Insurance Coverage for the 2011 Thailand Floods

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”).

For example, a policyholder may have suffered contingent business income loss because of damage to a “supplier” of services or information located in a damaged building in Thailand. A policyholder as far away as the United States may have had business income loss because of the inability to receive goods or services from a company in Thailand. For example, some Thailand manufacturing of computer parts appears to have been significantly impacted by the flooding, and U.S. companies that import such parts may have significant CBI claims.

Receivers of Goods or Services: The contingent business income loss may be caused by damage to a “receiver” of goods or services. There may be coverage where there is damage to property that directly or indirectly prevents a receiver of goods, services, or information from the policyholder from accepting the policyholder's goods, services or information. For example, a service provider may have business income loss because of its inability to deliver services to a company located in a damaged area of Thailand.

Sources of Customers: A policyholder may suffer a contingent business income loss caused by loss or damage to a location that is a source of customers or patrons. There may be coverage for business income loss “resulting from physical loss or damage of the type insured, to property of the type insured, at any location which provides customers or patrons to the insured.” Some policies provide examples of such sources of customers, such as “conference centers,” “stadiums,” “government centers,” and “business office parks.” For example, in Bangkok, an undamaged hotel might nevertheless be impacted negatively by damage to properties that normally attract guests to the hotel.

Contingent Coverage Issues: In contingent business interruption claims, the length of the period of coverage may be an issue. The “period of restoration” for losses resulting from damage to the policyholder's property is usually defined in terms of the end of the business interruption at the policyholder's own premises. In the contingent coverage context, the period, as defined in the policy with respect to the policyholder's premises, usually is applied to the contingent property. Thus, the contingent coverage ends when the interruption at the “dependent property” is over within the meaning of the policy.

Another issue might be the relevant coverage territory provisions. The coverage territory can be anywhere in the world, but even if it is limited to the United States, a U.S. company can advance a CBI claim for loss stemming from damage to property in Thailand. See Park Electrochemical Corp. v. Continental Casualty Co., No. 04-CV-4916 (E.D.N.Y. Feb. 18, 2011) (policyholder suffered its dependent property loss in Tempe, AZ, from a boiler explosion in Singapore, the relevant location being the place of the financial loss).

Another issue for contingent coverages may be the application of sub-limits. In some policies, there is a lesser per occurrence sub-limit for contingent coverages. If a business suffered only contingent losses, the per occurrence sub-limit should be simple to apply. Many businesses suffered physical damage to their own property, and also have contingent losses because of damage elsewhere. In such mixed cases, both types of coverage should be available to the policyholder. Some insurers may seek to re-label business interruption losses caused by damage to the policyholder's property as contingent coverage, in a result-oriented attempt to apply the sub-limits under contingent coverage. If, however, there is physical damage that triggers a business interruption claim, the insurer cannot switch such coverage with contingent coverage (because contingent coverage would otherwise apply) and invoke sub-limits. See, e.g., Zurich American Ins. Co. v. ABM Industries, Inc., 397 F.2d 158 (2d Cir. 2005) (where policyholder used WTC property to deliver its janitorial services, coverage was not properly classified as contingent and subject to the contingent sub-limit).

Civil Authority

Many first-party property policies pay for “business income loss” and “extra expense” when “an act of civil authority prohibits access” (or “impairs” or “hinders” access) to the insured premises (often limited to a period of 30 days). In a flooding context like Thailand, a policyholder may have coverage where its own property was not, in fact, damaged by the hurricane, but it lost income due to its compliance with a mandatory civil order.

Ingress/Egress

Many first-party policies also pay for “business income loss” and “extra expense” when there has been a “prevention” of “ingress/egress” to the covered premises because of damage. The standard coverage is for income loss “due to the necessary interruption” of business “due to prevention of ingress to or egress from an Insured location, whether or not the premises or property of the Insured is damaged, provided that such prevention is a direct result of physical damage of the type insured by this Policy, to the kind of property not excluded by this Policy.”

Service Interruption

“Service interruption” is the final major type of coverage triggered by damage to other property. This “coverage extension” typically covers the policyholder's business income loss caused by an “interruption of utilities or telecommunications service,” usually after a certain period of time (e.g., four hours). After the floods, many businesses in or near Bangkok lost utility or telecommunications services for weeks or months. These policyholders may have coverage under service interruption clauses.

Conclusion

Policyholders adversely impacted by the 2011 Thailand floods should focus on their insurance coverage promptly so that no rights or remedies are potentially compromised. Policyholders may well discover insurance coverage for contingent business income losses or other losses that would not have been incurred but for the Thailand floods.

Gary Thompson and John Shugrue are partners in the law firm of Reed Smith LLP. They represent policyholders in their pursuit of property and business interruption insurance proceeds. The views expressed herein do not necessarily reflect those of the firm, its attorneys, or its clients, or with regard to any pending cases. Comments on this article may be sent to [email protected] and [email protected].

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”).

For example, a policyholder may have suffered contingent business income loss because of damage to a “supplier” of services or information located in a damaged building in Thailand. A policyholder as far away as the United States may have had business income loss because of the inability to receive goods or services from a company in Thailand. For example, some Thailand manufacturing of computer parts appears to have been significantly impacted by the flooding, and U.S. companies that import such parts may have significant CBI claims.

Receivers of Goods or Services: The contingent business income loss may be caused by damage to a “receiver” of goods or services. There may be coverage where there is damage to property that directly or indirectly prevents a receiver of goods, services, or information from the policyholder from accepting the policyholder's goods, services or information. For example, a service provider may have business income loss because of its inability to deliver services to a company located in a damaged area of Thailand.

Sources of Customers: A policyholder may suffer a contingent business income loss caused by loss or damage to a location that is a source of customers or patrons. There may be coverage for business income loss “resulting from physical loss or damage of the type insured, to property of the type insured, at any location which provides customers or patrons to the insured.” Some policies provide examples of such sources of customers, such as “conference centers,” “stadiums,” “government centers,” and “business office parks.” For example, in Bangkok, an undamaged hotel might nevertheless be impacted negatively by damage to properties that normally attract guests to the hotel.

Contingent Coverage Issues: In contingent business interruption claims, the length of the period of coverage may be an issue. The “period of restoration” for losses resulting from damage to the policyholder's property is usually defined in terms of the end of the business interruption at the policyholder's own premises. In the contingent coverage context, the period, as defined in the policy with respect to the policyholder's premises, usually is applied to the contingent property. Thus, the contingent coverage ends when the interruption at the “dependent property” is over within the meaning of the policy.

Another issue might be the relevant coverage territory provisions. The coverage territory can be anywhere in the world, but even if it is limited to the United States, a U.S. company can advance a CBI claim for loss stemming from damage to property in Thailand. See Park Electrochemical Corp. v. Continental Casualty Co., No. 04-CV-4916 (E.D.N.Y. Feb. 18, 2011) (policyholder suffered its dependent property loss in Tempe, AZ, from a boiler explosion in Singapore, the relevant location being the place of the financial loss).

Another issue for contingent coverages may be the application of sub-limits. In some policies, there is a lesser per occurrence sub-limit for contingent coverages. If a business suffered only contingent losses, the per occurrence sub-limit should be simple to apply. Many businesses suffered physical damage to their own property, and also have contingent losses because of damage elsewhere. In such mixed cases, both types of coverage should be available to the policyholder. Some insurers may seek to re-label business interruption losses caused by damage to the policyholder's property as contingent coverage, in a result-oriented attempt to apply the sub-limits under contingent coverage. If, however, there is physical damage that triggers a business interruption claim, the insurer cannot switch such coverage with contingent coverage (because contingent coverage would otherwise apply) and invoke sub-limits. See, e.g., Zurich American Ins. Co. v. ABM Industries, Inc. , 397 F.2d 158 (2d Cir. 2005) (where policyholder used WTC property to deliver its janitorial services, coverage was not properly classified as contingent and subject to the contingent sub-limit).

Civil Authority

Many first-party property policies pay for “business income loss” and “extra expense” when “an act of civil authority prohibits access” (or “impairs” or “hinders” access) to the insured premises (often limited to a period of 30 days). In a flooding context like Thailand, a policyholder may have coverage where its own property was not, in fact, damaged by the hurricane, but it lost income due to its compliance with a mandatory civil order.

Ingress/Egress

Many first-party policies also pay for “business income loss” and “extra expense” when there has been a “prevention” of “ingress/egress” to the covered premises because of damage. The standard coverage is for income loss “due to the necessary interruption” of business “due to prevention of ingress to or egress from an Insured location, whether or not the premises or property of the Insured is damaged, provided that such prevention is a direct result of physical damage of the type insured by this Policy, to the kind of property not excluded by this Policy.”

Service Interruption

“Service interruption” is the final major type of coverage triggered by damage to other property. This “coverage extension” typically covers the policyholder's business income loss caused by an “interruption of utilities or telecommunications service,” usually after a certain period of time (e.g., four hours). After the floods, many businesses in or near Bangkok lost utility or telecommunications services for weeks or months. These policyholders may have coverage under service interruption clauses.

Conclusion

Policyholders adversely impacted by the 2011 Thailand floods should focus on their insurance coverage promptly so that no rights or remedies are potentially compromised. Policyholders may well discover insurance coverage for contingent business income losses or other losses that would not have been incurred but for the Thailand floods.

Gary Thompson and John Shugrue are partners in the law firm of Reed Smith LLP. They represent policyholders in their pursuit of property and business interruption insurance proceeds. The views expressed herein do not necessarily reflect those of the firm, its attorneys, or its clients, or with regard to any pending cases. Comments on this article may be sent to [email protected] and [email protected].