Business Interruption Insurance Claims Likely Triggered By Japan’s Historic Rainfall

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:

1. 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 those mudslides cause physical damage to insured property, then the income lost resulting from that damage would be covered by the typical business interruption policy.
2. Sue & Labor. In more sophisticated property policies, an insured business can seek reimbursement for the necessary and reasonable preventative measures it took to either avoid or mitigate a loss. For example, if a Japanese business set up sandbags along its property’s perimeter to keep from flooding, or removed its equipment or machinery to avoid water damage in anticipation of this event, the expenses associated with those measures could be recovered under its property policy. It is important to note that even if this hypothetical 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 insureds to protect and preserve its property, as long as those steps are reasonable in light of the pending event.
3. Civil Authority. Mandatory evacuation orders have been issued by Japan’s local governing bodies. These orders or mandates could trigger coverage under the property policy’s “Civil Authority” coverage. Under such as provision, a business that demonstrates lost income resulting from the evacuation orders can 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 an insurance professional in evaluating the likelihood that a claim pursuant to this provision can be supported.
4. 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 much more definitive requirements than “hindered” or “impaired”. The latter examples are much more favorable to an insured, and a 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.
5. 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 they are suffering income losses due to the event. CBI provides coverage not for damage to owned property, but rather for income losses sustained as the result of damage to property of others, such as key suppliers and/or customers of the insured upon which the insured’s business “depends” to conduct its business. For example, should a US-based retailer depend upon a manufacturer located in Japan’s southern region, and that manufacturer’s property is damaged causing an interruption in its production, the US company will likely suffer an impact to its revenue because of the disruption in production. CBI would provide the US company with coverage for the lost income related to the Japanese manufacturer’s property damage. Similarly, if a key customer cannot take or accept a US-based provider of goods or services because that customer’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 an insurance or claim professional to determine the nature and extent of coverage that might be available.

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