As governments lift COVID-19 lockdown restrictions and economies begin to reopen, consumer demand for products has skyrocketed. Amid the spike in demand, businesses are struggling to meet consumers’ needs due to ongoing global supply chain disruption. The disruption stems from many factors, including the lingering effects of COVID-19 mitigation strategies that slashed the production of goods, as well as a shortage of warehouse workers and truck drivers. Insurance is a key component of supply chain risk management. Policyholders who rely on a supply chain can use insurance to protect against supply chain risks. Here, we explore supply chain risks and how insurance can mitigate those risks.
Supply Chain-Related Risks
The leading causes of supply chain disruptions include natural disasters, transportation failures, geopolitical instability, price hikes, and cyberattacks. As the COVID-19 pandemic has shown, however, managing supply chain risks requires policyholders be mindful that many other—at times unforeseeable—risks can lead to massive business losses and extra expenses. Reductions in supply often result in increased costs for businesses to buy input goods needed to keep operating. They can also lead to partial or complete shutdown of businesses lacking the resources or goods to operate. Fortunately, different lines of insurance may provide coverage for supply chain-related claims.
Contingent Business Interruption Coverage
If a supply chain-related loss occurs, policyholders should review their commercial property policies as a source of coverage. In particular, policyholders should look to their contingent business interruption (“CBI”) coverage as an important line of defense.
CBI typically protects lost profits caused by a covered business interruption at the location of a supplier’s business caused by damage to its property. CBI coverage may also apply to losses caused by damage to a “dependent property,” which can include operations relied on by the policyholder to operate its business, such as a distribution center. For example, CBI might apply if a policyholder suffers a loss because a hurricane damages a supplier’s factory and the supplier cannot deliver its goods or if a fire destroys the policyholder’s distribution center and prevents the policyholder from selling its products.
Policyholders must be aware, however, that different policy forms provide different amounts, and scope, of CBI coverage. It is important, as always, for policyholders to review the policy language when purchasing CBI coverage. For instance, policies differ on the tiers of suppliers triggering coverage; some policies only cover damage suffered by direct suppliers, while others include indirect suppliers. There also can be different sublimits for different types and tiers of suppliers. In addition, policyholders should examine potentially applicable exclusions, including (as the Covid-19 pandemic has shown) those related to losses insurers can claim are because of a “virus” and those related to losses insurers can claim are because of alleged “extreme temperatures,” as experienced in the wake of the February 2021 Texas deep freeze.
Extra Expense Coverage
Aside from CBI coverage for business losses, many property policies provide coverage for the “extra expenses” a policyholder incurs for a covered event. Extra expense coverage also may apply when the policyholder incurs extra expense because of damage to the property of a supplier. Extra expenses can include, for example, the added costs to receive goods for sale or replacement goods, as well as increased transportation, labor, and logistical costs. As with any other claim, when incurring extra expenses because of a supply chain event, policyholders should keep accurate and contemporaneous records of the extra expenses incurred to support a potential claim.
Supply Chain Coverage
The growing risks posed by today’s global supply chain have also led to a specialty type of insurance: “supply chain insurance.” While there is no “standard” form for “supply chain insurance,” this insurance is available as an “all risks”-type cover. Besides covering disruptions caused by property damage to a supplier or a dependent property, supply chain insurance can be customized to cover losses caused by a wide range of events, including government-related disruptions (regulatory action), social unrest (riots), pandemic-related losses (viruses), labor issues (strikes), production process issues (supplier assembly line malfunction), and financial issues (supplier solvency).
As the holiday season approaches, those in the supply chain industry have warned that the current supply chain issues are likely to continue as consumer demand grows. Transportation Secretary Pete Buttigieg acknowledged that, despite the administration’s efforts to address the supply chain bottlenecks, it will take time to get supply chains back to normal. And this is in addition to the usual supply chain risks posed by natural (hurricanes) and human-made events (geo-political incidents). Given these risks, policyholders must understand how to manage the unique risks associated with supply chain-related claims and to have a plan to maximize their coverage options if a loss occurs.
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