggers for Time Element Losses
Beyond standard Business Interruption coverage, there are several other kinds of “time element” coverage in most policies that might be considered in the context of the Thailand flood losses.
Contingent Business Interruption or 'CBI'
Many first-party policies contain a “coverage extension” called “contingent business interruption” or “contingent time element.” This coverage applies where the policyholder suffers income loss because of damage to a “dependent property,” such as the property of a “supplier” or a “receiver” of goods or services.
A typical CBI clause reads:
-
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 or damage to “dependent property” ' caused by or resulting from any Covered Cause of Loss. '
Dependent Property means a business you don't own or operate but depend upon to
- provide goods or services, other than those indicated under off premises utility service coverage, which you need for your operations;
- purchase your goods or services;
- manufacture products for delivery to your customers under contract of sale; or
- attract customers to the location of your business.
1986 ISO Form CP15080695.
Some policies define the contingent coverage in terms of damage to “suppliers” or “receivers” of goods or services.
This policy is extended to cover the actual loss sustained by the insured resulting from the necessary interruption of the business conducted by the insured, caused by loss, damage or destruction covered herein during the term of this policy to the property of either a “supplier” or a “receiver” of services or information.
Depending on the policy, a policyholder might consider “contingent business interruption” coverage in at least three situations of loss or damage to other property of: 1) providers or suppliers of goods or services; 2) purchasers or receivers of goods or services; or 3) providers or suppliers of customers or patrons.
Suppliers of Goods or Services: The contingent business income loss may be caused by damage to a “supplier” or “provider” of goods, services, or information to the policyholder. This is most likely to be a common trigger for coverage from the Thailand losses. Historically, the supplier-of-goods scenario was the first area of contingent coverage to develop. The classic example is where a manufacturer needs a certain part on its production line, but there is damage to the plant that supplies the part, causing the insured manufacturer to stop its production line until its supplier's operations are restored, resulting in a business income loss.
This “supplier” coverage was later extended and adapted for non-manufacturing businesses, to address business income loss triggered by damage to a property that supplies services or information to the policyholder. For example, there may be coverage where there is damage to property that directly or indirectly prevents a supplier of goods, services, or information to the policyholder from rendering its goods, services or information to the policyholder. See, e.g., Archer Daniels Midland Co. v. Hartford Fire Ins. Co., 243 F.3d 369 (7th Cir. 2001) (contingent business interruption “protect[s] the policyholder against the consequences of suppliers' problems”).
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