Insurance coverage in the wake of a fragmented supply chain

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February 11, 2022 – For the majority of modern industry, a well-designed and reliable supply chain is the foundation of operational success. This means that all parts of it – from sourcing to manufacturing to distribution – work together in a reciprocal manner so that all components of a final product meet the necessary specifications and reach their destinations in a timely manner. . This, in turn, allows other participants in the chain to meet their own individual demands and fulfill their respective obligations.

But what happens when part of the supply chain encounters an unexpected delay, such as a shortage of raw materials, an unplanned plant shutdown, transportation problems or production problems? Disruptions to one part of the supply chain can and often do create ripple effects that increase in magnitude and severity further up the chain, resulting in a delay or absence of end product in one or more key markets. This can lead to a series of unintended financial (and reputational) consequences for many, if not all, members of that supply chain.

Worsening supply chain disruptions across the world

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According to a recent report, U.S. business leaders ranked business interruption, including supply chain disruption, as the #1 risk for U.S. businesses in 2022. That’s no surprise , as recent world events have caused and continue to cause substantial and aggravating damage. — disturbances in industries.

Covid19 pandemic. The pandemic, particularly in the first half of 2020, has spurred government orders across the world that have forced the closure of facilities in all sectors, sometimes for weeks. Even when full shutdowns ended or weren’t necessary, companies continued to impose capacity restrictions and quarantine requirements that reduced operations and facility occupancy. This unprecedented event resulted in pervasive supply chain issues that impacted nearly every industry.

Winter storm Uri. In February 2021, a week-long winter storm (unofficially referred to by the media as Winter Storm Uri) hit the state of Texas and caused power outages, road closures, loss of water service and facility closures across the state. In addition to being a major transportation hub, Texas is home to many major industries including oil and gas, semiconductor manufacturing, aerospace and defense, many of which suffered sudden disruptions at the aftermath of the storm. The global shortage of semiconductors is expected to cost the auto industry alone $210 billion in lost revenue.

Blockade of the Suez Canal. In March 2021, the massive container ship Ever Given was beached for more than six days in the Suez Canal, a key waterway for global shipping and transportation. It is estimated that over 350 vessels were saved during this period, including container ships, bulk carriers and tankers, which added substantial additional journey time on highly scheduled routes. The six-day lockdown has caused supply chain delays that have impacted industries around the world.

These events have only exacerbated the pervasive supply chain issues created as a result of the ongoing COVID-19 pandemic.

Supply chain disruptions, and disruptions of this scale and magnitude in particular, can have a devastating impact on a company’s expected earnings and other financial metrics, often with little or no warning. . In fact, according to the “2022 Allianz Risk Barometer Report”, 45% of companies said they had experienced a significant impact from recent supply chain issues. So what steps can companies take to minimize these financial impacts? The answer may lie in their insurance programs.

Adequate insurance can fill the void

In the wake of a fragmented supply chain, companies should look to their business interruption insurance programs to determine if they might have coverage for the resulting financial losses.

Business interruption insurance generally provides coverage for financial losses incurred by the insured to the extent that physical loss or damage to the insured’s property has forced the insured to terminate, suspend or reduce normal operations. Companies that purchase business interruption insurance in addition to their property insurance protect themselves not only from the costs associated with repairing the damage or loss involved, but also from the financial losses that arise from the associated operational impacts.

Business interruption insurance assumes that an insured risk directly affects the insured person. But what if a critical member of your supply chain suffers its own disruption? Since traditional business interruption insurance is generally limited to losses associated with the insured’s own damage or loss, this range of cover may not be suitable. So what now?

Fortunately, most business interruption insurance is purchased in conjunction with a similar but significantly different form of coverage: contingent business interruption. Contingent business interruption coverage is designed to protect a business against the financial impact of termination, suspension and/or curtailment of normal business operations as a result of physical loss or damage to its goods by one or more members of the supply chain. .

Using the example of the Uri winter storm, imagine a scenario where a member of a supply chain suffered a line break that damaged their machinery, causing a delay in the production of a component essential part of the end product in the supply chain. Other members of the supply chain may be able to obtain payment for their losses under their contingent business interruption coverages, even if the property damage did not occur at their respective properties . Contingent business interruption coverage is a potentially invaluable part of a company’s insurance program following such supply chain disruptions.

Wider supply chain coverage

As an essentially standard offering in the insurance industry, most businesses carry insurance against potential business interruption. But in the face of an unexpected supply chain disruption, is that enough?

As events like the COVID-19 pandemic, the Suez Canal blockage, and winter storm Uri have demonstrated, supply chain disruptions can have an endless array of causes. Although contingent business interruption coverage can provide a significant line of defence, it is generally limited to coverage for disruptions caused by property loss or damage, for example, floods, fires, or damage caused by the wind. But what if a supply chain disruption is caused by another type of risk? In such cases, traditional business interruption insurance may not apply.

Fortunately, many insurance companies offer broader coverage specifically tailored to supply chain issues. Supply chain insurance generally works the same way as traditional contingent business interruption coverage, but it encompasses additional risks. For example, supply chain insurance can also cover disruptions resulting from strikes and labor shortages, production issues, war or political unrest, and disruptive civil actions.

Depending on a company’s risk profile, purchasing this extended coverage may be worthwhile. It is particularly important to look closely at all members of the supply chain and identify the risks inherent in their activities.

Is a supplier located in a country that is not politically stable? Are key raw materials subject to the adverse effects of climate problems? Is a company notoriously contentious with unions? These issues are worth considering when determining whether supply chain assurance is warranted.

Conclusion

As recent global events have demonstrated, supply chain disruptions can strike at any time and have devastating financial impacts on all members of the supply chain. Therefore, it is important to work with trusted brokers, risk management professionals and coverage advisors to review the affected business’s insurance program and ensure that decision makers understand the scope of blankets available. While insurance against potential business interruption can prove invaluable in the wake of a supply chain crisis, best practice dictates that companies carefully assess their risk profile and determine if a broader supply chain coverage may be appropriate.

Ashley B. Jordan is a regular columnist on insurance law for Reuters Legal News and Westlaw Today.

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

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