Massive explosions occurred at a warehouse in Tianjin, China, in August 2015, that left hundreds of people dead or injured and destroyed much of the city’s port facilities.  Tianjin is located in the industrial north of China and is a critical transit point for many global industries, including electronics, automotive, aerospace, petrochemicals and manufacturing equipment.  Like the 2011 tsunami and earthquake in Japan, this event is already causing significant cancellations and delays of international product shipments, many of which are extremely time-sensitive in nature.  Your company may have insurance coverage for losses resulting from such supply chain disruptions, even though the explosions damaged none of your company’s property, or your property is not even located in China. 

Contingent Business Interruption Coverage

First-party insurance policies typically contain Contingent Business Interruption (CBI) coverage.  Although the policy language can vary significantly, CBI coverage usually means that if an unforeseen incident, such as a fire, explosion, earthquake or extreme weather event, causes property damage that prevents a customer from buying the company’s goods, or a supplier from delivering product to the company, the insurer will indemnify the company for the resulting economic loss.  The company’s own property need not be damaged by the unforeseen incident.  Most policies even provide coverage if the customer or supplier is only partially prevented from doing business with the company. 

Coverage Issues

There are conflicting opinions in the caselaw concerning whether a “supplier,” for purposes of CBI coverage, must be a direct supplier of goods or services to the company, or can be an indirect one.  The same issue exists with respect to whether a company’s “customer” is direct or indirect in nature.  In many policies, the coverage wording specifically encompasses both types of suppliers and customers. 

Another question is the level of proof required to show that the unforeseen incident was the cause of the company’s economic losses.  Many policies contain expansive language that provides coverage if the unforeseen incident “directly or indirectly” caused the losses.  Nevertheless, disputes with the insurer about the “real” cause of the company’s economic losses are likely to arise. 

A less obvious coverage issue is whether the unforeseen incident must damage property owned by the supplier or customer in question.  In some cases, an unforeseen incident might only damage property owned by a more remote supplier to the supplier to the company, or it might only damage property owned by a supplier to a customer of the company.  The specific wording of some policies bars coverage where the only property damage is sustained by such second-tier or third-tier suppliers or customers.  However, the wording of many other policies does not.  In most jurisdictions, any ambiguity on this point should be construed in favor of coverage. 

Conclusion

If your company has suffered business losses because of shipment cancellations or delays that are attributable, directly or indirectly, to the Tianjin port explosions, it is important to have coverage counsel examine your insurance policies, to give notice promptly under those policies and to put in place accounting procedures that will accurately track your company’s losses.  Contact counsel experienced in insurance recovery to help you evaluate coverage under your policies and maximize your recovery.   

© 2015 Perkins Coie LLP