More than a year has passed since the Deepwater Horizon incident, though the battles are far from over. Among them are third-party claims seeking to recover lost business revenue. From hotel operators and sport and commercial fisherman to cruise ship operators, numerous business owners are seeking compensation for losses they incurred from the April 2010 event.
No More Smooth Sailing
On April 20, 2011, Carnival Corporation (“Carnival”) filed suit against BP PLC, Transocean Ltd., and other drilling companies involved in operations on Deepwater Horizon. The cruise line seeks compensation for its economic losses and damages as a result of the April 20, 2010 explosion, fire, and oil spill in the Gulf of Mexico. Barely meeting the deadline to file suit against the rig owners in the multidistrict litigation in La., Carnival alleges claims for negligence, strict liability for manufacturing defect, fraudulent concealment, violation of the Oil Pollution Act (OPA) of 1990, and strict liability pursuant to the Florida Pollutant Discharge Prevention and Control Act.
Carnival currently has ports in Fla., Ala., Texas, and La., and their ships travel through the Gulf of Mexico daily to transport passengers and crew members to various ports worldwide. According to the complaint, events aboard the Deepwater Horizon oil rig caused environmental contamination of the Gulf of Mexico and its shorelines. Carnival argues that the oil spill and resultant contamination caused it to incur increased fuel costs and additional vessel cleaning costs, as well as significant loss of revenue and bookings.
Typically, companies protect themselves against such economic losses through business interruption (BI) insurance. Most BI policies, however, require “physical loss or damage” to covered property. While the oil spill arguably caused the interruption of Carnival’s business operations, it is not apparent that there was any physical damage to the company’s cruise ships or to its other property. As a result, the current litigation in La. may offer Carnival’s only chance of recovery for economic damages. Many other business owners find themselves in similar situations where they may not have a recoverable loss under their respective policies or may need to prove some form of physical damage.
The Missing Link
BI coverage protects the insured against lost income and extra expenses that result when a covered loss causes the insured to suspend its operations. It also applies during the period of restoration. The purpose of this type of coverage is to place the insured in the position it would have occupied had no loss occurred.
As with most commercial insurance coverage questions, any analysis must begin with the specific language of the insurance policy at issue. A typical policy may state that the insurer will pay for the actual loss of business income that the insured sustains due to the necessary suspension of its operations during the period of restoration. Thus, as a general rule, the insured must establish the following elements to trigger coverage: a covered peril, loss or damage to covered property, a necessary suspension or interruption in the insured’s business operations that caused a covered loss such as lost income or extra expense, and the covered loss must have occurred during the appropriate period of restoration.
Moreover, to be entitled to coverage, the insured must prove that these elements form a causal chain, flowing from a covered event to the eventual loss.
Physical Loss or Damage
Most pertinent in the Carnival litigation, BI coverage is usually limited to losses resulting from physical loss or damage to covered property. Insureds and insurers frequently dispute whether the insured’s losses resulted from damage that was physical enough to trigger coverage.
The insured in United Airlines also argued that if physical damage was required, then the destruction of the World Trade Center ticket counter and/or the accumulation of ash at Reagan Airport should trigger coverage. The court rejected both contentions, finding that “the amount of recovery sought ($1.2 billion) bears no relation to the actual damage suffered at the WTC insured location.” The court also found that, although ash accumulated at United’s Reagan Airport facility, it did not require United to “rebuild, repair, or replace” any property and thus did not trigger coverage.
Similarly, a Texas district court has held that homeowners could not recover for necessary loss of use of their home caused by lack of power or water where there was no physical damage. The court reasoned that the policy “unequivocally insures against physical loss to a dwelling” and that although the term “physical loss” was not defined, it required “tangible damage” or a “tangible loss.” The court concluded that the policy insured against physical loss to property caused by a covered loss, not the mere existence of a hurricane which caused the insureds to be without power or water.
Other unpublished opinions have found coverage or at least ambiguity by focusing on the wording of the phrase “direct physical loss or damage.” For example, the 4th Circuit Court of Appeals, in the unpublished opinion NMS Services Inc. v. The Hartford, reversed a summary judgment in favor of the insurer and remanded for trial. A former employee of the insured hacked into the insured’s network and caused considerable damage, including erasing vital computer files and databases necessary for the operation of the company’s manufacturing sales and administrative systems. The wording of the policy language was standard:
[The insurer] will pay for the actual loss of business income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at the described premises …
The court’s reading of the policy words “or damage” allowed it to avoid the issue of whether loss of data was a physical loss. Based on the fact that the insured’s computer files were erased, the court found that there was “no question that NMS suffered damage to its property, specifically, damage to the computers it owned.” Similarly, the North Carolina Court of Appeals considered whether to overturn an award for an insured that was without electrical power for about 24 hours as a result of flooding caused by Hurricane Floyd. The policy at issue provided:
The interruption must result from direct physical loss or damage by a covere cause of loss to … Power Supply Services.” The policy excluded damage from flooding, and the insurer argued that because flooding caused the loss of power to the insured, the business interruption coverage was not triggered. The insured asserted that the phrase “covered cause of loss” applied only to the precedent word damage, not the phrase “direct physical loss.” Both the trial and appellate courts found the policy susceptible to two reasonable constructions, which under North Carolina law required using the construction most favorable to the insured.
The Rocky Road to Recovery
In the present case, Carnival asserts that it first attempted to recover its lost profits and economic damages by presenting claims to BP and Transocean pursuant to the OPA, 33 U.S.C. § 2717 (b), and to the Gulf Coast Claims Facility, the $20 billion BP trust for such claims. Pursuant to the OPA, Carnival presented an interim claim to BP and Transocean on June 10, 2010 for losses and damages suffered as a result of the oil spill. According to Carnival, it then presented a second interim claim on July 14; a third amended and supplemental interim claim on July 27; and a fourth interim claim on Sept. 1. Carnival also states that it presented interim and supplemental claims to the Gulf Coast Claims Facility on November 23 that same year for losses and damages suffered by Carnival as a result of the oil spill.
Carnival also claims fraudulent concealment against BP, Transocean, and Halliburton Energy Services, Inc. for their alleged attempts to downplay and conceal the severity of the oil spill, as well as alleged misrepresentations about their capabilities to respond to the oil spill. Carnival seeks economic and compensatory damages, as well as punitive damages and litigation costs.
Reading the Fine Print
Business owners must understand the components of a BI claim and the specific wording of each policy. Many business owners would be well served by having someone review a policy and offer advice about the scope of the coverage provided is and which scenarios would be covered. Similarly, insurance companies need to ensure they understand the body of case law that has developed around this coverage.
Although the Deepwater Horizon oil spill caused significant damage to the Gulf of Mexico and its shorelines, BI coverage still requires physical damage to covered property before it kicks in. It is unclear whether there was any physical damage to Carnival’s cruise ships or other property. Business interruption coverage may therefore fail to restore the lost or reduced revenue and bookings suffered by Carnival. In an odd twist, had Carnival’s cruise ships sailed through the oil slick and received physical damage, the company could argue that it suffered physical loss or damage to property, thus becoming entitled to recover under a BI policy. Many other business owners along the Gulf Coast are in similar situations where their policies may not respond because they are unable to provide proof of direct damage to their covered property.
Given this possible lack of coverage, and perhaps similar denials under the claims process, more business owners may be turning to the courts to seek relief for their BI loss. Carnival has certainly chosen this path in its attempt to seek recourse from the parties involved in the drilling operations aboard the Deepwater Horizon. It is still unclear if the company will ever receive compensation.