Whodunit? The Enigma of Japanese Disaster Claims
Adjusters will have to dig deep into the details of the catastrophe to determine what actually caused business interruption, supply chain disruptions and other business income events.
The tragic events of March 11, 2011, will probably generate a host of insurance claims by large American corporations that have Japanese property or that do business with Japanese customers and suppliers. For claims professionals, this means navigating a range of complex issues surrounding this catastrophe.
Property Damage and Time Element Claims
Most American insurers have a relatively small Japanese property/casualty book. Ninety percent of Japanese P&C business is insured by three large domestic groups: MS&AD, Tokio Marine, and NKSJ, all of which are reinsured by a Japanese captive that is backstopped by the Japanese government. American companies with Japanese operations may insure those local operations and property under local Japanese policies as well as under master policies or other international policies.
But even those carriers that do not directly insure property located in Japan are certain to see claims from policyholders under the contingent business interruption (CBI) portion of their commercial property policies.
A good many claims asserted by American business partners of Japanese suppliers will be the result of supply chain disruptions—blackouts and other power grid problems as well as difficulties experienced by the Japanese company in securing the transportation, water and raw materials necessary to continue to do business with American customers. Many such claims will also involve situations in which neither the American policyholder nor its Japanese supplier experienced direct physical loss or damage on March 11. In such situations, claims professionals will have to determine to what extent there is coverage under the terms and conditions of the insurance contract at issue.
Bedeviled by the Details
Presumably, U.S. policyholders with a stake in Japan have an all-risk first-party policy with business interruption and extra expense coverage, as well as coverage for losses from earthquake and flood (a nuclear reaction/radiation-related loss would almost certainly be excluded). Insureds would also likely have sue and labor coverage and extensions of coverage for CBI losses, as well as losses caused by service interruption, orders of civil authority and ingress/egress restrictions.
Even with that set of underlying assumptions, however, CBI claims from the Japanese catastrophe will be enormously complex. Adjusters will be grappling with a process of events and an array of destructive forces that make it somewhat unclear which peril is actually to blame for losses. It may be agreed that a port was shut down, but was it due to a covered peril—maybe flood—or a non-covered peril, such as nuclear contamination. Further complicating matters, in many cases businesses were originally closed because of power supply problems but are now shut or underperforming because of government restrictions in their area due to radiation. Does the policy cover one and not the other cause of loss?
The key question for claims professionals evaluating a CBI claim will be what factors are actually driving the disruption of the insured's business operations. Damage to dependent business property by a covered peril is not sufficient by itself to trigger CBI coverage—damage to dependent property must be the cause of the disruption of the insured's operations. These claims will test how far down the supply chain insurance goes.
There were many factors beyond direct damage from the earthquake or tsunami that wreaked havoc on Japanese businesses and their downstream clientele. Some may have been exposed to radiation from the Fukushima Dai-Ichi plant or are within the evacuation zone imposed around the plant. Electricity loss from the Dai-Ichi plant and shutdowns of other Japanese nuclear power plants along the coast have resulted in electrical blackouts and rolling brownouts throughout Japan. Ports and other transportation facilities that are needed to ship goods to and from Japan, or to facilitate operations inside Japan, were also impacted by disaster. Additionally, disruptions to the transportation systems and electrical grid may have resulted from orders of civil authority. The human toll also had an impact on the ability of Japanese businesses to function at capacity. Thousands died during the earthquake and tsunami, and hundreds of thousands were displaced and unable to work while caring for their families and responding to their own losses. This loss of human capital may be the principal cause of disruption at many businesses.
Adding to the complexity, policyholders may argue that extensions of business income coverage, such as civil authority or loss of utilities, also act to expand the scope of CBI coverage—even for claims under CBI provisions that are expressly limited to losses caused by damage to property of dependent businesses. Policy language is going to be scrutinized by policyholders, and plaintiffs' lawyers might see a host of opportunities to challenge denials. Pre-empting bad-faith claims will have to be high on the list of considerations with each claim action. Insurers need to make some top-down decisions now to defend acceptances and denials of claims. Even then, carriers should prepare for legal action as the depths of the causal links to business income losses are plumbed.
Richard M. Mackowsky is a member of Cozen O'Connor's Global Insurance Group representing insurers in high-profile litigation involving major catastrophes, including the 9/11 terrorist attack and Hurricane Katrina. firstname.lastname@example.org
For Cozen O'Connor's white paper on the Japan earthquake and tsunami, visit http://www.cozen.com/admin/files/publications/Japan_WhitePaper.pdf.