I recently noted the importance of Contingent Business Income (CBI) coverage in Are Your Business Relationships Insured? – Understanding Business Interruption Claims. CBI coverage protects an insured from income losses caused by an interruption or slow-down in the operations of a “dependent business” (i.e., purchasers, suppliers, distributors or service providers). A Missouri jury understood the importance of this coverage, which I affectionately call “relationship insurance,” awarding $11 million in business income losses to a roofing material manufacturer that was affected by the shut down of its asphalt supplier.

The chain of unfortunate events that led to a 4 year battle that ended in federal court can be summarized as follows:

TAMKO manufactures roofing materials, including various types of asphalt shingles. In order to produce those shingles, TAMKO purchases coating grade asphalt from its supplier Bitumar USA, Inc. Bitumar produces the coating grade asphalt using a product called asphalt flux, which it purchases from Irving Oil, Ltd. Irving operates an oil refinery in New Brunswick, Canada. Its operations consist of a three-room monobuoy located in the Bay of Fundy, to which ships dock while unloading oil, and a pipeline system connecting the monobuoy to the onshore storage tanks. In August of 2008, Irving’s pipeline was damaged- leaking a large amount of oil into the bay. Irving was forced to shut down its operations to repair the pipeline. Bitumar was unable to obtain asphalt flux from Irving, and TAMKO was consequently unable to receive coating grade asphalt from Bitumar. TAMKO initially slowed down its operation, but eventually stopped production for a month.

TAMKO submitted a $12million business income loss claim to its carrier, Factory Mutual Insurance Company. After investigating the claim for two years, the carrier denied coverage. TAMKO filed suit, and Factory Mutual demanded appraisal in its response. The court ordered the parties into appraisal. TAMKO complied, but challenged the appraisal award of $3,569,261 alleging that Factory Mutual’s appraiser was not disinterested and had previous dealings with the company. Despite the award, Factory Mutual challenged coverage arguing that although the owner of the damaged pipeline was considered a direct supplier to TAMKO, the pipeline system itself was not an “insured location.”

A Missouri federal court analyzed coverage TAMKO’s policy in TAMKO Bldg. Products, Inc. v. Factory Mut. Ins. Co., 2012 WL 3596155 (E.D. Mo. Aug. 21, 2012).

TAMKO’s policy defined a “dependent time element location” as:

(i) Any Location:
(a) of a direct customer, supplier, contract manufacturer or contract service provider to the Insured.
(b) of any company under a royalty, licensing fee or commission agreement with the Insured.
(ii) Any Location of a company that is a direct or indirect customer, supplier, contract manufacturer or contract service provider to a Location described in a)(i) above.

The only location specified in the schedule of locations was TAMKO’s facility in Frederick, Maryland, but the policy broadly defined insured location, which included “Miscellaneous Unnamed Locations” and if not specified, a location was also defined as a “building, yard, dock, wharf, pier or bulkhead (or any group of the foregoing) bounded on all sides by public streets, clear land space or open waterways, each not less than fifty feet wide. Any bridge or tunnel crossing such street, space or waterway will render such separation inoperative for the purpose of this Reference and Application.”

Factory Mutual argued that the pipeline system could not be reasonably interpreted under the “dock, wharf or pier” definition of location of the policy. The court was not persuaded by Factory’s coverage interpretation, stating:

Even if the [pipeline] system was not an independently covered location under the policy, it is an inseparable part of the entire Irving Oil facility. Factory Mutual concedes that the on-shore portion of Irving Oil’s facility is a covered location under the policy, but argues that there is no coverage for the connected pipeline and monobuoy. As TAMKO argues, however, there would be no purpose for the on-shore facility without the monobuoy and pipeline, as the only way ships can transport oil to the facility is by docking at the monobuoy and unloading from that point. The damage at the supplier’s facility caused TAMKO’s entire facility to shut down. Interpreting the policy to provide coverage for only one portion of an interconnected facility is not reasonable. Therefore, I conclude that TAMKO is entitled to coverage under the policy for its loss.

Under Missouri law, the fairness and impartiality of an appraiser should be, like that of a juror, not only above reproach, but above suspicion. This standard is very strict in Missouri and many appraisal awards are vacated by courts for any whiff of impropriety. In TAMKO’s case, the court reviewed the evidence and vacated the award holding:

The appraiser appointed by Factory Mutual, Hagen, was interested as a matter of law. Though Hagen has provided an affidavit disputing this, the undisputed facts of Hagen’s conduct—as opposed to his self-serving statements in the affidavit—demonstrate that he was biased. It is undisputed that Hagen sought advice from Factory Mutual on whom he should select as an umpire; submitted his draft presentation for the appraisal hearing to Factory Mutual, after which Factory Mutual performed edits on that document; and sought approval on whether he should agree to the amount calculated by Rosenthal. The combined effect of these communications demonstrate that Hagen was not acting as a fair and disinterested appraiser. Furthermore, even without considering Hagen’s actual conduct during the appraisal, his prior business dealings with Factory Mutual render him interested because of an indirect financial interest in the outcome of the appraisal.

Factory Mutual’s appraiser had an ownership interest in the forensic accounting firm that represented Factory Mutual in other matters, and the appraiser had an outstanding balance owed of $940,000 from Factory Mutual.

The case was ultimately tried, and a jury awarded $12 million despite Factory Mutual’s defenses that TAMKO could have made up the lost time and had there were no actual loss of sales.