Commentary: Swatch Fire Losses and Contingent Business Interruption Coverage

By Jared Zola | January 31, 2014

An oft-overlooked insurance coverage found in many commercial property policies called “contingent business interruption” coverage may provide insurance proceeds to companies throughout the watch industry to cover their economic losses suffered as a result of a fire that devastated the world’s biggest supplier of watch movements.

Even the most sophisticated policyholders may believe that physical damage to their own property is required before their business interruption coverage will respond. That is not always the case because “contingent business interruption” coverage protects against economic losses caused by a supplier’s inability to provide its goods in the normal course as a result of damage supplier’s property.

Companies involved in the watch industry would be well-served to quickly locate and carefully review their insurance policies to help maximize coverage and minimize the financial impact incurred as a result of the fire.

A Dec. 29, 2013, fire devastated Swatch Group’s watch mechanism subsidiary, ETA Manufacture Horlogère Suisse (ETA), in the northern town of Grenchen, Switzerland. Swatch may be best known for its plastic timepieces that have been popular for decades and its high-end Omega brand that attracts celebrity endorsers including Daniel Craig (James Bond’s watch of choice), Nicole Kidman, Cindy Crawford and George Clooney.

Jared Zola

However, many people may not realize that Swatch’s ETA is the world’s biggest supplier of watch movements, the intricate internal components that operate a watch’s moving parts, and counts as its customers most of the world’s largest watch producers including high-profile luxury groups Compagnie Financière Richemont SA, Moët Hennessy Louis Vuitton, and Hermes. Swatch Chief Executive Nick Hayek told Swiss radio that “[e]verything is devastated.”

As Swatch assesses its damages and losses, businesses involved in the watch industry around the world need to examine their operations and assess their losses given Swatch’s critical importance to their products.

Indeed, companies far removed from ETA’s Swiss operations may face related disruption and losses. Many impacted businesses may find solace in their insurance assets.

Property insurance policies often provide “time element” coverages that protect an insured against economic losses. One such “time element” coverage, “contingent business interruption” coverage, is frequently included in the policy form or added to the standard commercial property policy by endorsement.

Contingent business interruption coverage protects against economic losses caused by the policyholder’s inability to receive a supplier’s goods or services because of damage to or destruction of the property of an insured’s suppliers or customers by an insured peril — such as fire. This coverage may be an important asset protecting many companies’ loss of business caused by delays in supply chains as a result Swatch’s devastating fire.

More specifically, “contingent business interruption” coverage typically covers two types of business interruption. First, it protects against economic losses caused by a “direct” supplier’s inability to get its goods to the insured due to damage to or destruction of the supplier’s property by an insured peril. See Park Electrochemical Corp. v. Cont’l Cas. Co. 2011 U.S. Dist. LEXIS 16344, *11-12 (E.D.N.Y. Feb. 18, 2011).

Second, it protects against economic losses caused by damage to or destruction of a customer’s property that prevents the customer from accepting the insured’s products. See Children’s Place Retail Stores, Inc. v. Fed. Ins. Co., 829 N.Y.S.2d 500 (App. Div. 2007) (business interruption coverage for the period of time reasonably taken to resume operations at a different location following the 9/11 attacks).

The first prong may apply to many companies in the watch world facing economic loss arising from ETA’s crippled operations after the fire.

Kepler Cheuvreux analyst Jon Cox underscored this point when he noted that “ETA is by far the most important production site. The structure of the building will have to be inspected for safety reasons, which means the whole complex will be out of action for a while, so there could be shortages of components.” Swatch’s Hayek summed up the situation by stating that the fire “is a bigger problem for them [companies relying on Swatch movements] than for us.”

The Archer-Daniels-Midland Co. case is instructive. There, as a result of a flood, the insured suffered approximately $55 million in losses consisting of increased costs of transportation and raw materials, even though the insured did not own the damaged property. 936 F. Supp. 534 (S.D. Ill. 1996), aff’d sub nom. Archer-Daniels-Midland Co. v. Aon Risk Servs., Inc. of Minn., 356 F.3d 850, 854-57 (8th Cir. 2004).

The policy included a coverage grant for loss sustained by the insured as a result of direct physical damage caused by the perils insured against. The insurers denied coverage because the damaged property was owned by suppliers.

The insured argued that the policy language required only: (1) that there be direct physical damage to “property,” and (2) that the damage be caused by a covered peril.

The court found that both of those conditions were met and held that the language of the insuring agreement did not require the damaged property to be insured under the policy. Therefore, the insured was entitled to coverage for its incurred losses. Here, fire is almost always a covered peril in commercial property insurance policies and the severe damage sustained to Swatch’s ETA facility and property appears to be well-founded.

These cases highlight important lessons for businesses engaged in the watch industry as they assess their losses arising from Swatch’s fire. Property insurance policies may provide an avenue to recover insurance proceeds to cover a policyholder’s economic loss incurred as a result of its “movement” supplier’s inability to deliver goods that the policyholder regularly receives for its business operations.

Although each policy requires a careful analysis, based on the specific policy language involved, the facts surrounding a company’s losses, and the law of the applicable jurisdiction, “contingent business interruption” coverage provides policyholders with an avenue to minimize the financial impact incurred as a result of the fire at Swatch’s facilities.

 

About Jared Zola

Zola is a partner and the northeast regional leader for law firm Dickstein Shapiro LLP’s Insurance Coverage Group and is based in the firm’s New York and Stamford, Conn., offices. He also leads the group’s Property & Business Interruption Practice.
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