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GM's Contingent BI Claim Resulting from Japan's Quake Far Less than Original $1 Billion Estimate

Source: Dow Jones - Erik Holm

Posted on 06 Jun 2011

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In the wake of Japan's devastating earthquake and tsunami, General Motors Co. had warned its insurance carriers that it could end up with $1 billion in lost profits if its Japanese auto-parts suppliers were unable to continue operating. This amount seems now to be far less.

Although it will take months for GM to add up lost profits, the automaker has said the disasters won't have a material impact on 2011 results.

That's good news for the insurance industry. Immediately after the disasters struck, insurers braced for billions of dollars in claims if manufacturers in the U.S. and Europe found they were unable to get the supplies they needed from Japan. But GM's new expectations suggest the worst-case scenarios involving mountains of these so-called contingent business interruption claims sweeping the globe, won't come to pass.

"The supply community has been able to manage their operations better than anyone had expected in the early days," GM spokesman Jim Cain said.

To be sure, companies including Toyota Motor Corp., hard-disk drive maker Western Digital Corp. and personal computer maker Hewlett-Packard Co.  have spoken publicly about manufacturing disruptions resulting from the quake. Many firms that rely on Japanese manufacturers still have time to alert their insurers of possible lost profits resulting from Japanese plant closures, transportation delays or power shortages. And some companies that haven't yet experienced problems may soon start to suffer if their existing inventories run dry.

But Robert Glasser, a managing director with BDO Consulting who assists businesses in submitting business-interruption claims, said the massive disruptions initially imagined by some in the insurance industry have been avoided.

"It looks like a lot of the major companies were able to source the parts they needed from alternative areas of the world to avoid major shortfalls in their productions and inventory," said Glasser.

While companies in Japan are suffering from slowdowns and parts shortages, "we are not seeing major shortages here," he said. "It looks like things are getting back to normal."

Others are less sure the threat has passed.

"It's only now that the rebuilding has started in Japan that there's been a focus-shift to the business impact," said Robert Runyon, a partner at Nelson Levine de Luca & Horst, who represents insurance companies. "It's probably a bit early to appreciate the impact on the supply chain...As far as the full effect on U.S.-based companies, you won't be able to see that for three to six months."

Most U.S. manufacturers have some form of business-interruption insurance, which generally covers profit lost following damage to their property--in this case, for example, if a U.S. company had a plant directly damaged by the quake. If a U.S. business has to stop production because a supplier can't deliver needed parts, it can only collect from its insurer if it has paid for the additional protection afforded by the contingent business-interruption coverage.

Several people in the insurance industry said a $1 billion claim from GM for contingent business interruption, if it were submitted, would likely result in a long game of tug-of-war between the auto maker and the syndicate of insurers that underwrote the coverage. Such syndicates often involve a dozen or more commercial insurers such as Warren Buffett's Berkshire Hathaway Inc., Zurich Financial Services AG, , American International Group Inc. (AIG), or insurers operating from Lloyd's of London.

GM's Cain said the company's policy is capped at $1 billion. But such policies typically have "sub-limits" that reduce the amount of coverage available for some specific perils, including earthquakes.

A company looking collect the full amount of the policy may have a strong argument that the earthquake caused some of the losses, the tsunami caused more, and the subsequent power shortages were responsible for still more, said Linda Kornfeld, a partner at Jenner & Block in Los Angeles, who represents companies in disputes with insurers.

Insurers are likely argue the opposite, saying they were all one disaster and that the policy's sub-limit for earthquakes applies.

Such disputes can spill over into the courts, and can take years to resolve. Some coverage disputes stemming from 2005's Hurricane Katrina are still being litigated nearly six years later.