As businesses and insurers sort out the impacts of Hurricane Harvey, it will take time to assess the physical damage and resulting business interruption losses. Invariably, however, business interruption impacts from Harvey will not just be felt along the Texas Gulf Coast. Texas’ significant refining, chemical and petrochemical facilities supply critical products to businesses throughout the U.S. and abroad (and to each other). To the extent that those supplies are disrupted, businesses located far from the Lone Star State may choose to assert contingent business interruption (“CBI”) claims under their own first-party property policies.
For example, there are media reports that the “world’s most important chemical” — ethylene — will be in severe shortage in the coming weeks and months. (See “Hurricane Harvey has Endangered the Supply of the World’s Most Important Chemical”). As discussed in the article, ethylene is “one of the most basic chemical building blocks” used to make plastics. It is the “key ingredient” in manufacturing of garbage bags, food packaging, antifreeze, polyester, vinyl products, mattresses, PVC pipes, medical devices, shoe soles, foam insulation, plastic car parts, tires, house paints and even chewing gum. Ethylene and its derivatives account for about 40 percent of global chemical sales.
Hurricane Harvey shut down, at least temporarily, almost all of Texas’s ethylene plants — which account for 61 percent of the United States’ ethylene capacity. The United States accounts for 20 percent of the world’s ethylene production. More than half of that production has been interrupted in a market already at high demand.
An ethylene shortage could significantly impact manufacturers based in Hoboken, Detroit, New York, Chicago, Nashville or elsewhere. The extent to which first party policies respond to CBI claims from disruptions of this type depends, of course, on the particular facts of the loss and the policy language. But there are some general principles that typically apply.
CBI Coverage Defined
Most commercial property insureds purchase some form of business interruption (aka time element) coverage. This type of coverage is generally intended to provide protection to the insured from disruptions in business due to covered physical loss or damage to the insured’s property. In effect, this coverage supplements the insured’s lost income while its property is being repaired, rebuilt or replaced: “the purpose of a business interruption policy is to indemnify the insured for loss caused by the interruption of a going business due to the destruction of the building, plant or parts thereof.” Quality Oilfield Prods. Inc. v. Michigan Mut. Insurance Co., 971 S.W.2d 635, 638 (Tex. App.—Houston [14th Dist.] 1998, no pet.) (citation omitted).
CBI insurance is a form of business interruption coverage that does not require physical loss or damage to the insured’s property. Rather, CBI insures against a business income loss caused by damage to the property of the insured’s customers or suppliers. A typical CBI provision provides coverage for:
This policy ... is extended to cover the actual loss sustained by the Insured resulting from the necessary interruption of the business conducted by the Insured, whether partial or total, caused by loss, damage or destruction covered herein ... to:
Property that directly or indirectly prevents a supplier of goods, services or information to the Insured from rendering their goods, services or information or property that directly or indirectly prevents a receiver of goods, services or information from the Insured from accepting or receiving the Insured’s goods, services or information.
Under this language, and using the ethylene shortage as an example, if damage to an ethylene supplier’s...
