Even insureds who do not sustain any physical loss or damage from Hurricane Irma may suffer business income or extra expense losses if their suppliers’ or customers’ premises were damaged. These insureds may be able to recover for their business income and extra expense losses if they have contingent business interruption or contingent time element (hereinafter “CTE”) coverage.
In contrast to regular business interruption coverage—which applies only where there is physical damage to the insured’s own property—CTE coverage applies where an insured’s customer or supplier sustains physical damage to its property. CTE coverage does not apply unless there is actual physical damage to a supplier or customer location. In Southern Hospitality, Inc. v. Zurich American Insurance Co., 393 F.3d 1137 (10th Cir. 2004), for example, the insured, which managed a number of hotels that were highly dependent on air travel, sought CTE coverage after the 9/11 terrorist attacks. The court found no coverage because there was no damage at any customer or supplier location.
CTE coverage requires that the type of physical damage must be the same as insured under the insured’s policy. Similarly, CTE coverage generally requires that the physical loss or damage be to property of the type insured by the insured’s policy. Thus, if the customer or supplier’s property that sustained physical loss or damage was a type of property that was not covered by the insured’s own policy, CTE coverage does not apply. For example, in Weirton Steel Corp. Liquidating Trust v. Zurich Specialties London, Ltd., No. 5:07CV122, 2008 U.S. Dist. LEXIS 57215 (N.D. W. Va. July 28, 2008), the court found that CTE coverage did not apply where the supplier’s underground mine was damaged but the insured’s policy excluded coverage for underground mines.
Additionally, to recover under a CTE provision, the insured must prove that its business income loss was the direct result of damage to a particular supplier or customer. In County of Clark v. Factory Mut. Ins. Co., No CV-S-02-1258-KJD-RJJ, 2005 U.S. Dist. LEXIS 47574 (D. Nev. Mar. 28, 2005), for example, the destruction of an airline’s ticket office in the World Trade Center during the 9/11 attack did not cause the airport’s time element loss that it sustained when the airport closed after flights were grounded. Additionally, a generalized revenue shortfall after a catastrophic event alone is not sufficient to trigger CTE coverage. Thus, the court in Arthur Andersen LLP v. Federal Insurance Co., 3 A.3d 1279 (N.J. Super. Ct. App. Div. 2010) found that an accounting firm that could not identify any specific supplier or customer whose property was damaged during 9/11 terrorist attacks could not meet its burden of proving coverage “by merely showing a decline in income coupled with property damage.”
And for CTE coverage to exist, the entity sustaining physical loss or damage from Hurricane Irma must actually supply to or purchase goods or services from the insured. In Pentair, Inc. v. American Guarantee & Liability Insurance Co., 400 F.3d 613 (8th Cir. 2005), the court found that such an actual customer-supplier relationship was lacking. There, an earthquake struck Taiwan, disabling a utility company substation that provided electrical power to two Taiwanese factories that supplied parts to Pentair. Lacking electrical power, these two factories could not supply parts to Pentair. The court rejected Pentair’s argument that the Taiwanese utility company was one of Pentair’s “suppliers,” reasoning that it did not supply a product or service ultimately used by Pentair.
Some CTE provisions require that loss or damage be to a “direct” supplier or customer. There has been some debate about the meaning of “direct.” In Millennium Inorganic Chemicals Ltd. v. Nationals Union Fire Insurance Co., 744 F.3d 279 (4th Cir. 2014) the court, relying on the dictionary definition of “direct”—“proceeding from one point to another in time and space without deviation or interruption” and “transmitted back and forth without an intermediary”— found the term “direct” to be clear and unambiguous. There, the court found that a natural gas producer was not a direct supplier where the insured received the natural gas through an intermediary. Although in Park Electrochemical Corp. v. Continental Casualty Co., No. 04-CV-4916 (ENV)(ARL), 2011 U.S. Dist. LEXIS 16344 (E.D.N.Y. Feb. 18, 2011), the court found the term “direct” ambiguous in the cotext of whether a wholly-owned subsidiary—as opposed to an entity outside of the insured’s control—could be considered a “direct supplier.”
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