David E. Weiss and Richard P. Lewis | Reed Smith
Supply chain disruptions due to natural and man-made events, such as the COVID-19 pandemic, climate change, and global and regional conflicts, have become more prevalent in recent times. Businesses need to focus on these issues more carefully as part of their risk management strategies. Many companies seek to insure potential losses caused by disruptions to their supply chain through first-party or property insurance coverage. The insurance industry has designed a range of coverages for this exposure, the main one being contingent time element (or dependent property) coverage, which provides coverage when (typically) physical loss or damage to a third-party supplier or customer prevents that third party from supplying goods to or purchasing goods from the policyholder. Policyholders need to be aware of certain key issues with this coverage.
What policyholders need to consider
- Most of these coverage grants only provide coverage if the interruption is caused by physical loss or damage to the third party and not, for instance, a service interruption. There are clauses in the market, however, that expand contingent time element coverage to losses from all manner of events that may befall the property of the third party.
- Most limit the “dependent” properties to those listed in the policy or to “direct” suppliers or customers. Again, there are clauses in the market that expand the reach of coverage to “direct or indirect” suppliers or customers, or suppliers or customers “of any tier.”
- Relatedly, it is often possible to avoid a contingent business income loss – loss of income from interruptions to your supplier – by finding a new supplier, often at higher cost. This is a contingent extra expense, and companies should make sure they have this coverage with an appropriate limit.
- These coverage grants often contain very low sublimits (e.g., $10MM in a policy with a Business Income limit of $400MM). Consider your level of exposure to dependent properties and whether they can be replaced easily.
There are broad contingent time element coverages available in the market, and these are often labeled specifically as supply chain coverage. If a business has large supply chain exposures, it should consider purchasing such coverage, which typically resolves the first three issues noted above. Many of these forms are new, and the language is untested, with few court interpretations. For this and other reasons, the limits offered by insurance companies for these bespoke supply chain coverages are often very low but, as with most things, can be negotiated.
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