Finding the Familiar in Contingent Coverage Provisions

Contingent business interruption insurance found in many commercial property contracts is business interruption insurance with a single modification: While business interruption is triggered by damage to property of the insured, which leads to an interruption of the insured's business, contingent business interruption is triggered by damage to the property of a specified third party (such as a supplier to the insured, or a receiver of the insured's goods or services), which leads to an interruption of the insured's business. Each of the other policy requirements for business interruption coverage ' e.g., that the damage arise from an insured peril, that there be a “necessary interruption” or suspension of the insured's business, that there be a compensable “actual loss,” etc. ' apply with equal force to a claim for contingent business interruption. The same is true of other forms of contingent coverage extending the time element provisions of a property insurance policy. For example, contingent extra expense incorporates the requirements found in the extra expense provision of the policy, save the one requirement that is explicitly altered ' ownership of the property damaged.

Brokers and insureds sometimes create controversies by failing to follow the bedrock principle that contingent coverage is predicated on the same requirements as the time element provision it operates to extend. Other questions that can arise concern the specific contours of the extension embodied in the contingent coverage provision ' i.e., does the third party entity that sustained property damage fall within one of the categories of third parties specified in the contingent provision? Disputes in both areas can be avoided by applying the predicate that each form of contingent coverage incorporates the requirements of the provision it extends, except to the extent that the contingent coverage specifically alters the requirement with respect to ownership of the property damaged.

Contingent Coverage Incorporates the Requirements of the Coverage It Extends

The concept of contingent coverage originally arose in the context of dependent ' but not fully integrated ' manufacturing concerns. For example, in a specialized supply chain, damage at the location of parts supplier X could easily result in a complete cessation of operations at manufacturer Y that depends on X's parts to create its finished product. For manufacturer Y to insure against the risk associated with such a cessation in its business, contingent business interruption was developed to extend the business interruption provisions that already existed in many commercial property insurance policies. And, as one United States Court of Appeals noted, contingent business interruption provisions have “doubtless become more common and significant as companies increasingly out-source component parts manufacturing and rely on so-called 'just in time' inventory systems.” Pentair, Inc. v. Am. Guar. & Liability Ins. Co., 400 F.3d 613, 615 (8th Cir. 2005).

In assessing contingent coverage, the court of appeals in Pentair suggested that “[t]he word 'contingent' is something of a misnomer; it simply means that the insured's business interruption loss resulted from damage to a third party's property.” Id. at 615, n.3. Though the Pentair court was correct (and succinct) in its assessment of how contingent coverage operates, the term “contingent” should not be dismissed as a mere “misnomer.” BLACK'S LAW DICTIONARY 315 (7th ed. 1999) defines “contingent” as “[d]ependent on something else; conditional.” That definition encapsulates two important concepts regarding contingent coverage: 1) it is “contingent” on insured physical loss or damage loss to a qualified third party's property; and, equally important, 2) contingent coverage is not a wholly independent grant of coverage, but is “contingent” on the coverage it is extending.

This latter concept is well recognized among professionals in the insurance industry familiar with the development and application of contingent coverages. For example, in the wake of the 9/11 terrorist attack, Marsh, one of the world's largest insurance brokers and risk advisors, published for its clients a review of property insurance issues that addressed contingent business interruption. See “The New Reality of Risk: A Report For Clients and Colleagues of Marsh on Risk-Related Topics Following the Events of September 11, 2001,” Property Coverage, 1:1, Oct. 5, 2001 at 3. Marsh describes contingent business interruption as an “exception” to the trigger for business interruption, i.e., an exception to the general rule that the insured must have “suffered direct physical loss or damage as a result of a covered cause of loss” in order to trigger business interruption coverage. Id. at 3 (emphasis in original). Similarly, Deloitte Financial Advisory Services LLP, a claims preparation group representing insureds nationwide, counsels that “[contingent business interruption] is the same in all respects as a business interruption claim, with one key difference: this aspect of a policy covers damage to a third-party asset that causes a loss of income to the policy holder for an insured peril.” Deloitte Financial Advisory Services LLP, Business Insurance Claims: Have You Read Between the Lines? (2007) at 2 (emphasis added).

Business Interruption Coverage

The question whether to treat a contingent business interruption provision as incorporating the requirements of the underlying business interruption coverage was addressed recently by the United States District Court for the Northern District of West Virginia in Weirton Steel Corp. Liquidating Trust v. Zurich Specialties London, Ltd., 2008 WL 2945493, Civil Action No. 5:07CV12 (N.D.W.Va. July 28, 2008). The insured, Weirton Steel, contested the denial of a claim it made as a result of disruption in its supply of coke, a fuel source for steel manufacturing derived from coal, when its main supplier, U.S. Steel, halted shipments following a series of explosions at its primary source of the product, Pinnacle Mine. Id. at *1. Weirton Steel submitted the claim under the contingent business interruption provision of its policies, which provided that the “Policy covers the Actual Loss Sustained and EXTRA EXPENSE incurred by the Insured during the PERIOD OF LIABILITY: 1) directly resulting from physical loss or damage of the type insured; and 2) to property of the type insured, at any locations of direct suppliers or customers located within the TERRITORY of this Policy.” Id. at *2. At first blush, the claim might appear to satisfy the requirements for coverage under the policy's contingent business interruption provision: Weirton Steel allegedly had sustained an interruption of its business as a result of physical damage to one of its direct suppliers. However, Weirton Steel's policy specifically excluded loss to certain categories of property, including underground mines. Id. at *3. The court was required to decide whether the contingent business interruption provision stood as an independent insuring provision, or incorporated the requirements of the policy read as a whole. Id. Reasoning that the contingent business interruption provision could “only have meaning in reference to another section of the Policy,” the district court held that the extension of coverage in the contingent business interruption provision was limited by the same restrictions as the underlying business interruption and property coverage. Id.

Extra Expense Coverage

The United States Court of Appeals for the Eighth Circuit applied a similar approach in assessing contingent coverage, putting each form of contingent coverage in its proper context by referencing the requirements of the policy provision it is extending. The Eighth Circuit touched on two forms of contingent coverage in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004): contingent business interruption and contingent extra expense. The appeal in Aon involved a claim by an insured against its broker for, inter alia, breach of contract for failing to secure specified coverage with one of the participating insurers in its insurance program, Id. at 853, but presented a threshold question for the Eighth Circuit: whether the insured, Archer Daniels Midland (“ADM”), was entitled to recovery for its underlying insurance claim. That underlying claim was made following severe flooding from the Mississippi River in 1993, which impacted crops and hindered the movement of cargo by barge on the river. Id. ADM sought recovery for extra expenses it incurred as a result of the flood's impact on farmers and the government entities operating the Mississippi River system. Id. Because ADM itself had not sustained property damage, its extra expense claim was presented under a “Contingent Business Interruption and Extra Expense” provision, which provided coverage for “loss of earnings and necessary extra expense resulting from necessary interruption of [ADM's] business ' caused by damage to or destruction of real or personal property, by the perils insured against under this policy, of any supplier of goods or services ' .” Id. at 852, n.1.

On appeal, Aon argued that no damages arose from its admitted negligence in failing to secure the quoted policy provision in each of ADM's property insurance policies because ADM's underlying claim for extra expenses did not satisfy the requirements for coverage. Id. at 854. Specifically, Aon contended that, although ADM had lost income and incurred additional expense following the flood damage, it never sustained a “necessary interruption of its business.” Id. Aon relied in significant part on cases addressing the “necessary interruption” requirement in the context of business interruption claims, and argued that the same requirement applied to ADM's contingent extra expense claim under the “Contingent Business Interruption and Extra Expense” provision at issue. Id. at 856-57. That argument failed to recognize that the contingent coverage always adopts the requirements of the coverage being extended. In this case, because ADM was making a contingent extra expense claim, not a contingent business interruption claim, the Eighth Circuit was required to look to the requirements of the extra expense provision, not the business interruption provision.

Specifically, in order to determine the extent of coverage under the “Contingent Business Interruption and Extra Expense” provision in Section 13Q of ADM's policy, the court of appeals turned to each of the two underlying time element coverage provisions, specifically Section 9 for business interruption and Section 10 for extra expense. Archer Daniels Midland Co., 356 F.3d at 855-56. In doing so, the court noted that even though there was a single contingent coverage provision at issue, Section 13Q of the policies, “[t]he loss of earnings and extra expense coverages provided by Section 13Q are separate and distinct, and … mirror the coverages provided in other sections of the policy.” Id. at 855. On the basis of that principle, the court reasoned that “[u]nlike Section 10, Section 9 specifically requires a suspension of operations before loss of earnings coverage can apply. The absence of a similar limitation in Section 10 is evidence of the parties' intent not to limit extra expense coverage in that manner.” Id. at 856. Thus, on its de novo review of the district court's ruling, the court of appeals found that the extra expense provision at issue in that case could not be read to require that ADM cease operations, and therefore that no such requirement was incorporated in the contingent extra expense coverage. Id. At the crux of this ruling was the logical conclusion that contingent forms of coverage are properly treated as extensions of the coverage they are extending, subject to the same scope and limitations except where explicitly modified.

In considering the question raised in Archer Daniels Midland, the Eighth Circuit Court of Appeals extended the precedent it first established in Altru Health System v. Am. Protection Ins. Co., 238 F.3d 961, 964 (8th Cir. 2001), which addressed whether a $1.5 million limit of liability for loss or damage from flood applied to the insured's recovery under another form of contingent coverage, a civil authority provision. In that case, the Eighth Circuit observed that, because the civil authority provision provided coverage “for losses 'from an interruption of business as covered hereunder,'” the policy “necessarily refers the insured to other policy provisions governing business interruption losses.” Id. (emphasis in original). Based on this reasoning, the court of appeals held that the limitation of coverage “to 'the peril(s) insured against,' ' requires analysis of covered perils and leads directly in this case to the Flood Coverage Section and its sublimit 'for losses resulting from any one Flood disaster.'” Id.

Developing this line of authority, the Eighth Circuit again returned to the question of contingent coverage in Pentair, Inc. v. Am. Guar. & Liability Ins. Co., 400 F.3d 613, 615 (8th Cir. 2005), considering a contingent extra expense claim. Pentair involved an earthquake in Taiwan, which disabled the electrical substation that provided power to factories that manufactured products for the insured, Pentair, Inc. Pentair, Inc., 400 F.3d at 614. After a two-week delay in production, Pentair incurred additional shipping costs in order to meet customer demand and then submitted an insurance claim for these costs under its contingent time element coverage. Id. That provision of Pentair's policies extended its time element coverages, including extra expense, to losses as a result of “'damage' to 'property of a supplier of goods and/or services to the Insured.'” Id. The district court concluded that the requirement in the policy's insuring provision, which limited insurance for property damage and business interruption to those losses arising from “direct physical loss or damage,” also applied to the contingent time element coverage. Id. Recognizing the consistent application of this principle by the Eighth Circuit, the insured did not challenge that point on appeal. Id. at 615. Taking as a given that the coverage limitation to “direct physical loss or damage” applied with equal force to contingent time element coverage, the Eighth Circuit affirmed the district court's conclusion that, because the two factories, Pentair's “supplier[s] of goods,” did not suffer “direct physical loss or damage,” the policy did not provide contingent time element coverage. Id. at 616.

Contingent Coverage Modifies, But Does Not Eliminate, Requirements

The Eighth Circuit's jurisprudence, as well as the more recent decisions, affirm the common sense conclusion that contingent coverages, which operate as an extension of a type of coverage found elsewhere in the policy, are subject to the same requirements and limitations as the coverage being extended. However, even where this principle is recognized, disputes may arise. For instance, contingent provisions specify certain third parties or categories of third parties (e.g., suppliers and/or receivers of the Insured's services) who sustain physical loss or damage of the type insured and, as a direct consequence, may give rise to a contingent claim insured under the contract. These circumstances require resolution of the question whether the entity experiencing physical loss or damage qualifies under the potential contingent categories. Two of the cases discussed above address such questions.

In Archer Daniels Midland, 356 F.3d 850, ADM's contingent extra expense claim was predicated on damage to property of farmers and the governmental entities that operated and maintained the Mississippi River system. The contingent coverage was triggered by damage to property “of any supplier of goods or services” to ADM. Id. at 852, n. 1. Although not at issue on appeal before the Eighth Circuit, the district court in the action against ADM's insurers had addressed whether the property damage to farmers selling indirectly to ADM through dealers as well as the governmental entities responsible for operating and maintaining transportation were “suppliers of goods or services” to ADM. Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F. Supp. 534, 543 (S.D. Ill. 1996). The district court, adopting an expansive view of coverage, held that: 1) the governmental entities were “suppliers” because ADM paid a “user charge” as compensation for the construction and maintenance of the Mississippi River system, id.; and 2) Midwestern farmers that sold to ADM through dealers were “suppliers” because the policy did not limit contingent coverage to damage only to suppliers in direct contractual privity. Id. at 544. Although the district court read the policy requirements loosely, it nevertheless conducted a close review of the facts regarding each alleged “supplier” to determine if the entities in question met those specific requirements. See Id. at 541-43 (discussing how the governmental entities' “improvements” to the Mississippi River system constituted a service and how governmental entities may serve dual functions as regulator and as market participant), and Id. at 543-44 (noting that, although 90% of grain purchased by ADM comes from resellers, “[t]he farmers may be an 'indirect' supplier of the grain, but they are a supplier nonetheless”).

In Pentair, the Eighth Circuit addressed the same question of whether the property damage identified as the basis for the contingent claim was within the scope of the contingent time element provision in the policy. In that case, the physical damage was to an electrical substation that provided power to one of Pentair's direct suppliers. Pentair, Inc., 400 F.3d at 614. The contingent coverage was triggered by “'damage' to 'property of a supplier of goods and/or services to the Insured' that is caused by a covered peril ' .” Id. The Eighth Circuit, in holding that the damaged substation was not a “supplier” of Pentair within the scope of the policy, distinguished the district court's decision in Archer-Daniels-Midland Co., 936 F.Supp. at 543, by noting that while the Midwestern farmers dealt indirectly with ADM through dealers, the product they sold was ultimately used by ADM; the electrical substation, on the other hand, did not supply a good or a service to Pentair. Id. at 615.

Conclusion

These two cases and outcomes highlight certain of the questions that may arise in determining whether the owner of the property damage identified as the basis for a contingent claim falls within one of the categories specified in the contingent coverage provision. While policy provisions will vary, in each instance the parties must carefully review the specific requirements and determine whether they are met by the claim presented, as the courts did in both Archer-Daniels-Midland, and Pentair. Contingent coverage does not extend indefinitely to the impact that damage to any third party's property may theoretically have on the insured's business.

Catherine Mondell is a partner at Ropes & Gray LLP, Boston, and has handled a wide range of complex insurance coverage disputes and other commercial litigation matters. She has litigated in multiple jurisdictions cases involving first-party property claims with substantial time element and contingent time element components. Seth Harrington is a litigation associate at the firm, with experience in both insurance and other commercial litigation.

Contingent business interruption insurance found in many commercial property contracts is business interruption insurance with a single modification: While business interruption is triggered by damage to property of the insured, which leads to an interruption of the insured's business, contingent business interruption is triggered by damage to the property of a specified third party (such as a supplier to the insured, or a receiver of the insured's goods or services), which leads to an interruption of the insured's business. Each of the other policy requirements for business interruption coverage ' e.g., that the damage arise from an insured peril, that there be a “necessary interruption” or suspension of the insured's business, that there be a compensable “actual loss,” etc. ' apply with equal force to a claim for contingent business interruption. The same is true of other forms of contingent coverage extending the time element provisions of a property insurance policy. For example, contingent extra expense incorporates the requirements found in the extra expense provision of the policy, save the one requirement that is explicitly altered ' ownership of the property damaged.

Brokers and insureds sometimes create controversies by failing to follow the bedrock principle that contingent coverage is predicated on the same requirements as the time element provision it operates to extend. Other questions that can arise concern the specific contours of the extension embodied in the contingent coverage provision ' i.e., does the third party entity that sustained property damage fall within one of the categories of third parties specified in the contingent provision? Disputes in both areas can be avoided by applying the predicate that each form of contingent coverage incorporates the requirements of the provision it extends, except to the extent that the contingent coverage specifically alters the requirement with respect to ownership of the property damaged.

Contingent Coverage Incorporates the Requirements of the Coverage It Extends

The concept of contingent coverage originally arose in the context of dependent ' but not fully integrated ' manufacturing concerns. For example, in a specialized supply chain, damage at the location of parts supplier X could easily result in a complete cessation of operations at manufacturer Y that depends on X's parts to create its finished product. For manufacturer Y to insure against the risk associated with such a cessation in its business, contingent business interruption was developed to extend the business interruption provisions that already existed in many commercial property insurance policies. And, as one United States Court of Appeals noted, contingent business interruption provisions have “doubtless become more common and significant as companies increasingly out-source component parts manufacturing and rely on so-called 'just in time' inventory systems.” Pentair, Inc. v. Am. Guar. & Liability Ins. Co. , 400 F.3d 613, 615 (8th Cir. 2005).

In assessing contingent coverage, the court of appeals in Pentair suggested that “[t]he word 'contingent' is something of a misnomer; it simply means that the insured's business interruption loss resulted from damage to a third party's property.” Id. at 615, n.3. Though the Pentair court was correct (and succinct) in its assessment of how contingent coverage operates, the term “contingent” should not be dismissed as a mere “misnomer.” BLACK'S LAW DICTIONARY 315 (7th ed. 1999) defines “contingent” as “[d]ependent on something else; conditional.” That definition encapsulates two important concepts regarding contingent coverage: 1) it is “contingent” on insured physical loss or damage loss to a qualified third party's property; and, equally important, 2) contingent coverage is not a wholly independent grant of coverage, but is “contingent” on the coverage it is extending.

This latter concept is well recognized among professionals in the insurance industry familiar with the development and application of contingent coverages. For example, in the wake of the 9/11 terrorist attack, Marsh, one of the world's largest insurance brokers and risk advisors, published for its clients a review of property insurance issues that addressed contingent business interruption. See “The New Reality of Risk: A Report For Clients and Colleagues of Marsh on Risk-Related Topics Following the Events of September 11, 2001,” Property Coverage, 1:1, Oct. 5, 2001 at 3. Marsh describes contingent business interruption as an “exception” to the trigger for business interruption, i.e., an exception to the general rule that the insured must have “suffered direct physical loss or damage as a result of a covered cause of loss” in order to trigger business interruption coverage. Id. at 3 (emphasis in original). Similarly, Deloitte Financial Advisory Services LLP, a claims preparation group representing insureds nationwide, counsels that “[contingent business interruption] is the same in all respects as a business interruption claim, with one key difference: this aspect of a policy covers damage to a third-party asset that causes a loss of income to the policy holder for an insured peril.” Deloitte Financial Advisory Services LLP, Business Insurance Claims: Have You Read Between the Lines? (2007) at 2 (emphasis added).

Business Interruption Coverage

The question whether to treat a contingent business interruption provision as incorporating the requirements of the underlying business interruption coverage was addressed recently by the United States District Court for the Northern District of West Virginia in Weirton Steel Corp. Liquidating Trust v. Zurich Specialties London, Ltd., 2008 WL 2945493, Civil Action No. 5:07CV12 (N.D.W.Va. July 28, 2008). The insured, Weirton Steel, contested the denial of a claim it made as a result of disruption in its supply of coke, a fuel source for steel manufacturing derived from coal, when its main supplier, U.S. Steel, halted shipments following a series of explosions at its primary source of the product, Pinnacle Mine. Id. at *1. Weirton Steel submitted the claim under the contingent business interruption provision of its policies, which provided that the “Policy covers the Actual Loss Sustained and EXTRA EXPENSE incurred by the Insured during the PERIOD OF LIABILITY: 1) directly resulting from physical loss or damage of the type insured; and 2) to property of the type insured, at any locations of direct suppliers or customers located within the TERRITORY of this Policy.” Id. at *2. At first blush, the claim might appear to satisfy the requirements for coverage under the policy's contingent business interruption provision: Weirton Steel allegedly had sustained an interruption of its business as a result of physical damage to one of its direct suppliers. However, Weirton Steel's policy specifically excluded loss to certain categories of property, including underground mines. Id. at *3. The court was required to decide whether the contingent business interruption provision stood as an independent insuring provision, or incorporated the requirements of the policy read as a whole. Id. Reasoning that the contingent business interruption provision could “only have meaning in reference to another section of the Policy,” the district court held that the extension of coverage in the contingent business interruption provision was limited by the same restrictions as the underlying business interruption and property coverage. Id.

Extra Expense Coverage

The United States Court of Appeals for the Eighth Circuit applied a similar approach in assessing contingent coverage, putting each form of contingent coverage in its proper context by referencing the requirements of the policy provision it is extending. The Eighth Circuit touched on two forms of contingent coverage in Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota , 356 F.3d 850 (8th Cir. 2004): contingent business interruption and contingent extra expense. The appeal in Aon involved a claim by an insured against its broker for, inter alia, breach of contract for failing to secure specified coverage with one of the participating insurers in its insurance program, Id. at 853, but presented a threshold question for the Eighth Circuit: whether the insured, Archer Daniels Midland (“ADM”), was entitled to recovery for its underlying insurance claim. That underlying claim was made following severe flooding from the Mississippi River in 1993, which impacted crops and hindered the movement of cargo by barge on the river. Id. ADM sought recovery for extra expenses it incurred as a result of the flood's impact on farmers and the government entities operating the Mississippi River system. Id. Because ADM itself had not sustained property damage, its extra expense claim was presented under a “Contingent Business Interruption and Extra Expense” provision, which provided coverage for “loss of earnings and necessary extra expense resulting from necessary interruption of [ADM's] business ' caused by damage to or destruction of real or personal property, by the perils insured against under this policy, of any supplier of goods or services ' .” Id. at 852, n.1.

On appeal, Aon argued that no damages arose from its admitted negligence in failing to secure the quoted policy provision in each of ADM's property insurance policies because ADM's underlying claim for extra expenses did not satisfy the requirements for coverage. Id. at 854. Specifically, Aon contended that, although ADM had lost income and incurred additional expense following the flood damage, it never sustained a “necessary interruption of its business.” Id. Aon relied in significant part on cases addressing the “necessary interruption” requirement in the context of business interruption claims, and argued that the same requirement applied to ADM's contingent extra expense claim under the “Contingent Business Interruption and Extra Expense” provision at issue. Id. at 856-57. That argument failed to recognize that the contingent coverage always adopts the requirements of the coverage being extended. In this case, because ADM was making a contingent extra expense claim, not a contingent business interruption claim, the Eighth Circuit was required to look to the requirements of the extra expense provision, not the business interruption provision.

Specifically, in order to determine the extent of coverage under the “Contingent Business Interruption and Extra Expense” provision in Section 13Q of ADM's policy, the court of appeals turned to each of the two underlying time element coverage provisions, specifically Section 9 for business interruption and Section 10 for extra expense. Archer Daniels Midland Co., 356 F.3d at 855-56. In doing so, the court noted that even though there was a single contingent coverage provision at issue, Section 13Q of the policies, “[t]he loss of earnings and extra expense coverages provided by Section 13Q are separate and distinct, and … mirror the coverages provided in other sections of the policy.” Id. at 855. On the basis of that principle, the court reasoned that “[u]nlike Section 10, Section 9 specifically requires a suspension of operations before loss of earnings coverage can apply. The absence of a similar limitation in Section 10 is evidence of the parties' intent not to limit extra expense coverage in that manner.” Id. at 856. Thus, on its de novo review of the district court's ruling, the court of appeals found that the extra expense provision at issue in that case could not be read to require that ADM cease operations, and therefore that no such requirement was incorporated in the contingent extra expense coverage. Id. At the crux of this ruling was the logical conclusion that contingent forms of coverage are properly treated as extensions of the coverage they are extending, subject to the same scope and limitations except where explicitly modified.

In considering the question raised in Archer Daniels Midland , the Eighth Circuit Court of Appeals extended the precedent it first established in Altru Health System v. Am. Protection Ins. Co. , 238 F.3d 961, 964 (8th Cir. 2001), which addressed whether a $1.5 million limit of liability for loss or damage from flood applied to the insured's recovery under another form of contingent coverage, a civil authority provision. In that case, the Eighth Circuit observed that, because the civil authority provision provided coverage “for losses 'from an interruption of business as covered hereunder,'” the policy “necessarily refers the insured to other policy provisions governing business interruption losses.” Id. (emphasis in original). Based on this reasoning, the court of appeals held that the limitation of coverage “to 'the peril(s) insured against,' ' requires analysis of covered perils and leads directly in this case to the Flood Coverage Section and its sublimit 'for losses resulting from any one Flood disaster.'” Id.

Developing this line of authority, the Eighth Circuit again returned to the question of contingent coverage in Pentair, Inc. v. Am. Guar. & Liability Ins. Co. , 400 F.3d 613, 615 (8th Cir. 2005), considering a contingent extra expense claim. Pentair involved an earthquake in Taiwan, which disabled the electrical substation that provided power to factories that manufactured products for the insured, Pentair, Inc. Pentair, Inc., 400 F.3d at 614. After a two-week delay in production, Pentair incurred additional shipping costs in order to meet customer demand and then submitted an insurance claim for these costs under its contingent time element coverage. Id. That provision of Pentair's policies extended its time element coverages, including extra expense, to losses as a result of “'damage' to 'property of a supplier of goods and/or services to the Insured.'” Id. The district court concluded that the requirement in the policy's insuring provision, which limited insurance for property damage and business interruption to those losses arising from “direct physical loss or damage,” also applied to the contingent time element coverage. Id. Recognizing the consistent application of this principle by the Eighth Circuit, the insured did not challenge that point on appeal. Id. at 615. Taking as a given that the coverage limitation to “direct physical loss or damage” applied with equal force to contingent time element coverage, the Eighth Circuit affirmed the district court's conclusion that, because the two factories, Pentair's “supplier[s] of goods,” did not suffer “direct physical loss or damage,” the policy did not provide contingent time element coverage. Id. at 616.

Contingent Coverage Modifies, But Does Not Eliminate, Requirements

The Eighth Circuit's jurisprudence, as well as the more recent decisions, affirm the common sense conclusion that contingent coverages, which operate as an extension of a type of coverage found elsewhere in the policy, are subject to the same requirements and limitations as the coverage being extended. However, even where this principle is recognized, disputes may arise. For instance, contingent provisions specify certain third parties or categories of third parties (e.g., suppliers and/or receivers of the Insured's services) who sustain physical loss or damage of the type insured and, as a direct consequence, may give rise to a contingent claim insured under the contract. These circumstances require resolution of the question whether the entity experiencing physical loss or damage qualifies under the potential contingent categories. Two of the cases discussed above address such questions.

In Archer Daniels Midland, 356 F.3d 850, ADM's contingent extra expense claim was predicated on damage to property of farmers and the governmental entities that operated and maintained the Mississippi River system. The contingent coverage was triggered by damage to property “of any supplier of goods or services” to ADM. Id. at 852, n. 1. Although not at issue on appeal before the Eighth Circuit, the district court in the action against ADM's insurers had addressed whether the property damage to farmers selling indirectly to ADM through dealers as well as the governmental entities responsible for operating and maintaining transportation were “suppliers of goods or services” to ADM. Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York , 936 F. Supp. 534, 543 (S.D. Ill. 1996). The district court, adopting an expansive view of coverage, held that: 1) the governmental entities were “suppliers” because ADM paid a “user charge” as compensation for the construction and maintenance of the Mississippi River system, id.; and 2) Midwestern farmers that sold to ADM through dealers were “suppliers” because the policy did not limit contingent coverage to damage only to suppliers in direct contractual privity. Id. at 544. Although the district court read the policy requirements loosely, it nevertheless conducted a close review of the facts regarding each alleged “supplier” to determine if the entities in question met those specific requirements. See Id. at 541-43 (discussing how the governmental entities' “improvements” to the Mississippi River system constituted a service and how governmental entities may serve dual functions as regulator and as market participant), and Id. at 543-44 (noting that, although 90% of grain purchased by ADM comes from resellers, “[t]he farmers may be an 'indirect' supplier of the grain, but they are a supplier nonetheless”).

In Pentair, the Eighth Circuit addressed the same question of whether the property damage identified as the basis for the contingent claim was within the scope of the contingent time element provision in the policy. In that case, the physical damage was to an electrical substation that provided power to one of Pentair's direct suppliers. Pentair, Inc., 400 F.3d at 614. The contingent coverage was triggered by “'damage' to 'property of a supplier of goods and/or services to the Insured' that is caused by a covered peril ' .” Id. The Eighth Circuit, in holding that the damaged substation was not a “supplier” of Pentair within the scope of the policy, distinguished the district court's decision in Archer-Daniels-Midland Co., 936 F.Supp. at 543, by noting that while the Midwestern farmers dealt indirectly with ADM through dealers, the product they sold was ultimately used by ADM; the electrical substation, on the other hand, did not supply a good or a service to Pentair. Id. at 615.

Conclusion

These two cases and outcomes highlight certain of the questions that may arise in determining whether the owner of the property damage identified as the basis for a contingent claim falls within one of the categories specified in the contingent coverage provision. While policy provisions will vary, in each instance the parties must carefully review the specific requirements and determine whether they are met by the claim presented, as the courts did in both Archer-Daniels-Midland, and Pentair. Contingent coverage does not extend indefinitely to the impact that damage to any third party's property may theoretically have on the insured's business.

Catherine Mondell is a partner at Ropes & Gray LLP, Boston, and has handled a wide range of complex insurance coverage disputes and other commercial litigation matters. She has litigated in multiple jurisdictions cases involving first-party property claims with substantial time element and contingent time element components. Seth Harrington is a litigation associate at the firm, with experience in both insurance and other commercial litigation.