When you’re in business, there are risks that can be completely out of your control.
The business might not be able to trade due to property damage. These consequential risks can be covered by business insurance policies that include coverage for Business Interruption insurance (BI), or Loss of Profits insurance.
BI covers a business for all consequential losses resulting out of claims against the policy. This could include a fire, flood, or loss of electricity.
Most businesses will have commercial interruption cover. It is either standard coverage in a package that has a predetermined level of indemnity or is based on the declared annual turnover value for a commercial combined policy that includes a separate section on business interruption risk.
Business consequential losses can be calculated daily pro-rata from an annual turnover. A business will often be required to submit accounts in order to prove the interruption loss.
Credit insurance, which covers the losses of creditors failing or going bankrupt, can help protect a business against distribution losses. But what about suppliers?
Prior to the current recession, the amount of insurance that could be used to cover trading losses caused by failures in the supply chains was very limited. There were also many terms and conditions regarding what coverage would include.
The recession has caused many businesses and their suppliers to go into liquidation. Enterprises in all business sectors may be at risk of being placed under receivership. It is not often because a business is in bad shape, but rather because a link in a chain of product-critical suppliers has become insolvent.
This is a major knock on effect and can lead to huge consequential losses if you lower the supply or sales chain.
This risk could result in a business shutting down.
Assuring the domino effect caused by a break in the supply chain
Problem with a standard BI policy is that it only covers loss of profits due to a disruption in the supply chain for essential goods and services from one immediate supplier.
The supplier must also have been temporarily shut down by the insured due to one of the perils.
My policy covers my printing business if it is insured for fire and interruption. If my supplier’s factory burns down, my policy will cover this. This is first tier coverage.
If the paper distributor’s paper mill caught fire and my printing company was not able to continue receiving paper from it, I would be unable to claim.
Underwriters have always considered this domino effect to be a business risk that is not insurable.
Lloyd’s Underwritten Supply Chain Policies are the most expensive. They have fixed indemnity limits that do not cover large businesses that have experienced supply chain failures more that one step away.
Due to an increasing number of insolvencies, and claims being denied under standard business-combined policiess, underwriters are forced by the market for cover. Recently, they have created a new form BI called Contingent Insurance. It addresses all limitations of the standard policy coverage.
Contingent Insurance policies can insure against any disruption in the supply chain. It now covers both damage and non–damage related events.
The policy covers supply chain interruptions caused by political risk-related incidents, civil disturbances and terrorism, as well cyber risks, strikes and erupting volcanoes that can stop flights, and any other transportation issues that may affect a business along the chain.
Insurance companies that cover large corporations and businesses will insist on proper risk assessments of potential losses resulting from supply failure by the company before issuing policies.
