Today’s risk manager looks to contingent
business interruption (CBI) insurance to soften the financial impact of events
outside the firm's control. There are four elements to handling a CBI
claim: understand the impact of other business on your operations; have a
business continuity plan; incorporate the correct policy wording and limits for
your circumstances; identify all the potential areas of loss and document them
effectively.

How much of your company’s operations rely on another entity? How disruptive
would a long-term computer outage be to your company’s ability to maintain
normal business operations? What if you lost a key source of raw material or
component parts from a supplier? What if the financial markets were interrupted
again or a transportation disruption occurred in the United States?
Today’s risk manager is faced with many of these questions and will often
look to contingent business interruption (CBI) insurance to soften the
financial impact of these events. CBI insurance, on its surface, may appear
straightforward; however, the documentation and analysis needed to validate an
insurance claim can be quite challenging. Relying solely on the concept of CBI
insurance and not understanding what is

needed to document and collect a claim could create a false sense of
security when buying CBI coverage. Why? Because oddly enough, many CBI losses
are so unique that insurers may not have contemplated such claims when writing
the policy. The complexity of policy interpretation remains a problem as the
claim profession is only now addressing some of the unique losses arising from
September 11, 2001.
This article will discuss the fundamentals of CBI insurance and the issues
that could arise from a CBI loss. What Is CBI Insurance?
What Is CBI Insurance?
Contingent business interruption insurance and contingent extra expense
coverage is an extension to other insurance that reimburses lost profits and
extra expenses resulting from an interruption of business at the premises of a
customer or supplier. The contingent property may be specifically named, or the
coverage may blanket all customers and suppliers. CBI insurance is also known
as contingent business income insurance or dependent properties insurance.
Sometimes the term "contingent time element" is used when discussing
both CBI and contingent extra expense. Time element simply refers to either
business interruption or extra expense coverage. Companies purchase this type
of insurance as an extension to their standard property insurance. Coverage is
usually triggered by physical damage to customers’ or suppliers’ property or to
property on which the insured company depends to attract customers. The type of
physical damage must be the same as insured under the controlling policy.
There are four situations in which this coverage is widely
used.
- When the insured depends on a single supplier or a few suppliers for
materials.
- When the insured depends on one or a few manufacturers or suppliers
for most of its merchandise.
- When the insured depends on one or a few recipient businesses to
purchase the bulk of the insured’s products.
- When the insured counts on a neighboring business to help attract
customers, known as a leader property.
CBI insurance can reimburse the policyholder in each of these situations,
covering the interruption in the insured’s business caused by a peril specified
in the policy causing physical damage or loss elsewhere. However, CBI coverage
does not protect against the interruption of the same insured’s company’s
business from damage to its own plants or third-party plants.
It is not necessary that the customer or supplier property be totally shut
down to cause a contingent business interruption loss to an insured. All that
is necessary is that an insured loss occurs at the type of location covered
under the policy and that the insured’s business be interrupted as a
result.
For example, the manufacturing of a supply of embedded microchips for an
insured might be partially interrupted by a fire at the suppliers’ plant. The
insured may be compelled to suspend production because it can’t obtain the
chips. Alternatively, it may be put on an allocation of product. In such a
case, the insured will have suffered a contingent business interruption loss,
even though the supplier has not been shut down.
Another scenario would be when a fire may close the chip plant completely,
but the insured has either ample supply or an alternative supplier and may not
be affected or only slightly impacted. In this situation, there may be no
contingent business interruption loss, unless the insured cannot find another
supplier or has to pay a premium to the new supplier. This scenario could lead
into contingent extra expense or CBI in an attempt to avert a business
interruption loss.
A good technique that can be used to determine whether CBI coverage applies
is to consider the contingent business interruption chain rule.
An Example
In the event of:
- Physical damage to property of a type insured under the insured’s
policy
- To a supplier or customer’s property, either specified or
blanket
- By a peril covered under the insured’s policy
- Which causes an interruption to the insured’s business operation
Then the policy covers:
- The business interruption loss under the provisions of the insured’s
business interruption policy,
- For the defined indemnity period.
The Contingent Business Interruption Chain Rule
It is important to know what CBI is not. CBI is not.
- Utility service interruption of an off-premises power
interruption
- Civil or military authority interruption
- Lack of ingress or egress interruption
- Interdependency or downstream business interruption, when damage at
an owned location causes a loss of revenue to another owned location
- Loss which results from a change in temperature due to damage to
heating or cooling equipment
Contingent extra expense is just that: extra expense coverage resulting from
a contingent loss.
Types of Policies Will Impact Coverages

Insurance policies must be reviewed in detail to determine how coverage
would impact any given loss situation. Policies will fall into three
categories: standard forms, such as forms from the Insurance Services Office,
Inc. (ISO), company forms, and finally broker or manuscript forms. Most Fortune
1000 companies will have either a company or manuscript form; with the ISO form
occurring most often with middle market or small businesses. Generally,
coverage is broader in company forms than ISO forms and even more comprehensive
with broker or manuscript forms. Coverage under CBI endorsements is provided
during the "period of restoration," which is the time it
"should" take the dependent property to affect repairs or restoration
"with reasonable speed and similar quality" and resume normal
operation. However, because the premises that have been damaged are beyond the
insured’s direct control, this presents something of a quandary for both
insurer and insured. Access to the damaged property is often not available,
thus the insurer has difficulty determining what the reasonable time for
restoration should be. The insured may find itself penalized by decisions of a
supplier that decides to improve, move operations, or otherwise delay repairs.
Further, the period of restoration does not include any additional time it
takes the insured to resume normal operations after the dependent location has
resumed its normal operations.
Typically, the form will include a "time deductible" in that the
"period of restoration"begins a specified number of hours after the
time of direct physical loss or damage resulting from any covered cause of loss
at the premises of the dependent property. The "period of
restoration" generally does not include any increased period required due
to the enforcement of any ordinance or law governing repair, reconstruction, or
pollution testing or cleanup. The expiration of the policy does not cut short
the period of restoration. Some other interesting considerations are that more
recent policies contain CBI coverage that covers loss resulting from damage to
property owned by others that are not suppliers, similar to the
"attractor" coverage cited previously, or that may cover damage to
property owned or operated by the insured which is not insured in the
policy.
It is generally found that the broader and less restrictive wording in the
manuscript forms, as compared to the ISO forms, tends to eliminate the specific
naming of contingencies, does not constrain the indemnity period or apply a
time based deductible. While wording may become more restrictive after
September 11, it is important that companies’ key contingencies are not
excluded from the policy. An in-depth look at an insured’s operations will be
necessary to consider wide reaching contingencies.

Oftentimes, contingencies may not be a function of a third party but of an
insured’s own operations. For instance, companies that maintain massive data
processing operations must consider a practicable long-term switch to an
alternative system should the data processing unit suffer from a physical loss.
If the data processing unit is owned and operated by the insured company, it
will not fall under the CBI coverage but rather traditional property and
business interruption (BI).
As a result of September 11, many companies are looking to ensure some form
of triangulated back-up system. The term triangulation refers to three
reference points or three support points. Triangulation is often used to
pinpoint the geographic location of a radio transmission or a cellular phone
user. Contingency plans that are triangulated will ensure that at least three
systems (power, water, communication) are not separate in their grid or supply
location to the site.
Litigation and Contingent Claim Challenges of September 11
Historically there are only a few cases that have been decided under a
contingent business interruption clause. In Archer-Daniels-Midland Co. v Phoenix Assur. Co.,
936 F Supp 534, (July 17, 1996), ADM sought coverage for increased raw
materials and transportation costs due to the flooding of the Mississippi River
and the resulting crop damage. The federal district court ruled that Midwest
farmers and the U.S. government were suppliers of goods and services to ADM.
Thus, ADM was entitled to coverage when flooding prevented those suppliers from
supplying the company with necessary raw materials and transportation services.
The losses from September 11 will likely result in some form of litigation
arising from CBI coverage.

Contingent claims from September 11 include damage at an attraction property
(World Trade Center) and damage to a variety of businesses and industries that
collectively include both suppliers and customers. Further, claims may also
include losses as a result of other policy endorsements such as:
ingress/egress, civil authority, and service interruption. Many of these losses
lack a tangible link to any property damage at the insured’s premises. These
less tangible loss areas could be a great challenge for the adjuster because
they potentially represent areas of increased subjectivity and scrutiny due to
information that may not be available to the company (policyholder). Yet,
adjusters will be looking for the greatest level of detail to document their
claim analysis to the insurance company.
The most obvious difference between a CBI claim and a BI claim is that an
insured is not dealing with damage to its facility and will not be handling a
property damage claim. However, the documentation requirements for a CBI
usually end up being more voluminous than a typical BI claim. The increased
documentation is a result of the analysis and documentation that may have to be
completed and compiled to identify the loss impact of an event outside of the
insured’s core business and company records. Ironically, these documentation
requirements are not discussed in any policies.
Further, policies emphasize that the policyholder will make available their
internal books and records and do not discuss information that is outside of
the insured’s organization. You need to go beyond the policy to properly
document a claim for the insurance company and its representations. (See
"Beyond
the Policy: Documenting a Business Interruption Claim.") This endless
search for documents that may or may not exist can cause great angst to the
policyholder. To avoid a battle over documents, the policyholder should take on
the responsibility to document the claim as completely as possible in order to
communicate an effective and reasonable claim calculation to the adjuster.
Getting These Ideas To Work for You
Establishing a plan to quantify the claim in compliance with the policy will
be paramount to obtaining a fair settlement. Look to identify a claim
preparation and claim management leader on your team who can champion the
effort for your company in an independent and skeptical way that can help you
expedite settlement. (See "The
Shakleton Approach:Effective Leadership Throughout the Claims
Process.") The firm you choose should be independent from your
insurance company and their agents, and one that will be engaged by your
company.

It is important for the risk manager to consider and be ready for the four
key elements to successfully handling a CBI claim. First, you must identify and
understand the impact of other business on your operations.

Second, plan for such events by having a business continuity plan. Third,
consider the need for CBI insurance and incorporate the correct policy wording
and limits for your circumstances. Finally, should a CBI event impact your
company, be prepared to spend the extra time and effort to identify all the
potential areas of loss and document them effectively.