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The Rough Notes Company Inc.



April 23
09:34 2020

A chemical manufacturer’s operations were interrupted when gas could no longer be delivered by its retail gas supplier. The retailer, in turn, could not make deliveries because of an explosion that halted the operations of its gas producer. The chem manufacturer filed a claim under its contingent business income coverage. It sued its insurer after the claim was rejected.

Below is the court’s opinion on whether a valid contractual obligation existed that would trigger coverage for gas supply-related business interruption loss.

Millennium Inorganic Chemicals LTD (Millennium) purchased gas under a contract with Alinta Sales Pty Ltd (Alinta), a retail gas supplier. Apache Corporation (Apache) a natural gas producer from which Alinta purchased gas, injected the processed gas into the DB Pipeline. The injection site was the point where title, custody, and risk associated with the gas passed to Alinta. Apache’s gas mixed with that of other producers in the DB Pipeline. On June 3, 2008, Apache’s facility experienced an explosion that ceased its natural gas production. Apache informed Alinta that it would not be supplying gas until further notice. In turn, Millennium had to shut down its operations for a number of months.

Millennium held contingent business interruption coverage for direct contributing or recipient property (ies) from National Union Fire Insurance Company of Pittsburgh, PA (National Union) and Ace American Insurance Company (Ace). Each policy set sub-limits of $25 million for any direct contributing property listed on the schedule and $10 million for any unnamed direct contributing property. Millennium did not schedule any contributing properties.

Millennium notified National Union and Ace of the loss on June 5, 2008. The carriers concluded that Apache was not Millennium’s direct supplier and denied the claim. After Millennium attempted to clarify the supply arrangement, the carriers re-stated their denial.

In July 2009, Millennium filed a complaint against the carriers and requested a declaratory judgment for coverage while also asserting breach of contract and failure to act in good faith. The carriers filed a joint cross-motion for summary judgment, contending that the policies provided coverage for only direct suppliers and that Apache was not one of them. They also argued that Millennium failed to support its bad faith claim.

The trial court granted Millennium’s motion for partial summary judgment and denied the carriers’ “no coverage” motion. But it did grant the carriers’ motion to reject the bad faith claim. The trial court concluded that the term ‘direct’ was ambiguous in the context of an entity that provides a direct physical supply of material to but has no contract with the insured. The amount of loss was established at $10,850,000 but National Union and Ace appealed.

The appellate court re-examined the policies. It determined that Millennium was not entitled to contingent business interruption coverage due to interruption of materials because the policies limited coverage to “direct contributing property(ies)” and Millennium did not have a direct contractual relationship with Apache. Alinta had legal title to the gas while it was in the pipeline between its facility and Millennium’s facility so Alinta, rather than Apache, was the direct contracting party.

The case was remanded back to it to the trial court to enter summary judgment in favor of National Union and Ace.

United States Court of Appeals, Fourth Circuit. Millennium Inorganic Materials LTD., Cristal Inorganic Chemicals Limited, Plaintiffs-Appellees, v. National Union Fire Insurance Company of Pittsburgh, PA; Ace America Insurance Company, Defendants-Appellants. No 13-1194. Argued Dec. 12, 2013. Decided Feb. 20, 2014. 2014 WL 642993 (C.A.4 (Md.)

There Has to Be A Connection

It’s always useful to remember the basic fact about an insurance policy: it is a contract. A coverage obligation exists only when payment is made for coverage and when a situation that is eligible for coverage takes place. Many losses can harm a company, but reimbursement is due only to certain losses.

Time element policies can provide protection against loss involving the inability to continue operations. Originally, the protection against lost income had to be due to the occurrence of direct physical damage caused by an eligible peril. Because coverage depends upon a separate event, time element forms are attached to base commercial property forms that determine the types of losses that are eligible for business interruption reimbursement. Further, time element forms contain additional definitions and terms that affect coverage availability.

Here is an excerpt of wording on Time Element coverage found in the ISO Commercial Property’s coverage analysis in PF&M.


The Business Income (and Extra Expense) Coverage Form has six definitions. All should be carefully reviewed because of the impact they have on the coverage being provided.

  1. Finished Stock

This is stock that the named insured manufactures. However, there are two exceptions:

  • Whiskey and other alcoholic products are considered stock unless there is a coinsurance percentage for business income on the declarations. This applies only when these items are being aged.
  • Stock that the named insured manufactured and that is held for sale at any retail location premises that this coverage form insures is not considered finished stock.

Note: This term is used in only 5. Additional Coverages c. Extended Business Income. This section states that the extended business income begins even if the finished stock has not been replaced. More importantly, it is used in the causes of loss forms that exclude business income loss due to damage to finished stock and the time to reproduce it.

Example: Krissy Chrizmaz has a retail outlet adjacent to its manufacturing plant that has $200,000 in finished stock on its premises. The manufacturing plant itself has $500,000 in finished stock. A tornado damages stock at both locations. Coverage applies for the time needed to replace the stock at the manufacturing plant. There is no coverage for the time needed to replace the stock at the retail outlet. The building and personal property coverage form covers the direct damage to the finished stock. Extended Business Income coverage begins when Krissy resumes operation, although Krissy needs 180 days to replace the damaged finished stock.
  1. Operations
  2. These are the business activities that occur at the premises described on the declarations.
  3. When rental value is included, operations also means whether a tenant can occupy the premises.

Related Court Case: Business Income Held Not Applicable to Building Not Scheduled for Such Coverage

  1. Period of Restoration

This is the period of time during which coverage applies. It begins either:

  1. Seventy-two hours after the time of covered loss or damage. This applies to business income coverage.

Note: CP 15 56–Business Income Changes–Beginning of the Period of Restoration can be used to reduce the waiting period to 24 hours or to completely eliminate it.

Related Article: CP 15 56–Business Income Changes–Beginning of the Period of Restoration

  1. Immediately after the time of covered loss or damage. This applies to extra expense coverage.

Under either of these, coverage ends on either the date when property at the described premises should be repaired, rebuilt, or replaced or the date that the business reopens at a new location. A major sticking point in evaluating when a premises should be ready is the clarifying statement that the repairs, building, or replacing must be done on a timely basis and with substantially similar materials.

Example: Maisy May’s hat manufacturing plant uses a custom-built machine. It takes 10 months to build a new machine and deliver it following a covered loss. Maisy May’s insurance carrier believes that Maisy May could have been back in business in four months if she had accepted a similar machine and refuses to pay more than a four-month business income loss.

The period of restoration does not include any increased time period required because of an ordinance, regulation, or law being enforced or because of the compliance with any ordinance, regulation, or law regulating construction, use, repair, or demolition of any structure. (10 12 change)

Note: This can cause a significant gap in coverage.

Related Article: CP 15 31–Ordinance or Law–Increased Period of Restoration

The period of restoration also does not include any increased time period required to test for, monitor, clean up, remove, contain, treat, detoxify, neutralize, or in any way respond to or assess the effects of pollutants.

The policy expiration date does not affect the period of restoration.

Related Court Case: Earnings Insurance Held Not Applicable When Motel Was Not Closed By Volcanic Ash

  1. Pollutants

These are irritants and contaminants such as smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste of a solid, liquid, gaseous, or thermal nature. Waste includes property to be disposed of, as well as property to be recycled, reconditioned, or reclaimed.

  1. Rental Value

This is a specialized type of business income that consists of two parts.

  1. The net income, either profit or loss, from tenant(s) that occupy the premises. The fair rental value of the named insured’s occupancy of its own premises is included in the net income amount.
  2. The normal operating expenses of the premises that continue after a loss. Examples of such expenses are payroll and tenants’ legal obligations that become the owner’s obligation during the period of time when the premises cannot be occupied.
Example: Trey and Margo own a strip shopping center. They have five tenants in addition to their own shop in the center. Heavy ice and snow accumulations cause the roof to cave in and everyone must vacate during the repairs. The monthly business income rental value is as follows:
Rental income from five tenants $10,000 ($2,000 per tenant)
Trey and Margo’s rental value $2,000
Payroll $1,500
Contracted utilities $2,500
Total monthly rental value $16,000
Trey and Margo have a rental value loss of $16,000 per month until the damage from the roof collapse is repaired.
  1. Suspension

This is either of the following:

  1. The complete closure of the named insured’s business operations or a slowdown.
  2. If rental value coverage is included, it means when tenants cannot occupy all or any portion of the insured premises.

An Indirect Loss Can Be Substantial

As serious as storm, fire or theft may be, those are direct losses. It takes time to make repairs or arrange replacement and, as the adage goes, “Time is Money!” Businesses are ongoing so when operations are halted, income is lost. Often, whether a business is able to resume depends on having financial sources of recovery available.

Here is an excerpt on the scope of protection offered by Time Element coverage found in Gordis in Advantage Plus.

Business Income

The business income coverage form is part of the Commercial Property Program and is the most commonly used time element form. The common policy conditions, commercial property conditions and causes of loss forms described in the Features Common To Commercial Property Forms And the Property- Insurance for Buildings and Personal Property topics apply to this coverage.

The business income coverage form indemnifies the insured for the actual loss of business income during the period of restoration, as defined below. In order for coverage to apply, the interruption of business must be caused by direct physical loss or damage by a covered peril or cause of loss to covered property at the location listed on the declarations or within 100 feet of it.

Period of Restoration
The period of restoration defines when coverage applies. It begins 72 hours after the direct physical loss or damage occurs and ends on the date the property is repaired so that normal business operations can resume. Coverage applies to the loss of business income during the period of restoration and includes certain defined supplemental benefits. It also offers a number of other specific optional benefits discussed below. The 72-hour waiting period acts in a way similar to a deductible. The waiting period does not apply to any extra expense coverage.

Business Income
Business income is the net profit or loss before income taxes that would have been earned or incurred, including continuing normal operating expenses, if no loss had occurred. Payroll is included but other charges and expenses that do not necessarily continue after a loss are not. It covers the loss of a landlord’s rents and also the rents a tenant must pay if a lease requires that rent payments continue even when the premises is untenantable due to a loss at the location. This measure of loss is discussed more fully later in this topic.

Coverage does not apply for loss for the entire period until the property is actually restored. It applies only for the amount of time the repairs should take. The insured may decide not to repair the damage or restore the property to the way it was before the loss. In any event, the liability of the insurance company ends when the business should resume operations if repaired with reasonable speed using materials of similar kind and quality.

The insurance company’s obligations end when the business is restored or should be restored, even if the insured needs additional time to restore its sales volume or production back to pre-loss levels.

There is no coverage for any continuing reduction in sales, loss of customers, good will, contracts or valuable employees. This is the case even if any of these cannot be recovered, except for the limited extended period of indemnity coverage specifically provided and explained below.

The measure of loss is the estimated future earnings beginning on the date of loss and ending on the date the damaged building, machinery or equipment is restored or should be restored. While past earnings of the business are used as guidance in determining the value of the loss, it is the value of the estimated future earnings that are covered.

The period of indemnity is not limited by the coverage expiration date. If the insured peril or covered cause of loss occurs while coverage is in force, the insured can collect for the length of time needed to repair the damage, even if it goes past the expiration date.

Extended Business Income
If the restoration period ends and business has not returned to the level that existed before the loss, coverage applies to the actual loss sustained during an additional period of up to 60 days. Coverage ends when business operations return to their pre-loss levels, after 60 days, or when the business income limit is used up whichever comes first. Other periods of indemnity for extended business income, up to 360 days, are available for an additional premium charge.

Extra Expense
Two business income forms are available. One is without extra expense and the other includes extra expense. When the without form is selected extra expense coverage applies for only those extra expenses the insured incurs to reduce the period of restoration, such as the extra costs to continue operations at either the insured location or another. It also covers other expenses incurred if business operations cannot continue. Extra expenses incurred to replace property and to restore information on valuable papers or records damaged in a covered loss are also covered. These expenses are included as part of the business income loss and are covered up to the limit of insurance.

The Business Income (And Extra Expense) Coverage Form includes extra expense coverage that is nearly identical to the extra expense coverage described below combined with business income. This form does not require that the extra expense reduce the business income loss.

Civil Authority
Even if the insured’s premises did not sustain direct loss or damage, direct physical damage by an insured peril or a covered cause of loss at another location may require civil authorities to deny access to the insured’s undamaged premises. The denied access lasts until repairs to the other location are completed or tests and investigations are finished. The other location must be within a mile of the covered location for this provision to apply. Coverage applies for loss of business income for up to four weeks after the date civil authorities deny access to the insured’s premises.

Alterations and New Buildings
Business income coverage pays for loss of business income resulting from direct physical loss or damage by a covered peril or cause of loss at the described premises to new buildings, whether complete or under construction, and alterations and renovations to existing buildings or structures. It also pays if loss of income occurs because of covered direct damage to supplies or building materials on or within 100 feet of the premises used in construction or alteration and incidental to the occupancy of the new building.

If direct loss by a covered peril or cause of loss delays the start of operations, the period of restoration begins on the date operations were scheduled to start if the loss had not occurred.

Interruption of Computer Operations
Coverage applies for business income and/or extra expense due to direct damage of computers resulting in an interruption. It is subject to different causes of loss and a $2,500 annual aggregate limit of insurance.

As an incentive for the insured to insure to value, the following extensions are provided if the policy is written at either 50% or higher coinsurance or on a reporting basis:

A Once and Future Disaster

Of course, we come back to a key issue. Indirect loss can be as great or even a greater threat to a business than direct damage. Even a greater concern is that serious indirect loss can occur in a manner that is not protected under the vast majority of commercial property insurance policies.

Of major concern to us all is the impact of the Coronavirus, which has already slammed many businesses and the country’s economy. The insurance sector is very busy monitoring and dealing with customers who seek assistance with a dangerous challenge to business survival. Litigation is already occurring with efforts both to secure or deny protection. Legislators are beginning to consider laws that may alter how insurers are expected to respond to a catastrophe-level source of loss. While insurance is, as of yet, a limited source of protection, the broader world of risk management may provide more help.

Here is a full copy of an article offering insights on pandemics from a 2010 issue of Rough Notes Magazine in Advantage Plus.


Agents can play a key role

By Phil Zinkewicz

In 1995, actor Dustin Hoffman starred in a film called “Outbreak,” which also featured Rene Russo, Morgan Freeman and Kevin Spacey. The film focused on an outbreak of a fictional Ebola-like virus called Motaba. The film called into question the role of the U.S. govern­ment in creating the virus for military purposes, as well as the government’s unwillingness to make the problem known to the public and its inability to contain the virus.

The film, which was a solid box office success and was nominated for various awards, raised some “what-if” scenarios as the media began to question what the government would really do in a similar situation, and whether the federal Centers for Disease Control and Prevention has plans in case an outbreak does occur. In fact, a real-life outbreak of the Ebola virus did occur in Zaire only a few months after the film was released.

When a disease reaches epic proportions such as were seen in the film, it is called a pandemic. Thankfully, we are not faced with an Ebola-like situation today, but recently we have faced our own pandemic in the H1N1 virus or so-called swine flu. Unlike in the film, the government stepped up to the plate in this pandemic with a strong push to develop and distribute a vaccine, but as the vaccine was being released there were still “what-if” questions that worried the population. What if the vaccine is being released before proper testing? What if it doesn’t reach those portions of the population that really need it? What if the vaccine doesn’t work at all?

Protection challenge

How can we as citizens and business entrepreneurs protect ourselves against a pandemic or at least mitigate its impact?

That question was addressed in a recent teleconference hosted by Agility Recovery Solutions, a provider of mobile business continuity solutions. Participating in the teleconference were Bob Boyd, Agility CEO; former FEMA Administrator David Paulison; and former Associate Chief Medical Officer of Homeland Security William Lang, M.D.

Dr. Lang explained the difference between a disaster and a pandemic. A disaster, he said, is usually confined to a particular region, while a pandemic affects two or more regions of the world. “Pandemics affect a wider realm of people,” he said.

“In disaster situations, insurers look at property loss primarily, but a pandemic affects the workforce, which is a business’s most valuable asset. In this pandemic, insurers have gone from taking actuarial-based gambles to a more proactive approach in dealing with loss control. Companies can talk to their agents and agents can talk to their clients to determine what pandemic plans are in place.”

Paulison agreed: “The most difficult thing is to get small businesses to put together a business plan. Agencies have to help their clients in leading by example.”

Boyd said that the most significant factor affecting the daily operations of a business is employee absenteeism. A pandemic likely will substantially reduce the number of workers available to businesses, and matters will be made worse if employees must care for ill children at home or when schools are closed for extended periods. Business owners play a key role not only in protecting their employees’ health, but also in limiting the negative impact on their local economies by remaining operational during an interruption.

Ten-step plan

Agility CEO Boyd outlined a 10-step process that business owners can follow to help prepare their companies and employees for a pandemic.

  1. Maintain a healthy work environment.Encourage workers to stay home if they are sick; to avoid touching their noses, mouths and eyes; to cover their coughs and sneezes; to wash their hands or use an alcohol-based hand sanitizer after coughing, sneezing or blowing their noses. Keep frequently touched common surfaces clean. Try not to use other workers’ phones, desks, offices, or other tools and equipment.
  2. Be informed.Provide education and training materials in an easy-to-understand format and in the appropriate languages and literacy levels for all employees. All information related to a potential outbreak should be accredited by a reliable source such as the Centers for Disease Control and Prevention. Make all employees aware of CDC recommendations for obtaining the H1N1 vaccine when it becomes available in your area.
  3. Communicate openly and proactively with employees.Provide workers with up-to-date information on influenza risk factors and instruction on proper behaviors. Establish a communication network via phone, e-mail or text to reach employees remotely and provide up-to-the-minute information related to a potential outbreak. Conduct town hall meetings with employees, customers and the public.
  4. Identify a pandemic team.Identify key members of your organization responsible for the management of vital company functions. Members of the pandemic team will be responsible for imple­menting the company’s contingency plan across all departments and for disseminating information.
  5. Identify essential job functions.Identify critical functions and activities needed to facilitate near normal operations and survive as an economic entity. Identify primary and supporting functions based on their impact on providing essential goods and services for the business and the community.
  6. Cross-train employees.Cross-train employees to perform essential functions in the absence of key management. Make arrange­ments to outsource critical functions like IT administration to third-party vendors.
  7. Prepare for telecommunication needs.Plan to implement practices to minimize face-to-face contact between workers if advised by the local health department. Develop other flexible policies to allow workers to telecommute (if feasible) and create other leave policies, including the distribution of tangible resources to employees’ homes or remote locations.
  8. Diversify your supply chain.Develop a list of redundant vendors for key supplies. Make arrangements with backup suppliers and vendors to obtain resources needed to facilitate critical operations and key functions. Maintain reliable utility services.
  9. Update sick, family and medical leave policies.Develop policies that encourage ill workers to stay at home without fear of reprisals. Encourage your staff to stay at home if they are feeling ill to reduce person-to-person contact. Recognize the emotional, mental and physical needs of employees during a catastrophic health event.
  10. Prepare financially.Encourage direct payroll deposits for all employees. Be prepared to handle large volumes of insurance claims. Determine the levels of accessible cash required to maintain business operations and to provide cash advances to employees.

“This process will serve as a guideline to enhance management’s decision-making ability during periods of turmoil that can ensue following a pandemic disaster,” said Boyd. “Challenging vendors and suppliers to evaluate their own pandemic continuity plan also guarantees that important resources are received or available in a timely manner without causing interruption in business operations.”

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