The tragic events in Japan serve as a reminder of how fragile our lives and societies are.  Businesses too can be fragile, and can be easily disrupted by events completely outside of our control.  That’s one of the rationales behind commercial insurance.

A little over a year ago, I wrote about the complexities and challenges of both purchasing, and making a claim on, business interruption insurance. (Business Interruption Coverage – 2/18/10)  Because many US companies will be either directly or indirectly affected by the devastation in Japan, this is a good time to revisit that topic.

US businesses that have operations in the affected area and who suffer a loss of income because their facility was damaged may be able to make a time-element / business interruption claim.  Check your policy, and if there is any doubt, ask your coverage counsel to review the policy as well.  As noted in my earlier article, business interruption claims are complicated at the best of times.  Insureds should not harm their own interests by failing to make a claim, or by making a claim late.  Not knowing what coverages you have is not a defense if your claim is time-barred.

Don’t expect insurers to be sympathetic to your loss.  No matter what they say in the advertising brochures, insurers are always reluctant to part with money.  So make sure you create/save/salvage every piece of documentation you can, as soon as you can.  Remember the burden of proof is on the insured to prove the magnitude of its loss.  Accounting records, budgets, invoices and receipts, inventory records, sales projections and payroll records are all relevant, and should be collected and saved.

Business interruption coverage is “non-standard”; that is, the wording varies from insurer to insurer, and even from policy to policy written by the same insurer.  This is another reason to get expert advice if you have questions as to what your policy covers.  Some policies limit the business interruption loss to lost income at the location where the physical damage occurred.  Others allow for “downstream” losses to be taken into account.  This means that if your facility that suffered the physical damage makes a component that is assembled into a finished product elsewhere, your loss is measured in terms of the value of the finished product that can’t be made and sold, not just on the value of the component.  Most policies also cover extra expense incurred in the restoration of operations.

US companies who have suppliers (but not their own facilities) in Japan that have been closed by the disaster may also have coverage from two independent sources.  First, their own business interruption policy may include contingent coverage – which provides coverage in the event that supplies are restricted because of a covered loss at the supplier’s premises.  Secondly, companies who are reliant on a supplier may have coverage if they are named as an “additional insured” on that supplier’s policy.  Good risk management practices always consider whether it is appropriate to be named as an additional insured on a supplier’s policy.  And if you are, you should always be supplied with a copy of that policy.  Given the degree of devastation in the area, no-one can count on getting any documentation from affected companies.  Again, read these policies carefully and make sure you understand the coverage.

Another area to consider is transit insurance – both marine and inland marine – for first party property coverage on products or components that were being shipped from your supplier either to you or to another facility.  Transit policies typically do not cover loss of income; however, these policies are also non-standard, and some carriers may offer that coverage separately.

And it must be remembered that all these coverages require a “covered cause of loss.”  It may not be clear yet whether the tsunami was a separate event from the earthquake.  Do the policies in question have earthquake coverage or flood exclusions?  What part is the nuclear power station situation playing in the overall loss?  These questions (and undoubtedly others) may not be answered for a long time.  But moving quickly now to document your loss may prove to be invaluable later.

Finally, as noted in my earlier article, insureds should get specialized accountants and coverage counsel involved in the claims process as early as possible.  These are typically difficult claims, and insureds need all the expert help they can get.  Naturally, insureds with operations in the affected area will be overwhelmed with trying to locate and safeguard their people and property.  However, not paying attention to these insurance issues could turn out to be very expensive omission.

As an aside, in December 2010 I also wrote about the continuing insurance “soft market.”  (The State of the Insurance Market – 12/07/10)  Was Japan the “big bang” event that some commentators thought would be required to change the market’s direction?  Certainly, it will be one of the largest losses in history.  While most of the primary insurers were probably local companies, the reinsurance market is international, and their financial health to some extent determines insurance rates globally.  This event will certainly affect their bottom line.  Early reports are that the Japanese market will definitely see a hardening.  However, at this point, it seems to be too early to predict what the ultimate effect on the soft US market will be.