Business loss is not limited to fire or smoke damage to its own property – it often arises from damage to the supply chain. In this post in the Blog’s Wildfire Insurance Coverage Series, we look at what coverage may exist when wildfire damages an entity’s supply chain.
In many instances, while the insured property does not sustain fire or smoke damage, wildfires can wreak havoc on the business supply chain. For some, contingent business interruption coverage may be a solution. Contingent business interruption insurance extends coverage for the loss of prospective earnings because of an interruption in the insured’s supply chain that is caused by damage to property that the insured neither owns nor operates.[1] Typically, the property covered is of a supplier or customer. For example, in 2000, Ericsson Telecom A.B., a mobile phone manufacturer, presented a substantial contingent business interruption claim based on a fire that damaged a Royal Philips Electronics semiconductor plant. Royal Philips supplied critical components for Ericsson’s mobile phones. The fire caused Royal Philips to close its plant, halting Ericsson’s phone production for six weeks, resulting in substantial losses.
Issues may arise concerning who qualifies as a supplier under the terms of the policy. Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York addressed this issue, taking a broader approach and interpreting “any supplier of goods or services” to mean an “unrestricted group of those who furnish what is needed or desired.”[2] As time has passed, insurers have limited “suppliers” to those with a direct relationship and some courts have so construed the provision. For example, in Pentair, Inc. v. American Guarantee and Liability Ins. Co., a power substation that provided power to two factories that in turn provided product to two Pentair subsidiaries sustained physical damage following an earthquake.[3] Damage to the power substation was insufficient to invoke contingent business interruption coverage because the power station was a supplier of the factories, not a supplier directly or indirectly of the insured.[4]
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This is the fourth post in the Blog’s Wildfire Insurance Coverage Series.
*This post is an excerpt from an article written by Scott DeVries and Yosef Itkin that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 3 (Summer 2022), pp. 213-222 (a comprehensive list of all references is provided in the published journal version).
[1] CII Carbon, L.L.C. v. Nat’l Union Fire Ins. Co. of Louisiana, 918 So.2d 1060, 1061, n. 1 (La. Ct. App. 2005).
[2] 936 F.Supp. 534, 541 (S.D. Ill. 1996).
[3] 400 F.3d 613 (8th Cir. 2005).
[4] See also Millennium Inorganic Chemicals Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 744 F.3d 279, 286 (4th Cir. 2014) (holding that a natural gas production facility was not a “direct contributing property” to qualify under contingent business interruption coverage).