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Business Interruption Insurance
itcs S0111570709v1 150520 3.8.2005Page 1
1. Introduction
Business interruption insurance indemnifies insureds for losses sustained due to the inability tocarry on business because of an event that forces the insured to suspend or cease businessoperations. The purpose of business interruption insurance is to return to the insured the amountof profit it would have earned had there been no interruption to the business's operations.In this paper, we discuss issues relating to the interpretation of typical business interruption policywordings, with reference to recent case-law. We also discuss issues relating to the quantificationof business interruption losses.The forms of cover for business interruption losses which are available vary between differentcountries. In Australia, business interruption insurance is often incorporated into policies known asindustrial special risks insurance policies (
ISR policies 
). The wording of the relevant clauses willvary from policy to policy.Generally, an ISR policy will contain a "Material Loss or Damage" section and a "ConsequentialLoss" section. Standard items covered under the Consequential Loss section include gross profit,professional fees, payroll and increase in cost of working not otherwise recoverable.Generally, in order for cover to be provided under a business interruption provision, two basicrequirements must be satisfied:
•
 
the insured must sustain a direct physical loss (i.e. damage to its property) as a result of aninsured event; and
•
 
there must be an interruption to the insured's business as a result of that direct physicalloss.Perhaps the most difficult legal issues which arise in connection with business interruption involveidentifying the cause or causes of loss and determining what loss is attributable to each relevantcause.
2. Proximate Cause
General principles
The concept of proximate cause is unique to the law of insurance contracts. In order for the insurerto be liable under an insurance policy, the insured bears the onus of establishing, on the balance ofprobabilities, that the loss suffered was caused by an insured peril. The proximate cause of a lossis not necessarily the one closest in time to the loss. It is what has been variously described as the"real", the "effective" or the "dominant cause". Determining the proximate cause often comes downto a matter of common sense, rather than the application of hard and fast rules.Proximate cause is of particular importance when dealing with business interruption cases. Oftenthe causes of the event leading to the loss are clear, but the question remains as to whether the
 
Business Interruption Insurance
itcs S0111570709v1 150520 3.8.2005Page 2
losses insured under the policy are "sufficiently proximate". In some cases there may be two ormore proximate causes of the loss.
1
 The New South Wales Supreme Court has accepted that where there are two or more proximatecauses of a loss, it is sufficient if one of those causes is an insured peril, provided one of thecauses is not an excluded clause.
2
In
The Miss Jay Jay 
, a yacht was insured against damage"directly caused by external accidental means". The yacht was damaged in the course of a difficultchannel crossing. The English Court of Appeal held that, on the trial judge's findings, the weatherconditions were markedly worse than average and that such conditions had contributed to thedamage. However the damage was also caused by a badly designed hull. Either of these twocauses was sufficiently significant to be described as a proximate cause. The adverse sea was aperil insured but the bad design of the hull was not. The Court of Appeal held that there were twoproximate causes and the insured could recover on the basis that it was sufficient if one of thecauses was a peril insured. Lawton LJ considered that the evidence established that, but for acombination of unseaworthiness due to design defects and an adverse sea, the loss would nothave been sustained.In contrast, in
Wayne Tank & Pump Co v Employers' Liability Assurance Corporation 
3
, a factorywas destroyed by a fire partly due to the negligence of the insured's servant (an insurable event)and partly due to the unsuitable nature of plastic material used in the installation. The latter causewas expressly excluded under the insurance policy. The Court held that since the insured hadpromised that the insurers would not be liable for loss caused by the excepted peril, the insuredcould not recover.
Two separate causes acting consecutively
Sometimes an event which causes interruption to the insured's business will cause the insured totake steps to protect itself against similar occurrences. This may result in further expense andfurther interruption to the business. Is the original insured event a sufficiently proximate cause ofsuch further losses?This issue was considered by the Queensland Supreme Court in
PMB Australia Ltd v MMI Insurance Ltd & Ors 
.
4
The Facts 
PMB provided roasted shelled peanuts to Kraft Foods Ltd. Between March and June 1996,salmonella was discovered in Kraft's peanut butter and traced back to the peanuts that PMB hadprovided. Peanut butter products were recalled by PMB's customers and Kraft advised PMB that itwould not take further delivery of their peanuts.Following the outbreak, Queensland Health Department (
QHD
) prohibited PMB from dispatchingpeanuts to any customers until they had met certain testing requirements. PMB took steps toclean, test, reclean and retest the plant. 
1
See
JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay) [1987] 1 Lloyd's Rep 32 
.
2
City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739.
3
[1974] QB 57
4
(2002) 12 ANZ Insurance Cases 61-537 per de Jersey CJ, Jerrard JA & White J.
 
Business Interruption Insurance
itcs S0111570709v1 150520 3.8.2005Page 3
PMB stopped production of peanuts on 6 July 1996 for two weeks whilst testing by QHD wascarried out. Two weeks later, QHD wrote to PMB allowing them to recommence production subjectto a batch testing regime. The following day, PMB began production again.Kraft carried out independent tests on PMB's plant over the same period and discovered traces ofthe salmonella bacteria still present in the plant. As a result of the positive outcome of these tests,Kraft did not begin re-ordering from PMB again until 27 September 1996.
The Policy 
The plant was covered by an ISR policy which indemnified PMB for business interruption inconsequence of loss, destruction or damage to its property by any cause or event not excluded.There was no dispute that the original outbreak of salmonella was an insured event. It furthercontained an extension clause which indemnified PMB for loss "directly resulting from interruptionof or interference with the business" in consequence of one of three trigger events. The closure ofpart of PMB's plant by the Queensland Health Department was a trigger for the extension clause.
The Claim 
PMB sought indemnity in the amount of $4.8 million in respect of all losses directly arising from theoutbreak, such as removal of contaminated product and cleaning of the plant, as well as lossesarising from alterations to the plant to minimise the risk of future outbreaks.The insurers recognised that the contamination itself interrupted PMB's business and paid$700,000 by way of indemnity but it rejected the balance of PMB's claim (approximately $4m) ongrounds that once the plant had reopened in July 1996, the proximate cause of any furtherbusiness interruption was PMB's new appreciation of the risk of salmonella and the taking of stepsto reduce that risk, not the initial outbreak.
The Outcome 
Mullins J, at first instance, accepted the insurer's submission that the words "in consequence of"were consistent with the application of the fundamental principle of insurance law that the insurer isliable only for losses proximately caused by the events insured against. She first considered whatextent of business interruption was proximately caused by the original outbreak.Mullins J observed that the original outbreak necessitated the shutdown and cleaning of the plantand the imposition of the testing and clearance regime imposed by the QHD in its letter of 20 July1996. The regime was a direct response to the contamination and subsequent positive tests forsalmonella. Each interruption caused by these tests was held to be a consequence of theoutbreak.PMB submitted that its business was interrupted for 12 months from 24 June 1996 when Kraftadvised that deliveries of peanuts should cease immediately. Significantly, PMB's policy providedfor an indemnity period of no more than 12 months from the date of the trigger event, (i.e. theoutbreak). However, Mullins J held that PMB was indemnified under the policy only for losses upuntil 31 March 1997, the end of the peanut season. She considered that after that time otherunelated unrelated factors (e.g. the 1997 crop being late) began affecting PMB's business in early1997. Accordingly, it could not be said after that time that the original outbreak was a sufficientlyproximate cause of any further business interruption.
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