With predictions of stronger hurricanes in years to come, resulting in constant interruptions to the supply chain, businesses should reassess their supply-chain coverage.
The Gulf accounts for about 30 percent of the nation’s oil production and 20 percent of natural gas production. According to the Insurance Information Institute, there was a significant impact from Hurricane Katrina in 2005.
Consider that the supply chain affects not only ports but rail and trucking centers that are distant from the ports.
Many businesses opt for contingent business interruption (CBI) coverage. It is designed to cover losses caused by damage to or destruction of the property of suppliers and customers of the policyholder.
CBI alone is not enough because it is limited to physical damage to, or at, a supplier’s or customer’s premises.
CBI is not an all-perils coverage, meaning it does not protect a business when roads are closed and employees cannot get to work, or when products cannot be distributed or other suppliers are affected.
Business owners should be aware that supply chain disruptions can create many serious problems, including reduced company revenue, potential loss of market share and inflated costs. Even small businesses need the proper insurance coverage to protect against a supply chain failure.
Consider what can affect your business besides natural disasters. There are industrial accidents, labor issues, production process failures, political upheaval, trade disputes, supplier finances or solvency, and credit/cash flow problems.
The Insurance Information Institute notes a business can be protected against supply chain disruptions with an “all risks” business interruption coverage that focuses on incidents outside the insured’s control. This form of insurance offers protection against both physical and nonphysical interruptions to the business, including strikes, riots, ingress/egress, pandemics and more. Virtually any peril can interrupt and supply chain can be underwritten into the policy.
Business owners should consider that sound loss prevention engineering can best help protect the supply chain from property loss.
That means insurance becomes a last resort rather than a first line of defense.
Additionally, companies often have multiple tiers of suppliers, but insure only first-tier supply. Last year, a study by the Business Continuity Institute found that 40 percent of disruptions occurred below the first-tier supplier. The findings from that study resulted in more businesses obtaining multi-tier supply coverage.
Businesses should check with their insurers to see if this type of coverage is available. Companies can name specific suppliers in their coverage, especially second- and third-tier.
Insurers can provide services to help mitigate risk, much like a risk-engineering assessment studies a company’s supply chain to find ways to transfer risks.
An up-to-date business continuity plan that includes suppliers and their coverage allows business owners to make informed decisions for mitigation planning, risk transfer and levels of self-insurance.
Accurate planning makes a difference when recovering from a catastrophic situation.
DAVID COLMANS IS THE EXECUTIVE DIRECTOR OF THE GEORGIA INSURANCE INFORMATION SERVICE. CONTACT HIM AT (770) 565-3806 OR DCOLMANS@GIIS.ORG.