When supply chains break - Japan 2011 


May 2011 - (International Law Office )

International Law Office

Has your company's production been adversely affected by the recent events in Japan? Have you considered whether your insurance policy might respond? What should you bear in mind as you answer these questions?

While Japan still suffers from the aftershocks of the March 11 2011 earthquakes, manufacturers around the world are dealing with the resulting business interruption aftershocks. Japan is the world's third-largest economy and its exports reflect this - for example, 60% of the world's silicon wafers come from Japan and it is the world's largest steel exporter. Japan is also a major consumer of the world's industrial output. Coupled with the modern lean operations approach and just-in-time inventory management, production lines around the world, including in Canada, are being disrupted either because they cannot get vital Japanese-made parts or because their Japanese customers are shut down and cannot receive supplies and inventories.

Business interruption policies are designed to provide compensation for losses arising from a disruption in operations attributable to an insured peril. Many policies respond only when the interruption involves damage to the insured's property. However, you should not assume that your policy does not cover your particular disruption until you have carefully reviewed the insurance coverage in light of your particular fact situation. Contingent business interruption coverage, for example, may cover lost profits resulting from property damage that occurred at the premises or location of a supplier or at a customer.

The insuring clause

Policies and thus insuring clauses vary widely and, like any contract, must be interpreted in light of the facts and the policy wording. A coverage review should start with determining exactly what caused the break in your supply chain and examining how it fits with your policy wording. Was it the earthquake, the resulting fire, the tsunami, the power outage, a civil authority action or a nuclear-related event? The answer to this question may have a direct bearing on coverage. While it is the insured's responsibility to find a way to fit the loss within the coverage terms, courts will generally interpret coverage provisions broadly.

Policy exclusions

Your policy undoubtedly has a number of exclusions. For example, most policies contain broad nuclear exclusions. You should determine how your business interruption experience fits within the exclusion language. While coverage provisions are interpreted broadly, courts will interpret exclusions narrowly.

Post-loss matter to consider

Your policy will most likely contain reporting requirements and time limitations. Be careful not to breach any of the requirements or miss out on a deadline. If you require additional time to collect the facts or to formulate the loss, open a dialogue with your insurer. The duty of good faith requires that both insurer and insured be forthright and reasonable in their dealings with each other.

Expert assistance

You are likely to need expert assistance to formulate and quantify your claim. The records that you may need to substantiate a claim may be different from those that you normally keep. Your policy may actually pay for professional fees for, for example, accountants, auditors and engineers. The terms of the policy may require the insurer's prior consent before reimbursable costs are incurred.

Legal considerations

As with any legal document, a lawyer may assist you in its interpretation, in the application of facts and in presenting your claim. A lawyer can also ensure that your legal rights are not adversely affected by premature, inopportune or prejudicial statements. Solicitor-client privilege, whether in the context of receiving legal advice or a coverage dispute, may be an important safeguard against admissions that may be against your interest.

Now is the time to review your policy, gather the facts that are required to make a claim, understand the conditions surrounding making a claim, comply with time limits or obtain extensions from your insurer. Your legal adviser and other experts may assist you to ensure that risks that you transferred by purchasing and paying for your policy are in fact transferred.

Ed.: This article appeared previously on the International Law Office website, an e-subscription information service that delivers global analysis of legal developments to lawyers worldwide.