A Broker’s Wit Can Save You Millions — Understanding Business Interruption Claims, Part 63

As discussed in my post, Insured’s Control or Operation of Leader Property Does Not Trigger Contingent Business Coverage – Understanding Business Interruption Claims – Part 50, it is generally understood that ownership or insurable interest (i.e., leaseholds) over the dependent property, or supplier, destroys contingent business income coverage. However, in Park Electrochemical Corp. v. Continental Cas. Co., No. 04-4916, 2011 WL 703945 (E.D.N.Y. Feb. 18, 2011) the court declined to follow this maxim of business income loss, proving once again that a diligent broker can save you millions.

Park developed and manufactures printed circuit boards and other advanced materials for the telecommunications, computing, and aerospace industries. Neltec and Nelco Products, Pte., Ltd. (“Nelco”) were wholly-owned subsidiaries of Park. Neltec, based in Tempe, Arizona, manufactured and sells a product called N6000. Neltec purchased its entire supply of “prepreg,” a vital component of N6000, from Nelco, located in Singapore. An explosion at Nelco’s Singapore facility destroyed the special “treater” used to produce prepreg, temporarily halting Nelco’s ability to supply prepreg to Neltec and, per force, Neltec’s ability to produce N6000. As a result thereof Neltec’s N6000 customers could not readily substitute any alternative Neltec product, causing Neltec to lose a significant amount of income.

Under “Contingent Business Income,” (CBI) the policy states in pertinent part:

[Continental] will pay for the loss resulting from necessary interruption of business conducted at Locations occupied by the Insured and covered in this policy, caused by direct physical damage or destruction to:

a. any real or personal property of direct suppliers which wholly or partially prevents the delivery of materials to the Insured or to others for the account of the Insured …

The term “direct suppliers” was not defined anywhere in the policy.

After the November 27, 2002 explosion at Nelco’s facility in Singapore, Park submitted a claim under the CBI provision, seeking coverage for Neltec’s lost sales income. Continental declined coverage stating that subsidiaries of the insured, such as Nelco, are not considered “direct suppliers” under the policy. Park filed suit contending that nowhere in the policy such was a restriction found.

While courts are typically the ultimate arbiters of policy interpretations, in this case, the court left the issue for a jury to decide.

The term “direct suppliers” is not defined anywhere in the policy. Both parties provide reasonable interpretations of the term: it could be read to include any supplier, regardless of whether the supplier is a subsidiary of the insured, or it could be read to exclude subsidiaries or sister companies of the insured. Moreover, on the one hand, if the term is read to include subsidiaries, then it would arguably make the CBI provision redundant, given that the “Time Element-Gross Earnings” provision already covers business interruption losses caused by physical damage to Park-owned facilities-that is, to avoid redundancy, the CBI provision must have been specifically intended to cover business interruption losses caused by damage to “direct suppliers” outside of Park’s control. On the other hand, insurance policies may have multiple or redundant provisions covering certain kinds of losses. The fact remains that the words are ambiguous, and ambiguity requires the Court to consider extrinsic evidence to arrive at a proper interpretation.

Continental presented evidence of industry standards and principles of contingent business income where coverage should not be available if the other property is a branch, department or subsidiary or sister business of the insured. Park, in turn, presented deposition testimony of its broker showing that in the process of shopping for insurance products Continental’s policy was broad enough to suit Park’s needs. Ultimately the $2.5 million dollar question was left for a jury to draw adequate inferences from the common practice and customs of the insurance industry and, ultimately, the knowledge and intent of the parties at the time the policy was purchased.