Ensure you are not exposed with inadequate insurance coverage. Always factor in supply chain risk and extra coverage, says Pritchard & Jerden’s Dave Mathews.
The unparalleled events in Houston, Texas, from Hurricane Harvey not only inspire us with lifesaving efforts of ordinary citizens but also remind us of the power of Mother Nature.
Weather-related events will continue to cause damage and have a major impact on day-to-day life, business and the overall economy when these events occur. Additionally, many businesses that are not in the direct path of such weather events are also affected by disasters.
When natural disasters hit business directly, insurance will often replace lost business income when coverage is properly designed. However, what if the disaster happens in another state and causes an income loss to a business that is unaffected by physical damage? This supply chain risk can be insured with contingent business interruption (CBI) insurance and should be evaluated as part of a risk management program.
Most property policies can provide CBI coverage. A contingent business interruption exposure exists when a business is dependent on another for income.
Businesses can be dependent on a supplier, a buyer, or a specific attraction like an anchor tenant in a mall or a sports stadium in a city. The key for CBI insurance coverage to respond is that the business must be insured for the peril that causes the loss to the dependent property.
Consider this example specific to Houston (and the Harvey flooding) using fictitious companies: DMMFG Inc. (DM) relies on Houston Chem Inc. (HCI) for a key raw material in its manufacturing process.
The raw material HCI distributes is already in short supply worldwide, and there are few other distributors in the world. DM’s success is contingent upon a dependent property – HCI. DM is aware of this business dependency and therefore buys contingent business interruption as part of its property policy. The CBI coverage will provide lost income to DM as long as the loss that HCI suffers is a loss that would be covered under the DM policy.
During its most recent insurance renewal, DM chose not to purchase flood coverage because it had a low exposure to a flood loss.
The rains from Harvey caused water to infiltrate the warehouse and severely damage the ingredient DM needs to manufacture its final product. As the flood water receded, HCI informed DM that it could be months before it could produce the raw material needed for DM to make its product again.
With this information, DM submitted the claim to its insurance company expecting to be indemnified for the loss. DM was surprised when it received a denial letter from the insurance carrier.
The insurance carrier explained that because DM did not purchase flood insurance, and flood was the peril that caused damage to the dependent property, DM’s contingent business interruption coverage does not apply to the loss.
The lesson is simple. Contingent business interruption only provides coverage to your business if the loss that the dependent property, DM’s contingent business interruption coverage does not apply to the loss.
The lesson is simple. Contingent business interruption only provides coverage to your business if the loss that the dependent property suffers is a loss that would be covered under your insurance policy.
To underwrite the risk, underwriters will need information about the dependent property, including address, construction, protection and other basic information. CBI coverage can be placed on both domestic and international companies.
As you evaluate risks, you may want to consider adding coverage to your policy for perils such as flood, earthquake or windstorm especially if your key suppliers are in areas were losses from those perils are possible.