Interdependency coverage in LOP policies:

The material damage provison of the LOP says there has to be an indemnifiable loss or damage under the material damage policy for the LOP claim to trigger.

“……the Company agrees (subject to the Special Conditions and Exclusions contained herein or endorsed or otherwise expressed hereon and also to the Conditions and Exclusions contained in the Fire Policy covering the interest of the insured in the property at the premises) that if any building or other property or any part thereof used by the Insured at the premises for the purpose of the Business, be destroyed or damaged by the perils covered under the fire policy,”

Application of MD proviso is fairly simple and straightforward if there is one MD policy and corresponding LOP policy.

In accordance with good underwriting practices of yore, the particulars of the MD policy such as the policy number have to be entered in the schedule of the LOP policy to show the linkage between the two policies.

But what if there are:

(1) Multiple locations covered under a single MD policy?

(2) One location covered under multiple MD policies?

(3) Multiple locations covered under multiple MD policies?

As regards (1), interdependencies are implicitly covered. If one location’s finished goods is raw material for another location, then loss in one plant can possibly interrupt both of them together. Since such interruption would show up on the P&L of the insured, the loss would become payable even without any specific interdependency clause.

In respect of (2) and (3), the question arises which “Fire Policy” as per the MD proviso is applicable, since there are many. So you need an interdependency or “tie-in” clause which says that loss under any of the MD policies would trigger the LOP policy.

Recently, there was a case in which the insured took an IAR policy for covering building, plant and machinery. Since the IAR policy does not have a provision to cover stocks on declaration basis, a separate stock declaration policy. The loss happened on the stocks and business interruption ensued. There was no tie-in clause linking the stocks policy to the BI section of IAR policy. The insurer took the stand, and rightly so, that the MD proviso is not satisfied and claim is not payable.