Corrosion exclusion overrides contingent business income loss coverage

Specialty pharmaceutical companies that manufacture and distribute diagnostic medical imaging products rely on many components, including radioactive isotopes. Is a pharmaceutical company protected under its contingent business income loss coverage when the nuclear reactor that supplies a specific isotope is shut down for 15 months due to a leak? In one recent case, the answer was no.

Lantheus Medical Imaging, Inc., sued Zurich American Insurance Company challenging Zurich’s denial of coverage under a commercial property insurance policy purchased by Lantheus for business income loss from a 15-month shut down of the nuclear reactor at Chalk River Laboratories in Ontario, Canada, which supplied approximately 40% of the world’s medical isotopes. The company claimed that it incurred more than $70 million in losses as a result of the shutdown.

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

1. 1. Lantheus didn’t experience a total cessation of business activity, and
   2. The shutdown was caused in whole or in part by the excluded peril of corrosion.

(Photo: Shutterstock/iQoncept)

Reliance on one supplier

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

We will pay for the actual Business Income Loss you sustain and necessary Extra Expense you incur resulting from the necessary suspension of your business activities occurring at a premises described in the Declarations Schedule if the suspension is caused by direct physical loss of or damage caused by a covered cause of loss to a Contingent Property (of the type insured) not owned, occupied, leased or rented by you or insured under this Policy and that property is located within the Covered Territory. We will pay no more than the applicable sub-limit of insurance.

Lantheus’s Billerica, Mass., facility, where TechneLite Generators using the isotope were manufactured, was one of the premises described in the Declarations Schedule. The policy defines “contingent property” to include “property from which you or others on your account receive the delivery of manufactured materials or services if those materials or services are essential for the continuation of your business activities.” The policy also had an endorsement to provide a $70 million sublimit of insurance for contingent time element from the Chalk River reactor as a supplier to Lantheus. The policy also covered extra expenses under the CBI provision beginning on the date of the loss and continuing “during the period of restoration to resume and continue as nearly as practicable your normal business activities at the premises.”

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

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

(Photo: Shutterstock/Paolo Bona)

Decreased production, not total suspension

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

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

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

(Photo: Shutterstock/emilie zhang)

Exclusion trumps business interruption issue

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

Lantheus countered that the disruptions it faced as a result of the reactor shutdown were precisely the kinds the parties anticipated when executing the policy, and, in any event, that the reactor shutdown forced it to “suspend”—briefly but repeatedly—its business activities. Lantheus noted that it had multiple lines of production at the Billerica facility, that it specifically bought the CBI coverage to safeguard the continuation of a single business line, and that requiring a complete cessation of all business activities at the facility would be fundamentally inconsistent with the policy’s critical concern.

The court declined to resolve the issue of whether a partial or complete suspension of production was necessary, because it ultimately found that the corrosion exclusion foreclosed all coverage under the policy. The policy provided no definition for the term corrosion, the court said, but using the ordinary meaning, corrosion is a gradual wearing away or alteration such as when metal rusts. According to Atomic Energy of Canada Limited, the operator of the reactor, the reactor was damaged by corrosion from nitric acid, which was excluded from coverage under the policy. The court also found that the exception for ensuing loss didn’t apply because the provision couldn’t be used to restore coverage for the loss caused by corrosion.

The court granted summary judgment for Zurich.

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