Protecting Your Business Against Contingent Business Interruption and Supply Chain Disruption

In today’s global marketplace, more and more businesses rely on overseas suppliers. If your company’s operations depend on the timely delivery of raw materials, parts or finished products from distant locations, then your business could be hurt when these goods are delayed or fail to arrive altogether. Furthermore, a significant downturn in supply often results in increased costs for acquisition of the materials needed to continue operating. It can also result in partial or complete shutdown of facilities lacking the resources to operate.

You can take steps to limit the impact of supply chain disruption, such as warehousing inventory and using multiple suppliers when possible. Purchasing specialty insurance policies, including contingent business interruption (CBI) insurance and supply chain insurance can also limit your exposure to loss. These types of insurance reimburse your business for lost profits and related costs caused by disruptions in your supply chain even if your company itself has not suffered any damage.

Keep in mind that it can take two years or more for a company to recover from a supply chain failure. Significant supply chain disruptions can reduce revenue, cut into market share, threaten production and distribution, inflate costs and ultimately affect a company’s bottom line. Whether you run a global corporation or a small business, you need the proper insurance coverage to protect against supply chain failure.

Limits of contingent business interruption insurance

Contingent business interruption, or CBI, coverage can provide an important line of defense against losses caused by disruptions at the locations of your suppliers or downstream customers. This type of insurance is limited because it only provides coverage if the businesses you depend on are disrupted by physical property damage—for instance, if a supplier’s factory is damaged by fire and ceases operations. CBI does not protect for all perils; nor does it protect a business when roads are closed and employees cannot get to work or when products cannot be distributed or other suppliers are affected.

Your CBI insurer may require your business to identify specific supplier and customer locations to be covered by the policy. If you change suppliers, fail to update your policy and then a disruption occurs, you will not be covered by the policy.

Broader supply chain coverage

Supply chain insurance provides far broader coverage than CBI insurance for business interruption caused by disruptions to your supply chain. In addition to covering disruptions caused by property damage to your suppliers’ or downstream customers’ businesses, supply chain insurance can covers losses caused by a wide range of events, including:

• Natural disasters.
• Industrial accidents.
• Labor issues (strikes, shortages, etc.).
• Production process problems.
• Political upheaval, war, civil strife.
• Riots or other disruptive civic action.
• Closure of roads, bridges, or other transportation infrastructure.
• Public health emergencies; e.g., pandemics requiring quarantine.
• Regulatory action.
• Financial issues; e.g., solvency, cash flow problems.

Suppliers in less politically stable nations or in places with more vulnerable infrastructure may be more prone to disruption.

Companies often have multiple tiers of suppliers, yet often only cover the first tier. As a result, more insurers are moving towards offering multi-tier coverage—where the whole supply chain is insured. Check whether your insurer offers this type of coverage.

Mitigating supply chain risk

Insurance is a critical component of managing supply chain risk, but it should not be seen as your first line of defense. Your business can also limit its exposure to supply chain risk by taking the following actions:

• Assess your supply chain and identify risks and weaknesses.
• Balance supply chain logistics (e.g., just-in-time delivery) with risk management.
• Identify back-up suppliers and vendors.
• Establish contingency plans and include supply chain disruption in your business continuity plan.

By taking these steps, business owners can make informed decisions about mitigation planning, risk transfer and levels of self-insurance. Your supply chain insurer may provide services to help you assess and limit your risks. Your insurance professional can also be a valuable resource in helping your business identify risks and secure adequate insurance coverage.