Business Insurance

Supply Chain Coverage and Exposures

By Marg Stebbing, Leavitt Group

Oftentimes, the risks you choose to insure against are those involving physical loss to your business and property. However, there is another type of risk that could have a significant impact on your business but may not always be fully covered by traditional business interruption coverage: FAILURES IN YOUR SUPPLY CHAIN. 
Following the 2001 terrorist attacks, many clients purchased terrorism coverage; however, the next catastrophic event was Hurricane Katrina, a weather risk. Rather than getting bogged down by a precise type of risk, supply chain risk assessments focus on “big picture” risks that are not necessarily predictable, and carry some key advantages over business interruption:
• A loss at a supplier’s location is not limited to the covered perils or territories of your own policy.
• It allows you to choose the suppliers and customers you wish to have covered on the policy. 
• It has few exclusions—any peril that may interrupt your supply chain can be underwritten in the policy.
While you may already be covered by contingent business income on your insurance policy, you will find that supply chain insurance is broader in its scope of coverage. For example, if your business was affected by a damaged supplier after the earthquake in Japan, you would not be covered by business interruption unless your policy included earthquake, flood, or nuclear coverage. Likewise, if you receive supplies from South America, Europe, or Asia, coverage would not be available without expanding your territory limitation.
The following is an example of how supply chain risk can be mitigated by this coverage:
There is a pharmaceutical product that uses an item in its production that is a direct byproduct of the acrylics made in the production of carpets. In 2008, three distinct events came together to cause a major loss to the pharmaceutical company:
• China was preparing for the Olympics. Due to the smog near Beijing, they shut down much of the industrialized area, including one of the major carpet producers in the world.

• A major producer of carpets in Houston, Texas, was shut down due to Hurricanes.

• The U.S. economy began to falter and new home sales dropped, decreasing the demand for carpet. As a result, carpet sales and production declined. 

The lack of the chemical for this drug caused a major scarcity of the drug and a consequential loss of revenue for the pharmaceutical company, as well as a scarcity of the drug for people who were ill and needed the drug.
No insurance coverage was available to meet the needs of the industry except for contingent business interruption at the Houston carpet facility, which paid a nominal amount of claims. Had the pharmaceutical company carried supply chain coverage, it would have paid for their losses up and down the supply chain.
If your business or organization operates with complex logistics or relies heavily on select suppliers and/or vendors, you should seriously consider including supply chain coverage in your insurance portfolio.
Contact your Leavitt Group advisor to learn more about supply chain insurance and to determine if this coverage is right for your needs.
The coverages discussed herein are for illustrative purposes only. The terms and conditions of your specific policy may differ from those described. Please consult the provisions of your policy for the terms, conditions, and exclusions that apply to your coverage.