Do You Need a Supply Chain Interruption Policy?

 

Is your business completely self-sufficient? If your operations are like most in today’s marketplace, you rely on the delivery of goods from others. While you may find these sources reliable, it’s possible their supply could one day fail. Are you prepared if the chain should break?

If materials or finished products are delayed, your business suffers. A significant delay or cancellation can cause a complete shutdown of operations. And lacking the resources it needs, your business could come to a temporary standstill or even close.

Many business owners underestimate the effect this supply chain failure can have. It’s important to note that it can take more than two years to recover, as this type of failure affects distribution, costs, service, and ultimately your bottom line. From small businesses to global corporations, companies need proper protection against broken links in the supply chain. The right insurance can’t stop the chain from breaking, but it can stop your business from doing the same. For proper coverage, business owners have two main options.

Option 1: Contingent Business Interruption Insurance

Contingent business interruption (CBI) insurance reimburses lost profits and extra expenses caused by the interruption of someone else’s business. Your company does not have to suffer shared damage for coverage to apply. The point of the policy is to provide for your business when your supplier can’t. This coverage is appropriate when you:

  • Rely on a single supplier for materials.
  • Depend on one manufacturer for most of your merchandise.
  • Purchase the bulk of your products from one business.
  • Rely on a leader property (a neighboring business) to help attract customers.

While CBI offers helpful protection, it is limited. The policy only provides coverage if your supply chain is interrupted due to physical property damage at a “partner’s” business. If it has a fire, for example, you’re covered. However, if its employees can’t get to work due to road closures, you aren’t. In short, CBI doesn’t cover all perils or circumstances that could negatively impact your supply chain.

Option 2: Supply Chain Insurance

Supply chain insurance offers broader coverage than CBI. Like CBI, it covers disruptions to your supply chain caused by property damage to your supplier’s business. However, it also covers losses due to other events. Remember that fire that wasn’t covered by CBI? Did the thought of road closures scare you? Supply chain insurance offers a broader umbrella that includes these threats. This type of policy can cover:

Public health emergencies, natural disasters, industrial accidents, riots, labor issues, road closures, political upheaval, regulatory action, financial issues.

Make Your Chain Stronger

Obtaining the proper insurance coverage is essential to protect your business from supply chain risk. To determine which option is best for your operations, talk to your insurance agent and take the following steps to avoid making a claim:

Evaluate your supply chain. What risks and weaknesses exist? Do you need to make changes?
Identify backups. What other suppliers and vendors could you use in a crisis?
Create a contingency plan. This includes securing appropriate insurance coverage for your business.