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Page 428 DEFENSE COUNSEL JOURNAL–October 2012opportunity exists for a company totransfer the risk of financial losses that donot arise from a physical loss.B. Bridging the GapIn light of the emerging globalsupply chain system, there is clearly amarket for transferring the risk offinancial losses that result from aninterruption of the supply chain that donot result from physical loss. As a result,carriers have begun underwriting TradeDisruption Insurance (TDI) coverage.TDI provides coverage for economicdamages that result from a disruption ofthe global supply chain. The intent is totransfer the risk of financial lossessustained by the policyholder in the eventof delay, or outright break, in the supplychain. While BI or even CBI coverage aregenerally triggered by an actual physicalloss, coverage under TDI is triggered bythe occurrence of a named peril.Pear Inc., who as a result of a floodin Vietnam was required to find anothermanufacturer to maintain production andsales, incurred increased production costsfor the twelve months it took to repair theroads to and from the Vietnam plant.Under TDI, Pear could seekreimbursement of these increased costsand any resulting lost profits to the extentthis peril was covered under the policy.C. The Interplay Between BI andTDIUnderstanding the interplay betweenBI and TDI is key to properly assessingvulnerability to an interruption in theglobal supply system and properlytransferring risk. Consider some recentexamples:Country Peril BI TDIJapan ChibaRefinery Fire– loss of oilYes NoIvory CoastUkraineEgypt/LibyaIcelandSemi-ConductorPlantDamaged –loss ofmanufacturedproductsSony –inability toship productssubsequent toearthquakePort closure– SendaiSanctions oncocoa cropsGrainembargoPoliticalupheaval –inability towork andemergencyevacuationsClosure of airspace –volcaniccloudYesNoNoNoNoNoNoNoYesYesYesYesYesYesA further example of the interplaybetween BI and TDI arises fromHurricane Mitch, which struck CentralAmerica in 1998 causing significantdamage. At that time, a multi-billiondollar fresh fruit and vegetable marketer’s
The Global Supply Chain Page 429sources for fresh goods were interrupteddue to damage caused by the hurricane.As the most powerful storm that year,Hurricane Mitch damaged theinfrastructure of Honduras, Guatemala,and Nicaragua.As a result, the marketer lost salesand incurred increased costs in findingalternative sources. The marketerdiscovered that its competitors hadcontingency plans that were moreadvanced and the competitors were ableto secure alternative supplies. Themarketer could not recover the economicdamages under a property policy as thephysical damage was to non-ownedassets. That said, the TDI policy coveredthe lost revenues and increased costs dueto the break in the supply chain.D. Interpretation of CoverageOptionsTo develop an insurance portfolioand those coverages required to properlytransfer risk to an insurer, one must alsoconsider how these policies have beeninterpreted.1. Business InterruptionInsuranceCourts have held the “[t]he purposeof business interruption insurance is toindemnify the insured against lossesarising from inability to continue normalbusiness operation and functions due tothe damage sustained as a result of thehazard insured against. . . . In otherwords, the goal is to preserve thecontinuity of the insured’s earnings.” 56Courts have made a distinctionbetween a partial shutdown and a mereslowdown or loss of productivity; theformer is generally covered, while thelatter is not. In Howard Stores v.Foremost, the insurer denied coverage fora business interruption claim that aroseout of water damage because there was nosuspension of business. 57 Thepolicyholder manufactured men’sclothing and sold the clothing at variousretail stores it owned. One of the storessustained water damage. The propertydamage claim was not disputed and waspaid by the insurer.The policyholder also submitted aclaim for business interruption. Theinsurer denied the claim on the basis thatthere was no business interruptionbecause the policyholder continued to dobusiness. The policyholder thenreformulated its claim and asserted thatsince it had to divert inventories fromsome of its other retail stores, thepolicyholder failed to meet projectedsales in all three stores. The court heldthat recovery was properly deniedbecause there was no suspension ofbusiness and an alleged adverse effect oncontinuing sales did not constitutebusiness interruption. 58Similarly, in Quality Oilfields, thecourt held “[I]n sum, after considering thepolicy as a whole and persuasive56 Howard Stores Corp. v. Foremost Ins. Co.,82 A.D.2d 398, 400-401 (N.Y. Sup. Ct. 1981);see also Quality Oilfield Prods. v. MichiganMut. Ins. Co., 971 S.W.2d 635 (Mich. App Ct.1998).57 See Howard Stores, 82 A.D.2d at 676.58 Id.
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