Most large companies insure against business interruption. The savvier ones, particularly those with sprawling global supply chains, also have contingency business interruption riders to protect against events that impact the plants of their suppliers or customers. In March, when one of the largest earthquakes in history struck Japan, followed by a 60-foot tidal wave that crippled a nuclear generating plant, many probably thought they were covered. Not so fast. Because a nuclear facility was involved, companies whose Japanese suppliers had problems may have a tough time getting compensated. In most countries, including the U.S., insurers exclude nuclear events from coverage.
“The extent of coverage that a company has will depend upon the proximate cause determined for each claim,” warns Michael Korn, managing principal at Integro Insurance Brokers. Many policies also exclude earthquakes, he adds.
“Whether you get compensated for losses resulting from an interruption in the operation of a supplier who had to shut down in Japan will depend on whether the cause of the shutdown was the tsunami [which with most U.S. policies would come under flood coverage], the earthquake or the nuclear crisis,” Korn says. “You might argue that the nuclear plant was damaged by the tsunami, but your carrier may say the problems with the generating plant, and the resulting loss of power to the supplier, were caused by the reactor design or the operator, and you would not be compensated.”
“There are going to be a lot of legal issues around this,” says Duncan Ellis, U.S. property practice leader at Marsh & McLennan. “That makes it important that companies that think they may face losses from the disaster in Japan examine their BI and contingent BI policies in conjunction with their lawyers and insurance brokers and then go about documenting their loss. You’ll need to build a case for a covered loss.”
In some cases, Ellis says, insurers may decide a loss is partly attributable to a non-covered event—a nuclear plant meltdown or the earthquake—and partly to a covered event—the tsunami.
“There is a lot of room for dispute about causality,” says Loretta Worters, vice president at the Insurance Information Institute. “People need to file their claims and see how it works out—sometimes in the courts.” Hurricane Katrina led to similar disputes about whether damage was from wind or water, she notes.
Korn advises not waiting until losses occur, but letting your insurer know right away about possible supply disruptions, to avoid running up against a policy’s time requirements. “If in the end your supplier is back up and running before you use up your inventory, no harm done,” he says.