
The insurance industry is watching closely as Japan’s southern region gets hit with a historic deluge of rain. Weather experts are predicting record rainfall, unlike anything the region has ever experienced. Businesses and residents have been ordered to evacuate the area, and already more than 1 million people have been displaced in anticipation of, and as a response to the storm. As a result of this event, business owners and risk managers may need to trigger their business interruption insurance coverage to recover lost income related to this event.
Below are a few issues to consider:
- Property damage leading to business interruption. The most common way to trigger business interruption coverage is
to connect property damage to lost income. If the rain leads to mudslides (which already have been reported in certain areas), and thosemudslides cause physical damage to insured property, then the incomelost resulting from that damage would be covered by the typicalbusiness interruption policy. - Sue & Labor.
In more sophisticated property policies, an insured business canseek reimbursement for the necessary and reasonable preventative measuresit took to either avoid or mitigate a loss. For example, if a Japanese business set up sandbags alongits property’s perimeter to keep from flooding, or removed its equipment or machinery to avoid water damage in anticipation ofthis event , the expenses associated with those measures could be recovered underits property policy. It is important to note that even if thishypothetical property never sustained the expected damage, a “sue & labor” provision could still provide an avenue for recovery of these expenses. This provision is meant to encourage insuredsto protect and preserve its property, as long as those steps arereasonable in light of the pending event. - Civil Authority. Mandatory evacuation orders have been issued by Japan’s local
governing bodies . These orders or mandates could trigger coverage underthe property policy’s “Civil Authority” coverage. Under such as provision, a businessthat demonstrates lost income resulting from the evacuation orderscan recover those losses, generally for a specific period of time (normally 30, 60 or 90 days). Nuances in the language of this provision can change, alter or preclude recovery, so take time with aninsurance professional in evaluating the likelihood that a claim pursuant tothis provision can be supported. - Ingress & Egress. Another common provision that a policyholder can use to support a business interruption claim in these circumstances is the “Ingress/Egress” provision. Many property policies contain a provision that permits a claim when
access to insured property is prohibited, causing income losses. Again,these provisions vary by policy and the differences in policy language can significantly impact a business owner’s ability to recover.For example , terms such as “prohibited” or “prevented” carry muchmore definitive requirements than “hindered” or “impaired”. Thelatter examples are much more favorable to an insured, anda business would only need to show, for example, that customers had difficulty accessing the insured location, and opposed to actually being “prevented” from that access. - Contingent Business Interruption (“CBI”).
Even though the event is occurring thousands of miles away from the US mainland, multinational businesses that have key suppliers or customers in the rainfall region are watching closely to determine if theyare suffering income losses due to the event. CBI provides coverage notfor damage to owned property, but rather for income losses sustained asthe result of damage to property of others, such as key suppliers and/or customers of the insured upon whichthe insured’s business “depends” to conduct its business. For example, should a US-based retailer depend upon a manufacturer located inJapan’s southern region, and that manufacturer’s property is damaged causing an interruption in its production, the US companywill likely suffer an impact to its revenue because of the disruptionin production . CBI would provide the US company with coverage for thelost income related to the Japanese manufacturer’s property damage. Similarly, if a key customer cannot takeor accept a US-based provider of goods or services because thatcustomer’s property was damaged in this rain event, the US company can also make a claim for the income loss resulting therefrom under the CBI provision.
These are a few examples of the terms and conditions that can be relied upon to offset income losses related to this historic event in Japan. We encourage all risk managers and business owners with any business in Japan to review its policy with
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