Contingent Business Interruption Insurance 101

ThinkstockPhotos 852285320By Stephen Washkalavitch 

From relentless wildfires to the devastation caused by several significant hurricanes, losses in the U.S. caused by last year’s natural catastrophes were record-breaking. The 16 severe weather events resulted in cumulative damage exceeding $300 billion, according to the National Oceanic and Atmospheric Administration

With 2017 now noted as one of the costliest years on record, many businesses are left wondering what – if anything – can be done to reduce risk moving forward? 

Manufacturing and distribution companies located in catastrophe-prone areas are especially attuned to these hazards. However, the risks associated with natural disasters far surpasses just the physical damage to a single facility. These organizations rely on external products and raw materials in everyday logistics, so even a localized weather event affecting a third-party supplier could force your business to completely halt operations due to lack of resources.  

To protect against losses resulting from a disruption in the supply or distribution chain, many manufacturing and distribution companies have turned to Contingent Business Interruption (CBI) insurance. CBI insurance is designed to minimize the financial impact to a policyholder if damage is sustained by direct suppliers, distributors or receivers. To ensure your business is fully covered, there are several elements you will need to consider:

  1. Supply Chain Visibility: The 2016 Supply Chain Resilience Report found that 66 percent of businesses do not have full visibility into their supply chain. Without visibility, how can an organization pinpoint where potential shortfalls are likely to occur? To effectively minimize the possibility of business interruption, organizations will need to evaluate all suppliers and distributors from the bottom-up.  
  2. Policy Wording & Limits: Just as no two businesses are alike, not all insurance policies are created equal. It’s important to fully understand the policy you are purchasing by evaluating specific wording throughout. For example, certain forms of CBI insurance only cover third-party losses if the policyholder itself is also insured for that type of peril, while other policies exclude loss of income due to damage from windstorms or flooding. In addition, make sure you have adequate coverage limits in place, based on the specific risks that your individual organization is facing. 
  3. Contingency Plan: The key to minimizing potential business interruption is having a well-thought-out preparedness plan. First, analyze how different suppliers and distributors contribute to your overall business activity. Only then can you begin creating a contingency plan that will help ensure your business can either maintain operations or resume day-to-day activity as soon as possible. Next, consider creating a network of secondary suppliers and distributors. Finally, always maintain ample product reserves, if possible.   

It’s no secret that manufacturing and distribution organizations face a complex set of risks. If considering CBI insurance, it’s imperative to work with your insurance broker as a true outsourced risk management partner. Your insurance broker can help you develop a comprehensive program that minimizes exposure based on the unique hazards to your operation.     

Stephen Washkalavitch is a Producer at Graham Company. Drawing from 13 years of insurance and consulting experience, Washkalavitch designs and brokers comprehensive insurance programs and long-term risk management strategies. He can be reached by calling 215-701-5297. 

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