Hurricane Sandy was a major event that caused companies in all sectors to incur direct property damage and massive losses because of interrupted business operations. The direct costs of the storm have been estimated at as much as $20 billion for property damage and $10-30 billion more for lost profits deriving from business interruptions. What has been less widely discussed, though, is that companies well outside of the directly affected areas may lose millions of dollars in profits because they cannot deliver their products to customers in the affected area. This problem is particularly acute for food companies, where products may have short shelf lives and regular delivery schedules.
For example, media articles have stated that supermarkets in affected areas now are reopening, but that deliveries of food supplies have been interrupted and many consumers have been unable to get to supermarkets that are open. Still, many other stores remain without power and thus remain closed. While some supermarket chains have limited supplies of back-up generators, large supermarket chains have had to make choices about which of their many stores that remain without power should receive generators. Meanwhile, food manufacturers have had to hold products that otherwise would have been delivered and sold.
Most food companies have insurance coverage that may protect against some of the lost profits or spoiled inventory due to property damage or business interruptions of their customers, or even to the ultimate consumers. Many property policies, which most food companies maintain, cover “contingent business interruptions.” This coverage pays for lost profits and extra expenses incurred due to property damage sustained by a company’s customers. Many policies limit contingent business interruption coverage to situations where the customer’s property damage or business interruption would itself trigger the policy’s property damage or business interruption coverage. This condition may not significantly limit coverage, though, because many business property policies provide coverage for disruptions caused by both floods and wind. Many of these policies cover contingent business interruptions even where the contingent business interruption resulted from disruptions at an indirect customer, potentially including retailers and even consumers.
A related problem for food companies is that many ingredients are manufactured in affected areas. If a food company cannot obtain ingredients, or must pay more to get alternative supplies of that ingredient, that too may be covered under contingent business interruption and related coverages. Indeed, even if a food company incurs increased shipping costs because of the storm (such as needing to circumvent closed ports or snowed-under roads), there may be coverage under the property policy’s extra expenses provisions.
Food companies that do business in the directly affected area should pay careful attention to whether they incur lost profits due to storm damage to their customers. If they have such losses, food companies should review their policies carefully and take all necessary steps to preserve and pursue their coverage.