In today’s world, businesses are able to source and distribute products almost anywhere. With all this opportunity comes the risk of disruption along the supply chain. This can be caused by catastrophe (think the tsunami in Japan or Hurricane Sandy along the east coast) or the failure of a supplier to meet a company’s demands. Automobile giant BMW recently slowed production to a crawl on certain models because of a shortage in parts from supplier Bosch, who in turn was having difficulties acquiring parts from an unnamed supplier in Italy.
Does this risk affect your business and how do you know you have the proper coverage to secure continuity of your operations?
Contingent Business Interruption (CBI) insurance protects a company from losses when the supply chain fails due to a covered cause. A company may be protected from such losses even if they did not suffer damage to their own property. However, this coverage may only apply if the third party suffers losses that the policyholder is covered for. This type of insurance can be limited as it only provides coverage if your dependent businesses suffer physical property damage.
Product Liability insurance offers supply chain protection. Liability can result from bad practices at the factory, but also from where components are sourced. If a company unknowingly receives counterfeit parts, the end products will likely fail. Insurance companies will often have accurate information as to where counterfeit components come from.
Another exposure of supply chain disruption is the extra expense involved to bring operations back up to speed. This coverage includes situations where expenses are incurred because of damage to the property of a policyholder’s suppliers, receivers, and distributors.
Again, this type of coverage may be limited. For example: Nintendo recently failed to accurately forecast demand for their new Switch console. They were forced to ship units by air to Europe and the United States at a cost of almost $45 more per unit than shipping by ocean carrier. Under traditional extra expense coverage this loss would not likely be covered. By working with your trusted advisors, you can ensure that you will be able to recoup your losses.
There are other areas in which policy language may exclude losses. Insurance companies may deny CBI claims by arguing that the policyholder must suffer a total and complete halt of operations. More often than not, this argument ends in favor of the insured, but some courts have held that a total shutdown is necessary under conventional business interruption coverage.
Proving an interruption-related loss is a complicated process of identifying how the policyholder would have performed had the event not occurred. By proactively reaching out to experienced counsel, a company can minimize the impact disruption may have to its bottom line.
If you are uncertain of how broad your coverage is, reach out to your trusted Commercial Lines advisors at J. Krug & Associates to make sure you have the protection you need.
J.Krug & Associates, Inc.