How to Assess Business Interruption After FSK Bridge Collapse

How to Assess Business Interruption After FSK Bridge Collapse

June 05, 2024

Note: Originally presented via webinar alongside Michael Levine of Hunton Andrews Kurth LLP

When the Francis Scott Key (FSK) Bridge collapsed on March 26, 2024, and closed off the Port of Baltimore, disruptions reverberated among global businesses. As one of the top 20 busiest ports in the U.S., the Port of Baltimore saw a total import/export value of $81 billion in 2023.

The bridge collapse has prompted a flurry of claims, particularly in commercial property and business interruption insurance. Businesses striving to recover from the aftermath of the bridge collapse will need to navigate the intricacies of insurance claims, which are likely to involve a variety of time element-based coverages.

A Primer to Time Element Insurance Coverage

Companies that hold contingent business interruption (CBI) coverage through commercial property insurance may seek to recover policy proceeds following the bridge collapse. CBI serves to protect them against lost profits stemming from disruptions caused by damage occurring away from the insured property, such as disruptions due to the collapse of the bridge or shipping delays to and from the Port of Baltimore. 

CBI Coverage Policies

CBI coverage is commonly found within comprehensive “all risk” commercial property insurance policies, providing broad protection against a wide range of perils and events. Since it protects lost profits caused by disruption resulting from damage away from insured property, CBI coverage extends to losses resulting from covered causes of damage that impact suppliers, customers, logistics, and transportation providers vital to the insured’s operations.

For CBI coverage to apply, the disruption must stem from a peril covered under the insurance policy. The scope of CBI coverage encompasses disruptions affecting not only direct suppliers and customers but also entities crucial to the insured’s supply chain and distribution network.

Policy language varies, often delineating the extent of coverage based on the proximity of the disrupted entity to the insured property. Certain policies stipulate a direct relationship between the disrupted entity and the insured property for coverage to apply. Others extend coverage to “suppliers of suppliers” and others even further. 

In addition to CBI coverage, commercial property insurance may include various other business interruption-related coverages, such as ingress/egress, where coverage is the determination of whether access to the insured property has been severely impacted, thereby justifying coverage for business interruption losses.

Supply Chain Coverage

While CBI coverage addresses disruptions stemming from damage to third-party entities, supply chain insurance offers a distinct form of coverage focusing on the broader supply chain ecosystem.

Unlike CBI coverage, supply chain insurance does not always necessitate physical loss or damage to trigger coverage, expanding protection to losses resulting from supply chain disruptions. Any interruption in the supply chain could lead to an insured loss: This coverage acknowledges the interconnected nature of modern supply chains, where disruptions at any point can reverberate downstream, impacting insured businesses.

Extra Expense Coverage

Extra expense coverage reimburses businesses for expenses incurred to continue operations as near to normal as practicable in the wake of a covered loss. However, some policies impose qualifiers on extra expense coverage, limiting reimbursement to expenses that do not exceed the amount of loss otherwise payable as business interruption loss.

What to Consider When Measuring Business Interruption

Was revenue lost, or just delayed? 

Businesses may experience a temporary interruption in revenue generation during the indemnity period, but post-recovery, business activities may resume, and revenue streams may return to normal levels. 

As such, the concept of delayed revenue raises questions: Does revenue deferred during the interruption period forego future sales? Is it merely postponed, or is it truly lost forever?

The challenge lies in determining whether revenue generated post-recovery effectively mitigates business interruption losses incurred during the interruption period or if there are enduring impacts on future revenue streams.

Does the performance of other insured facilities impact the business interruption claim?

Interdependency plays a significant role in business interruption measurement, particularly in scenarios where businesses operate multiple facilities or rely on interconnected supply chains. For example, if a company has facilities in both the Port of Baltimore and another port, the performance of the unaffected facility may impact the overall business interruption claim. 

For example, if the unaffected facility experiences increased business demand due to the disruption at the Port of Baltimore, it may partially offset the business interruption losses incurred at the affected facility. Understanding these interdependencies is essential for accurately quantifying business interruption losses and determining the extent of coverage under insurance policies.

Does a change in market conditions after the loss affect business interruption quantification?

Economic and market factors are particularly relevant in industries sensitive to commodity prices and market fluctuations. For businesses dealing with commodities such as gas, sugar, or coffee, changes in market conditions can significantly impact revenue streams. 

Companies should often assess whether the loss of revenue is solely attributable to the interruption at the Port of Baltimore or if other economic factors contributed to the decline. Understanding the causative factors behind changes in market conditions enables businesses to accurately quantify business interruption losses and present compelling claims to insurers.

Four Quick Tips for Recovery

1.  Understand your risk and review policies.

Take the time to thoroughly understand your insurance policies and the extent of coverage they provide. Discuss any uncertainties or questions with your insurance broker and seek guidance from coverage counsel if necessary.

Additionally, ensure clarity regarding the scope of coverage for various types of losses, including property damage, business interruption, and liability claims.

2.  Notify your insurer promptly.

Identify all potentially responsible insurance policies that may provide coverage for losses resulting from the FSK Bridge collapse. Give prompt notice to your insurers if you believe you have a claim. Failure to notify insurers promptly could jeopardize your ability to secure coverage for losses incurred.

3.  Track costs. 

Keep meticulous records of all expenses incurred in response to the event, including costs associated with mitigating damages, temporary relocation, and business interruption.

Collect and safeguard all relevant documentation to support your insurance claims, including financial records, sales orders, civil authority orders, cancelled orders, and force majeure notices.

4.  Look forward. 

Evaluate your business’ dependency on upstream and downstream partners and suppliers. Understand how disruptions to your supply chain may impact your operations and financial performance.

Be transparent with supply chain data and communicate effectively with your insurers to ensure that your insurance coverage aligns with your specific risks and exposures.

Getting Assistance with Your Claim

Third-party claims assistance provides support to businesses as they navigate the landscape of insurance policies and claims procedures. From deciphering policy language to ensuring timely notification to insurers, knowledgeable assistance is essential for maximizing coverage and expediting the recovery process.