Specialty pharmaceutical companies that manufacture anddistribute diagnostic medical imaging products rely on manycomponents, including radioactive isotopes. Is a pharmaceuticalcompany protected under its contingent business income losscoverage when the nuclear reactor that supplies a specific isotopeis shut down for 15 months due to a leak? In one recent case, theanswer was no.

Lantheus Medical Imaging, Inc., sued Zurich American InsuranceCompany challenging Zurich’s denial of coverage under a commercialproperty insurance policy purchased by Lantheus for business incomeloss from a 15-month shut down of the nuclear reactor at ChalkRiver Laboratories in Ontario, Canada, which supplied approximately40% of the world’s medical isotopes. The company claimed that itincurred more than $70 million in losses as a result of theshutdown.

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Zurich argued that the losses were not covered under the policyfor two reasons:

1. |
   1. Lantheus didn’t experience a total cessation of businessactivity, and
   2. The shutdown was caused in whole or in part by the excludedperil of corrosion.

(Photo: Shutterstock/iQoncept)

Reliance on one supplier

Zurich issued an all-risk property insurance policy to Lantheusthat was in effect from January 8, 2009, through January 8, 2010.The policy covered contingent business income (CBI) loss accordingto the following specifications:

We will pay for the actual BusinessIncome Loss you sustain and necessary Extra Expense you incurresulting from the necessary suspension of your business activitiesoccurring at a premises described in the Declarations Schedule ifthe suspension is caused by direct physical loss of or damagecaused by a covered cause of loss to a Contingent Property (of thetype insured) not owned, occupied, leased or rented by you orinsured under this Policy and that property is located within theCovered Territory. We will pay no more than the applicablesub-limit of insurance.

Lantheus’s Billerica, Mass., facility, where TechneLiteGenerators using the isotope were manufactured, was one of thepremises described in the Declarations Schedule. The policy defines“contingent property” to include “property from which you or otherson your account receive the delivery of manufactured materials orservices if those materials or services are essential for thecontinuation of your business activities.” The policy also had anendorsement to provide a $70 million sublimit of insurance forcontingent time element from the Chalk River reactor as a supplierto Lantheus. The policy also covered extra expenses under the CBIprovision beginning on the date of the loss and continuing “duringthe period of restoration to resume and continue as nearly aspracticable your normal business activities at the premises.”

The policy also excluded loss of damage as a result ofcorrosion, among other factors. But the policy included an“anti-concurrent cause” provision, which bars coverage when aclaimed loss is caused by a combination of covered and excludedperils. The policy did contain an ensuing loss exception, however,which provides coverage if an excluded peril causes a secondcovered peril to occur. In that situation, coverage is providedonly for the loss of damage that actually results from the coveredperil.

On May 14, 2009, the nuclear reactor lost power, began to leak,and was shut down for approximately 15 months. There was somedebate between the experts for each side as to the proximate causeof the leak, with Lantheus’s expert stating that corrosion was afactor, but that a rapid change of pressure within the reactorvessel was the likely cause.

(Photo: Shutterstock/Paolo Bona)

Decreased production, not total suspension

Lantheus claimed that the reactor shutdown forced its Billericafacility to cancel 47 production runs for TechneLite Generatorsbetween May and September 2009. Because Lantheus received less ofthe radioactive isotope it produced fewer TechneLite Generatorsduring its weekend production runs while the reactor was offline.The court noted that nothing in the records suggested thatproduction runs for TechneLite Generators—or any otherproduct—scheduled during weekdays were affected as a result of thereactor shutdown.

Lantheus also claimed that the reactor shutdown caused it tolose revenue and incur extra expense in obtaining an alternatesupply of the isotope. The company estimated its financial lossesto be greater than the policy’s $70 million sub-limit for CBIlosses provided by the endorsement.

Zurich denied coverage to Lantheus, explaining that all of theavailable information indicated that the shutdown of the reactorwas due to corrosion, an excluded cause of loss; the ContingentBusiness Income Loss and Extra Expense claim was not covered.

(Photo: Shutterstock/emilie zhang)

Exclusion trumps business interruptionissue

In court, Zurich argued that Lantheus had no valid claim underthe policy’s CBI provision because it didn’t have the “necessarysuspension” of its business activities. Zurich contended that“suspension” is equivalent to total or complete cessation—a levelof interruption the Billerica facility never approached.

Lantheus countered that the disruptions it faced as a result ofthe reactor shutdown were precisely the kinds the partiesanticipated when executing the policy, and, in any event, that thereactor shutdown forced it to “suspend”—briefly but repeatedly—itsbusiness activities. Lantheus noted that it had multiple lines ofproduction at the Billerica facility, that it specifically boughtthe CBI coverage to safeguard the continuation of a single businessline, and that requiring a complete cessation of all businessactivities at the facility would be fundamentally inconsistent withthe policy’s critical concern.

The court declined to resolve the issue of whether a partial orcomplete suspension of production was necessary, because itultimately found that the corrosion exclusion foreclosed allcoverage under the policy. The policy provided no definition forthe term corrosion, the court said, but using the ordinary meaning,corrosion is a gradual wearing away or alteration such as whenmetal rusts. According to Atomic Energy of Canada Limited, theoperator of the reactor, the reactor was damaged by corrosion fromnitric acid, which was excluded from coverage under the policy. Thecourt also found that the exception for ensuing loss didn’t applybecause the provision couldn’t be used to restore coverage for theloss caused by corrosion.

The court granted summary judgment for Zurich.

Lantheus Medical Imaging, Inc. v. Zurich AmericanIns. Co., 10 Civ. 9371, NYLJ 1202725323152, at *1 (SDNY,Decided April 28, 2015)