Business interruption coverage is often difficult to figure out.We receive many questions from FC&S subscribers on a variety ofBI topics, like the following:

Our client has complete or majority ownership of manycompanies, which are all insured on the same property and businessinterruption policy. Some of the companies make goods that arebought by the other companies within the group.

For example, one company is a paint producer and buys cansfrom another company in the group in which the actual paint ismerchandised. Therefore, if one of these producing companiessuffers a loss that is insured under the property coverage, thereis a possibility that not only will this company suffer a directbusiness interruption loss but also that the recipient company ofthese goods will suffer an indirect business interruption lossbecause they could not produce their own products.

Would the business interruption loss suffered by therecipient company be covered under the policy given that they areinsured under one policy and that they are companies of similarownership? In order for the loss suffered by the recipientcompany to be covered, does there have to be an explicit clause orsublimit covering contingent business interruption?

Our interpretation is that contingent business interruption ismeant for companies that are important suppliers to a client butthat do not share ownership or are controlled by the sameadministration. In turn, we believe that contingent coverage willnot respond in this example.

However, we believe that interdependent business interruptioncoverage for companies that have similar ownership or that arecontrolled by the same administration is what would apply in thisexample. We consider this coverage to be required in explicit termswithin the policy when these companies have different policies foreach business or when the insurance company wants to sublimit thiscoverage to an amount smaller than the total business interruptionlimit of the policy.

If, as is our case, these companies are within one policy,unless excluded specifically in the policy, our understanding isthat there is interdependent business interruption coverage up tothe limit of the policy without the policy being required tospecifically list it.

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FC&S feels that it may depend on how the business incomelimit(s) was calculated. If it is based on total sales for allcompanies, then the “interdependent coverage” could be automatic.That is, because the can production is interrupted at Company A,Company B cannot sell its product, the loss of paint sales would becovered. However, if Company A and Company B have separate limits,the coverage may not work that way.

While we understand that these companies are interdependent, weare not aware of anything specifically called interdependentbusiness interruption coverage, so we are not aware of adifferentiation between when to use that or contingentcoverage.

However, it would be best if the underwriter agreed to endorsethe policy stating that this type of loss (suffered by therecipient company as a result of the interruption at the providingcompany) was covered for interdependent business interruptionlosses. That way there would be no doubt. This may be done with asimple manuscript endorsement stating the fact if one is notavailable.

Sometimes underwriters may agree to document their files withthis type of confirmation, but that is not as good since the policyis the contract. At the least, such an endorsement would savearguments during the adjustment process.

What is your experience with these types of businessinterruption losses? Have you ever seen an endorsement or policyprovision called “interdependent business interruption”? Let usknow in the comments below.