What About Your Suppliers? Insuring Against Climate Risks to Your Supply Chain

More than 20 storms—11 of which will become hurricanes, and 5 of which will become Category 3 or greater hurricanes. That's one prediction for the Atlantic hurricane season. Not to worry, you say. Your operations are located far from the coast. But what about your critical suppliers? Or your key customers?

A natural disaster or other peril striking one of a company's critical suppliers or customers can have a substantial impact on a company's business, even if the company itself is located far from disaster. Contingent business interruption insurance coverage, also known as contingent time element coverage, can help offset any loss when disaster strikes your supplier or customer.

Contingent business interruption coverage is often included in a company's property insurance program. In general, contingent business interruption coverage provides a policyholder coverage if one of its suppliers or customers suffers physical damage from a peril that is covered under the policy if that damage results in a slowdown or stoppage of the policyholder's business. It may also provide "extra expense" coverage for additional costs to resume the policyholder's normal business operations, such as increased costs from temporarily switching to a different supplier or supplier location. Of course, the precise coverage will depend on the language of the insurance policy. 

Consider this example. Company A relies on Supplier X for a critical component. A flood strikes Supplier X's factory. Company A must shut down its factory while it finds a new source of its critical component, and then must incur additional costs to procure that critical component from the new source. Company A's property insurance program includes damage caused by flood and contingent business interruption coverage. Company A may be able to look to its property insurance program to offset its loss. 

Many companies are already assessing how climate risks may impact their critical suppliers and customers. Armed with that information, companies should assess their property insurance programs with the following questions in mind: 

• Does the company's property insurance program provide contingent business interruption coverage for the suppliers' and customers' climate risks that have been identified? 
• If so, are the contingent business interruption limits in the property insurance program adequate to protect against the climate risks identified? 
• If not, what is the cost of adding contingent business interruption coverage relative to the climate risks identified?

In addition, for companies that purchase contingent business interruption insurance, those companies should have a plan in place to respond in the event a supplier or customer suffers a loss that could fall within the policy's coverage. In such circumstances, policyholders often face two major challenges:

• First, the policyholder must prove that the supplier or customer suffered a loss from a peril that is covered by the policy in order to trigger the contingent business interruption coverage. This can be difficult because the information necessary is within the control of the customer or supplier, not the policyholder.
• Second, the policyholder must quantify the impact on its operations to establish the amount of loss that is reimbursable under the policy. Policyholders should have a team in place—lead supplier/customer contacts, counsel, and forensic accountants—to respond in the event of a contingent business interruption claim.

As climate risks increase, contingent business interruption insurance is more important than ever. Evaluate whether you have the right coverage, and be prepared to use that coverage if the need arises.

Read the full Climate Report.